An allowance is a payment in cash in addition to the salary by the employer to the employee for the purpose of meeting some particular requirements connected with the services rendered by an employee. Allowances are taxable unless specifically exempted.
For income tax purpose allowances are classified into
- Fully taxable allowances
- Allowances exempt up to specified limit
- Fully exempted allowances
Fully taxable allowances
1) Dearness Allowance, Additional Dearness Allowance and Dearness Pay
Dearness pay means payment under the terms of employment
2) Fixed Medical Allowance
3) Tiffin Allowance
4) Servant Allowance
5) Non-practicing Allowance (given to government doctors)
6) Hill Allowance
7) Warden Allowance and Proctor Allowance
8) Deputation Allowance
9) Overtime Allowance
10) Other Allowances like family Allowance, project Allowance etc.
Allowances exempt up to specified limit
3) Special Allowances for performance of official duty
This Allowance is not taxable to the extent of amount actually incurred or the amount of allowance received whichever is less
4) Special Allowance to meet the personal expenses
This Allowance is not taxable to the extent of allowance received or the limits specified whichever is less
Fully exempted allowances
1) Foreign Allowance
2) Sumptuary Allowance
3) Allowances from U.N.O
4) Per-diem Allowance