Types of Allowance -Taxable, Non-Taxable & Partially Taxable

Hello, in this post we are going to discuss the different types of allowances in the salary slip of an employee. We will cover the following topics:

• What is an Allowance?
• Types of Allowances in the salary slip
• Difference between Basic salary and Allowance
• Difference between Allowance and Reimbursement

  Allowances are the financial benefit that is provided to the employee by the employer based on their job profile, role and performance. So, below there, you will get the details of allowance and types of allowances.

What is an Allowance?

An allowance is a fixed amount received by a salaried employee from his employer to meet specified needs or expense other than his/her basic salary. The allowance amount is calculated on the basic salary of the employee. According to the law, the basic pay will be 30% to 60% of the salary. For example, if employees work more than their fixed working hours, they get overtime allowance. Allowances are a part of the salary and it is taxable, except for some exemptions provided under various sections of the Income Tax Act.

What is a position allowance?

Position allowance is nothing but the company provides the allowance that will allow an expatriate’s level of compensation to the lowest paid local hire.

Types of Allowances in the salary slip

The different types of allowances in the salary slip for the benefit of an employee are:

• Taxable Allowances
• Partly Taxable Allowances
• Non-taxable Allowances

Taxable Allowances

1. Dearness Allowance (DA): DA is provided to compensate for the inflation impact on the employee during his/her employment period. It is based on the cost of living. Dearness allowance is usually revised twice in a year, first in January and then in July. So it is taxable under ITA.
2. City Compensation Allowance(CCA): It is for the employee to meet his/her high costs of living in a metropolitan / Tier-1 city like Delhi, Mumbai or Bangalore.CCA is also applicable for Tier-2 city employees and it changes from one city to another. The employer need not provide CCA as it is taxable if the amount is above Rs.900.
3. Entertainment Allowance: It is given to the employees for expenses like the meal, beverages, hotels, etc. for the business clients of the company. Government employees can claim the exemption u/s 16(ii) for it but not non-government employees.
4. Overtime Allowance: The amount provided when an employee does extra working hours than his regular working hours.
5. Tiffin Allowance: It is provided for the food expenses of the employee.
6. Cash Allowance: The employer provides cash allowance like marriage allowance, holiday allowance, etc. to the employee and it is taxable.
7. Project Allowance: The amount provided to carry out the expenses for the project by the employee.
8. Servant/helper Allowance: The employee gets an allowance for hiring a servant/helper and it is fully taxable.
9. Warden allowance: It is applicable for employees who are working as a warden, and the received allowance is fully taxable. 
10. Uniform allowance: Uniform allowance is provided to the employee to maintain or buy a uniform. 
11. Interim Allowance: This allowance is given by the employer to their employee instead of the final or last allowance.

Partly Taxable Allowances

1. House Rent Allowance (HRA): HRA is to meet the accommodation expenses of the employee. It is partially exempt u/s 10(13A), and the remaining amount is taxable.
2. Leave Travel Allowance (LTA): It is offered for an employee for travelling anywhere in India for the company purpose. The company can only provide a part of the fare and the balance amount is taxable.
3. Conveyance Allowance: The amount offered to the employees for travelling from home to office, and vice versa. However, any expense over Rs.1,600 per month is taxable.
4. Medical Bills Reimbursement Allowance: The amount given by the employer for the treatment of the employee or his/her family. If the amount is above Rs.15,000 then it is taxable.
5. Education Allowance: Here the employees get an allowance to educate their children in India. If the amount is more than Rs.100 per month for a child (maximum of 2 children) then it is taxable.
6. Hostel Allowance: It provides you with Rs. 300 per month for a child. You can claim it for a maximum of 2 children.
7. Special Allowance: Under section 14(i), it is paid to an employee based on his/ her performance.

Non-taxable allowances

1. Allowance to Government Employees: Any amount paid for rendering services outside India by the Government.
2. Allowances given to Supreme Court / High Court judges.
3. Benefits received by the people working in the UNO.

Note: These non-taxable allowances can become taxable allowance if the employee do not use them.

Difference between Basic salary and Allowance

Basic salary

The base income of an employee which is constant and fixed. This entire amount is a part of your in-hand salary. So, basic salary depends on the employee’s designation and their area/industry of work.

Allowance

Allowances are an integral part of the salary structure of an employee. It is provided besides the basic salary. It mainly depends on the employer and can also vary from company to company. These allowances also include HRA (house rent allowance), LTA (leave travel allowance), DA (dearness allowance), medical, vehicle, mobile phone, incentives and special allowances.

Difference between Allowance and Reimbursement

Allowance

The amount to cover the expenses of an employee during his/her employment period. For example, if an employee uses his/her vehicle to travel, then the company will provide him with a transportation allowance.

Reimbursement

When the employer covers the business expenses of the employees. They add nothing to the employee’s income. So, it is not taxable if you submit the bill or any proof of payment.

How to calculate taxable income?

To calculate taxable income, you need to add Income from all sources of an employee that they earned in the financial year and then deduct all applicable exemptions and deductions from Gross total income.   

How does allowances work?

Allowances work based on income tax and salary paid. It means if you claim more or additional allowances, then the deduction of income tax will be less from your salary. If you claim less or zero, then the salary deduction on income tax will be more. In short, additional allowance is equal to additional money in your hand.   

List of Allowances in salary – Taxable, Non-taxable and Partial allowance  

Taxable	Partial allowance	Non-taxable
Dearness Allowance (DA) City Compensation Allowance(CCA) Entertainment Allowance Overtime Allowance Tiffin/food Allowance Cash Allowance Project Allowance Servant/helper Allowance Warden allowance Uniform allowance Interim Allowance	House Rent Allowance Leave Travel Allowance Conveyance Allowance Medical Bills Reimbursement Allowance Education Allowance Hostel Allowance Special Allowance	Allowance to Government Employees Allowances given to Supreme Court / High Court judges Benefits received by the people working in the UNO.

With that, we have come to an end of this post on types of allowances. Share with us your views and opinions in the comment section below.

Refer to our blogs:

• Salary Structure
• Payslip Format
• Payroll Reimbursement
• Payroll Automation
• Exemptions on allowances