0 hidden charges. 0 forex
Open a Fi Salary account and manage your salary with ease

What Are The Different Types of Allowances in Salary Slip

article image

What Are The Different Types of Allowances in Salary Slip

Table of Contents

Depending on your job & salary structure, you'll find different types of allowances in your salary slip. Some such salary allowances can help you save on taxes if you've just started your employment journey. All other allowances in your salary can get placed under (a) taxable, (b) non-taxable and (c) partially taxable headers. 

You can reduce your income tax burden by claiming partial or tax-free allowances. In short, claiming more allowances ensures more tax savings. 

What is a Salary Allowance?

It's a supplementary payment made by the employer over and above the base salary. Salary allowances are given to employees for specific purposes and can vary based on the job profile and designation of the employee. Most employers offer allowances to cover the employee's rent, travel expenses, medical bills, overtime work, etc. 

Allowances are usually calculated on the employee's base pay and may be regulated by government norms. As such, allowances are taxed under the Income Tax Act, 1961, under the 'Income from Salaries' header. 

However, not all allowances are taxable. Thus, if managed wisely, you can lower your tax liabilities.

Types of Allowances in a Salary Slip

Allowances listed on a salary slip can be classed under the three following broad headers: 

  • Taxable Allowances 
  • Partly Taxable Allowances
  • Tax Exempt Allowances

Taxable Allowances 

Entertainment Allowance

Employees receive an entertainment allowance to cover hospitality expenses while acquiring customers. While this allowance is fully-taxable for private-sector employees, public-sector workers are entitled to some tax relief. 

This tax relief can be claimed under Section 16(ii) and is equivalent to the lowest value of the following:

  • One-fifth of the employee’s basic salary
  • 5,000
  • Actual entertainment allowance 

Dearness Allowance 

Employees receive a dearness allowance to offset the increased living costs due to inflation. It is calculated as a percentage of the base salary and is fully taxable under the Income Tax Act. 

Overtime Allowance

Some employers may offer overtime allowances to employees for working beyond the stipulated hours. This allowance is also a fully-taxable under the Income Tax Act. 

City Compensatory Allowance 

Certain employers may offer this allowance to help employees manage the high costs of living in a metropolitan city. 

Interim Allowance 

Another type of allowance in the salary slip might be an interim allowance. The employer may issue this fully-taxable allowance instead of a final allowance. 

Project Allowance

It’s paid to meet project-related expenses. This type of allowance is also fully-taxable.

Meals Allowance

This taxable allowance covers the employee’s meals or tiffin cost. 

Cash Allowance

Employers may give cash allowances to help employees cover the costs of a wedding, funeral, holiday, etc. 

Non-Practising Allowance

It's a special allowance in the salary slip for doctors working for clinics or institutions. The money earned through this allowance is fully taxable.

Warden Allowance 

A warden allowance accrues to employees like keepers of educational institutions. This special allowance is part of the employee’s tax liabilities. 

Servant Allowance

The archaic terminology notwithstanding, this is an allowance to compensate for domestic help's salary.

Partially-Taxable Allowance

House Rent Allowance

This allowance is paid to help employees cover their rent expenses. As such, it is a fully-taxable allowance for employees not living in rented houses. 

As per Section 10(13A) of the Income Tax Act, HRA is partly exempted from tax. The exemption granted under the section is equal to the lowest of the following options:

  • Actual house rent allowance received.
  • Rent paid- 10% of the basic salary
  • 40% of the salary (basic + DA) for those living in non-metro cities.
  • 50% of the salary (basic + DA) for those living in metro cities. 

Medical Allowance 

The employer pays a fixed medical allowance to cover the medical expenses of employees and their immediate family members. A medical allowance is tax-free, up to ₹15,000 per year. 

Special Allowance

Such allowances are paid to employees for performing certain duties. Under Section 14(i), this allowance is partially tax-exempt. 

Conveyance Allowance

Employees may receive a conveyance allowance to travel to and from work. Conveyance allowances of up to ₹1,600/per month are tax-free. 

Education Allowance

The employer pays an education allowance for the employee’s child’s education. Under the Income Tax Act, an allowance of up to 100 per child (for two children) every month is eligible for tax exemptions.

Leave Travel Allowance (LTA)

The employer grants LTA to cover the employee’s travel expenses when on vacation. This allowance only covers the cost of travel by air, bus or train, but not the associated accommodation or sightseeing expenses. Exemptions on LTA are subject to certain limits and conditions. 

Non-Taxable Allowance 

Allowance Paid to Government Servants Abroad

Allowances paid to government employees posted abroad for rendering services abroad are tax-free allowances. 

Sumptuary Allowance Paid to Judges

Sumptuary allowances paid to Supreme and High Court judges are tax-free under the Supreme Court Judges Act of 1958 and the High Court Judges Act (1954). 

Compensatory Allowance Paid to Judges

All compensatory allowances paid to Supreme and High Court judges are covered under Article 222 (2) of the Indian constitution and, as such, are exempt from taxes. 

Allowances Paid to UNO Employees

Allowances received by UNO employees in India are covered under the United Nations (Privilege and Immunities Act).

Other Tax-Free Allowances

Other allowances in salary, like academic allowances, daily allowances, helper allowances, uniform allowances, etc., are some of the other tax-free allowances in India. 


Understanding the tax breaks associated with salary allowances can help you better plan your taxes — and maybe even manage an improved take-home salary. And if you're looking for a definitive account to place it in, try Fi! Fi Money, and its RBI-licensed partner Federal Bank, provide a salary account with many benefits. For starters, you get 10% of your salary as Fi-Coins — every month. Plus 5,000 Fi-Coins as a joining bonus. Other perks include no minimum balance, a free VISA Platinum debit card with zero forex charges, priority customer service & more. That's not all! Fi will also help you manage/grow your money with features like Connected Accounts, Analyser, Goal-based saving, SIPs & automatic payments.

Frequently Asked Questions

1.What do ‘other allowances’ include?

The ‘Other Allowances’ header in your salary slip includes supplementary benefits offered by the employer. These allowances are over and above your stipulated base salary. This header contains taxable, non-taxable and partially taxable allowances the employer provides. The specific components included in this category will vary from employer to employee, depending on how their payrolls are structured.

2.What are examples of allowances?

Allowances paid to employees will vary as per their job profile and designation. Some common examples of taxable allowances include dearness allowance, cash allowance, entertainment allowance, and project allowance. Partially-taxable allowances include house rent allowance, conveyance allowance and special allowance. Examples of tax-free allowances include benefits accruing to Supreme and High Court judges, UNO employees and government officers posted abroad.What Are The Different Types of Allowances in Salary Slip

Time to switch to Fi. Smart banking and only that.
Related Posts
Get the Fi app