SCHOOL OF MANAGEMENT

DEPARTMENT OF COMMERCE

PONDICHERRY UNIVERSITY

ASSIGNMENT ON DIRECT TAX LAW AND PRACTICE

SUBMITTED BY: KIRITHIGA.S I M.COM (BUSINESS FINANCE) PONDICHERRY UNIVERSITY

TAXABLE ALLOWANCE
The term allowance has been derived from the word to allow. As per Oxford Dictionary the word Allowance means any amount or sum allowed regularly. As such allowances are given in cash along with salary by the employer. Allowance is a fixed monetary amount paid by the employer to the employee (over and above basic salary) for meeting certain expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in gross salary unless specific exemption is provided in respect of such allowance. These are divided into three categories on the basis of tax treatment we divide these allowances into 3 categories: I. Fully taxable allowances. II. Partially taxable allowances. III. Fully exempted allowances. I. FULLY TAXABLE ALLOWANCES (i) Dearness Allowance As is clear by its name, this allowance is paid to compensate the employee against the rise in price level in the economy. Although it is a compensatory allowance against high prices, the whole of it is taxable. Sometimes it is mentioned that: a) D.A. enters into pay for service benefits; or b) D.A. enters into pay for retirement benefits; or c) D.A. is given under the terms of employment; or d) Dearness pay, it is treated as part of salary for certain purposes such as provident fund, value of rent free house, house rent allowance, bonus, gratuity, leave encashment etc. (ii) City/Capital Compensatory Allowance These are given to compensate for the high cost of living in a particular big city of India or any other capital city. These are fully taxable. (iii) Tiffin / Lunch/ Marriage/ Family/ Deputation/ Wardenship/ Non-practising/ Project/ Overtime/ Fixed Medical Allowance It is fully taxable. It is given to employees for lunch as coupons or added as part of salary. (iv) Servant Allowance It is fully taxable whether or not servants have been employed by the employee. II. PARTIALLY EXEMPTED ALLOWANCES This category includes allowances which are exempt up to certain limit. For certain allowances, exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances, there is a fixed limit of exemption. (i) House Rent Allowance (H.R.A.) An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following three amounts: a) House Rent Allowance actually received by the assessee b) Excess of rent paid by the assessee over 10% of salary due to him

c) An amount equal to 50% of salary due to assessee (If accommodation is situated in Mumbai, Kolkata, Delhi, Chennai) or 40% of salary when accommodation is situated in other cities. If an employee is living in his own house and receiving HRA, it will be fully taxable. (ii) Entertainment Allowance This allowance is fully taxable irrespective of any expenditure incurred on entertainment of guests or customers, but in case of government employees an exemption is given. This allowance is first included in gross salary under allowances and then deduction is given to only central and state government employees under Section 16(ii). a) Actual allowance received b) 1/5th of salary c) Sratutory limit Rs. 5000 whichever is less is exempted. (iii) Special Allowances for meeting official expenditure Certain allowances are given to the employees to meet expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given. These include travelling allowance, daily allowance, conveyance allowance, helper allowance, academic research allowance and uniform allowance. a) Any special allowance in the nature of Composite Hill Compensatory Allowance/ High Altitude allowance/ Uncongenial Climate allowance/ Snow Bound Area allowance/ Avalanche allowance are exempted upto Rs.300 p.m. to Rs.7000 p.m. b) Any special Compensatory allowance in the nature of Border area allowance/ Remote area allowance/ Difficult area allowance/ Disturbed area allowance exempted upto Rs.200 p.m. to Rs.1300 p.m. c) Compensatory field area allowance exempted upto Rs.2600 p.m. d) Compensatory modified field area allowance exempted upto Rs.1000 p.m. e) Counter insurgency allowance/ Compensatory field area allowance exempted upto Rs.3900 p.m. f) Highly active field area allowance exempted upto Rs.4200 p.m. g) Underground allowance given to coal mine workers exempted upto Rs.800 p.m. h) Island duty allowance giver to Armed forces posted in Andaman & Nicobar and Lakshadweep group of island exempted upto Rs.3250 p.m. i) Tribal area allowance: This allowance is exempted upto Rs.200 p.m. in the States of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar and Orrisa. (iv) Special Allowances to meet personal expenses There are certain allowances given to the employees for specific personal purposes and the amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard. These allowances include: a) Children Education Allowance: This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children (grand children are not considered).

b) Children Hostel Allowance: Any allowance granted to an employee to meet the

hostel expenditure on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children. c) Transport Allowance: This allowance is generally given to government employees to compensate the cost incurred in commuting between place of residence and place of work. An amount uptoRs.800 per month paid is exempt. However, in case of blind and orthopedically handicapped persons, it is exempt up to Rs. 1600p.m. d) Any running flight allowance: An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt up to 70% of such allowance or Rs.6000 per month, whichever is less. e) Any special allowance: In the nature of counter insurgency allowance given to the members of the armed forces operating in areas away from their permanent locations for a period of more than 30 days shall be exempted upto Rs.1300 p.m. III. FULLY EXEMPT ALLOWANCES (i) Foreign Allowance This allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad. It is fully exempt from tax. (ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax. (iii) Allowances from UNO organization to its employees are fully exempt from tax.