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Allowances – Taxable, Fully Exempt & Partially Exempt

Your CTC is ₹10 lakh but take-home is ₹7.5 lakh. Where did ₹2.5 lakh go? Allowances and their tax treatment! Let's decode every allowance.

What is an Allowance?

Definition: Fixed monetary benefit given by employer in addition to basic salary for specific purposes

Purpose:

  • Compensate for extra expenses (travel, education)
  • Incentivize performance (special duty allowance)
  • Attract talent (city allowance)

Classification of Allowances

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1. Fully Taxable Allowances

Add to salary income, NO exemption

Common Taxable Allowances:

  • City Compensatory Allowance (CCA)
  • Dearness Allowance (if doesn't form part of retirement benefits)
  • Tiffin/Lunch Allowance
  • Overtime Allowance
  • Project Allowance
  • Warden Allowance
  • Servant Allowance
  • Non-Practicing Allowance (doctors)
  • Entertainment Allowance (private sector - fully taxable)

Example:

Rajesh:

  • Basic: ₹5,00,000
  • CCA: ₹1,00,000
  • Lunch Allowance: ₹50,000

Taxable Salary: ₹5,00,000 + ₹1,00,000 + ₹50,000 = ₹6,50,000 (all taxable!)

2. Fully Exempt Allowances

NOT included in taxable income at all

A. Transport Allowance (Section 10(14)(i))

For Specially-Abled Persons: ₹3,200/month

Condition: Blind, deaf, dumb, or orthopedically handicapped

Example:

  • Allowance: ₹3,200/month = ₹38,400/year
  • Exempt: Full ₹38,400 ✅

B. Conveyance Allowance (Section 10(14)(ii))

For official duty: Actual expenses

Not for commuting home to office (that's covered by standard deduction now)

Example:

  • Field salesman travels for work
  • Petrol/taxi bills: ₹1,00,000/year
  • Exempt: Full ₹1,00,000 ✅

C. Foreign Allowance (Section 10(7))

Government employees posted abroad

Example:

  • Indian diplomat in USA
  • Foreign allowance: $1,000/month
  • Exempt: Fully ✅

D. Sumptuary Allowance (Section 10(14)(i))

For High Court/Supreme Court judges

Example: Chief Justice allowance - Fully exempt

3. Partially Exempt Allowances (Most Important!)

A. House Rent Allowance (HRA) - Section 10(13A)

Most common allowance!

Exemption: Least of 3:

  1. Actual HRA received
  2. Rent paid - 10% of salary
  3. 50% of salary (metro cities: Mumbai, Delhi, Kolkata, Chennai) 40% of salary (non-metro)

Salary for HRA = Basic + DA (forming part of retirement benefits) + Commission (% of turnover)

Example 1 (Metro):

Priya (Bangalore - now metro post-amendment):

  • Basic: ₹60,000/month = ₹7,20,000/year
  • HRA: ₹30,000/month = ₹3,60,000/year
  • Rent paid: ₹4,00,000/year

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Example 2 (No Rent):

Amit (lives with parents, no rent paid):

  • HRA received: ₹2,00,000
  • Rent paid: ₹0

Exempt: ₹0 (no rent, no exemption!) Taxable: ₹2,00,000

Conditions:

  • Must actually pay rent
  • Rent receipt if rent > ₹1,00,000/year
  • Landlord's PAN if rent > ₹1,00,000/year

B. Leave Travel Allowance (LTA) - Section 10(5)

Exemption: Actual travel cost OR allowance (whichever lower)

Conditions:

  • 2 journeys in block of 4 years (current: 2022-2025)
  • India travel only (foreign = taxable!)
  • Shortest route by air/rail economy class
  • Self + family (spouse, children, dependent parents/siblings)

NOT exempt:

  • Hotel stay
  • Food
  • Local conveyance (taxi, auto)
  • Sightseeing

Example:

Family trip Delhi to Kerala:

  • LTA received: ₹80,000
  • Actual tickets (4 people): ₹60,000
  • Hotel: ₹40,000
  • Food: ₹20,000

Exempt: ₹60,000 (only tickets!) Taxable LTA: ₹20,000

If didn't travel: Full ₹80,000 taxable!

C. Children Education Allowance (Section 10(14))

Exemption: ₹100/month per child (max 2 children)

Annual: ₹1,200 per child = ₹2,400 for 2 children

Example:

  • Allowance received: ₹500/month × 2 kids = ₹12,000/year
  • Exempt: ₹100 × 12 × 2 = ₹2,400
  • Taxable: ₹9,600

D. Hostel Expenditure Allowance (Section 10(14))

Exemption: ₹300/month per child (max 2 children)

Annual: ₹3,600 per child = ₹7,200 for 2 children

Example:

  • Allowance: ₹1,000/month × 2 kids = ₹24,000/year
  • Exempt: ₹300 × 12 × 2 = ₹7,200
  • Taxable: ₹16,800

E. Entertainment Allowance (Government Employees Only) - Section 16(ii)

Deduction (not exemption!): Least of:

  1. Actual entertainment allowance
  2. ₹5,000
  3. 20% of basic salary

Private sector: Fully taxable, NO deduction

Example (Govt Employee):

  • Basic: ₹50,000/month
  • Entertainment allowance: ₹2,000/month = ₹24,000/year

Deduction: Least of ₹24,000, ₹5,000, ₹1,20,000 = ₹5,000

Taxable: ₹24,000 - ₹5,000 = ₹19,000

Special Allowances

Uniform Allowance

Exemption: If spent on buying/maintaining uniform required for duty

Example:

  • Security guard: Uniform allowance ₹10,000
  • Spent ₹10,000 on uniforms
  • Exempt: ₹10,000 ✅

Research Allowance

Teachers in universities: Exempt to extent actually spent on research

Hill Compensatory Allowance

For government employees in hilly areas: Partially exempt

Comprehensive Classification Table

AllowanceTypeExemptionNew Regime
HRAPartialLeast of 3 conditions❌ Not allowed
LTAPartialActual travel (2 in 4 years)❌ Not allowed
Children EducationPartial₹100/month/child❌ Not allowed
HostelPartial₹300/month/child❌ Not allowed
CCAFully TaxableNilN/A
Lunch/TiffinFully TaxableNilN/A
OvertimeFully TaxableNilN/A
Transport (disabled)Fully Exempt₹3,200/month✅ Allowed
Conveyance (official)Fully ExemptActual✅ Allowed
Foreign (govt)Fully ExemptFull✅ Allowed

Practical Example - Multiple Allowances

Suresh (Private sector, Bangalore):

Salary Structure:

  • Basic: ₹8,00,000
  • HRA: ₹3,00,000
  • LTA: ₹50,000
  • Children Education: ₹6,000 (₹500/month)
  • CCA: ₹1,00,000
  • Lunch Allowance: ₹30,000

Actual:

  • Rent paid: ₹3,60,000
  • Traveled to Goa: ₹40,000 tickets

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HRA Calculation:

  • Least of: ₹3,00,000, ₹2,80,000 (₹3.6L - 80k), ₹4,00,000 = ₹2,80,000 exempt

Common Mistakes

❌ Mistake 1: Claiming HRA while living in own house

  • Correct: No rent paid = No HRA exemption

❌ Mistake 2: Claiming hotel expenses under LTA

  • Correct: Only travel tickets exempt

❌ Mistake 3: Claiming foreign trip under LTA

  • Correct: LTA only for India travel

❌ Mistake 4: Taking HRA in new tax regime

  • Correct: HRA NOT allowed in new regime

Documentation Required

HRA:

  • Rent receipts (if rent > ₹1L/year)
  • Landlord's PAN (if rent > ₹1L/year)
  • Rental agreement (advisable)

LTA:

  • Travel tickets (air/rail)
  • Proof of family relationship (for dependent parents/siblings)

Children Allowances:

  • School fee receipts

Summary

  • Allowances: 3 types - Fully taxable, fully exempt, partially exempt
  • HRA (10(13A)): Least of (actual, rent-10% salary, 50%/40% salary) - NOT in new regime
  • LTA (10(5)): 2 trips in 4 years, India only, ticket cost only - NOT in new regime
  • Children education: ₹100/month/child (max 2), Hostel ₹300/month/child
  • Entertainment: Govt employees only, max ₹5,000 deduction
  • Fully taxable: CCA, lunch, overtime, project allowance
  • Fully exempt: Transport (disabled ₹3,200/month), conveyance (official duty)
  • New regime: Most allowances not allowed (except transport for disabled, official conveyance)

Quiz Time! 🎯

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Next Chapter: Perquisites – Valuation & Taxability! 🎁

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