A Total Guide On Types Of Allowances In India: Definition & Purpose in Payroll
taxable income
10 min read
February 15, 2024
Taxes, No Taxes: when it comes to receiving a handsome salary, somehow we all begin to fixate our minds on these terms! The calculator in mind begins to throw numbers on the screen, and they keep shattering here and there! And at the end of that, a question comes to the screen ‘How much of my salary would be subject to taxation, and what parts of it won’t?
To answer that question, to solve your queries regarding various Types Of Allowances In India paid by your employer, and the subject of taxation over those are the prior reasons behind writing this blog! So have a look throughout to get yourself complete knowledge regarding Taxable Allowance, Non-Taxable Allowances. and Partially Taxable Allowances!
But before we begin to turn the pages of the comprehensive guide to employer allowance benefits. Let us freshen up some basic knowledge regarding the types of allowances in salary slips! So we can have a better understanding of it!
These allowances are the financial benefits provided by the employer and received by the Employee! However, there are some definitive factors based on which employer decides to pay these monetary benefits, and those parameters would be Job Profile, Role of the Employee Performance! These different types of Allowances are given to the employees in the form of monthly salary!
These financial benefits come with a list, which starts with your Basic Pay and continues with travel, rent, medical, overtime, and many more allowances! Regarding the taxation over these Allowances paid by the employer, many have queries such as,
How tax deduction would be done from my salary?
What portion of it would be exempted from tax?
How can I reduce my tax burden?
How do the changes in my salary or employment status affect my taxation?
What are the different types of allowances in salary?
The list about compliance can go on and on, but the questions and queries won’t! That is why we have taken the stand to make this complex structure seemingly easy and comprehensible! So we all can have a clear understanding of different types of allowances in detail!
How To Count Allowances In Salary?
The employer divides your salary into different portions amongst which the most important would be BASIC SALARY[basic pay]! This portion of yours is the typical gross pay minus all the other types of allowances [such as HRA, travel allowance, Dearness allowance, etc.]! When you hold your salary slip in your hand, you will see different sections, amongst which first would be basic pay, and will start the list of allowances! Because the basic one would be just 40-50% of your salary!
Gross Pay – Total Allowances Paid = Basic Pay
How Allowance Is Different Than Reimbursement?
Well, both the terms whether allowance or reimbursement are different and have a thick line in between! Let us explain it to you guys with an example!Here we provide information as – common types of allowances decoded.
If you’re going out on your bike for company work, then what the company would provide is a transport allowance! As it is the amount to cover the expenses of an employee during their employment period!
Compared to Allowance, the reimbursement does not get included in your salary, so it can’t be taxed if you submit the bill or any kind of receipt of the expenses!
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As per the Income Tax Act, these allowances for both government employees and private ones fall under three different sections according to taxation! These 3 categories of common allowances, some allowances are taxable, while some are not, and some are just partially taxable allowances! So let’s get them one by one and understand which salary allowances fall under which category!
1. Taxable Allowances
Here we are presenting a list of taxable allowances below;
CCA [City Compensation Allowance]
City compensatory allowances are for those employees who are living in expensive metropolitan cities like Delhi, Mumbai, or Banglore, where the cost of living is pretty high! And this one falls under the category of taxable allowances!
DA [Dearness Allowance]
This one is to keep the employee safe from inflation, so she/he can be safe from the impact of inflation! Inflation is a fluctuating term, hence this Dearness Allowance usually gets revised two times in a year, the first one in January and another one in July!
EA [Entertainment Allowance]
The guests have come, and you have to make sure to attain them well with great food and much greater hospitality, but through this Entertainment Allowance, you can get your money back! And for the government employees, it won’t be taxable, though!
Overtime Allowance
An allowance paid for your extra time and extra work for the company, and the allowance you get through overtime is taxable! You can perform overtime calculation using HRMS software
Tiffin Allowance
On working hours, when an employee pays for their food and gets an allowance for that food, it’s taxable!
Project Allowance
Times when the employer pays for their employees for the project-related expenses, that’s taxable! So whenever you receive the payment for project-related expenses then always keep this one thing in mind; it will be taxed!
Cash Allowance
When the employee gets an allowance from their employer for weddings, holidays, and burials, it falls under the taxable allowances!
Medical Allowance
At times of medical emergency, the company covers the expenses of their employees through allowances, which fall under taxable once!
Interim Allowance
Any kind of allowance paid before the final allowance is an Interim allowance, then among the types of allowances, it is taxable!
Transport Allowance
When the employee gets an allowance for leaving their home and traveling through places to accomplish their duty, it falls under the category of taxable types of allowances!
2. Partially-Taxable Allowances
HRA [House Rent Allowance]
A house rent allowance is a special allowance that is granted to employees to compensate for their accommodation expenses or rent! As per the Income Tax Act, it falls under the section of partially taxable section!
When the employee travels in the same country for the company, their employer offers types of allowances for the same which stays different from their employee payslip! This exemption applies to all employees who travel by bus, train, or plane!
Conveyance Allowance
Conveyance allowance is a compensation the company provides to the employee for traveling to and from the workspace and home! In such cases, taxes would exempted up to the price of 1600 rupees, and when the charges exceed that band of 1600 rupees monthly taxes would be applicable!
Medical Bill Reimbursement Allowance
Just like any other reimbursement, this one also provides the facility of availing refunds of the employee’s medical expenses! These expenses are for the employees and their family members to avail up to the limit of 15,000 every year, over which the condition will be fully taxable!
Education Allowance
For children’s education, Employees get a grant which is known as Education Allowance! Here, they can pay for the expenses incurred due to their children’s education! As it falls under the partially taxable section, it can be exempt from tax up to 100 rupees for a month, and it’s only applicable for 2 children!
Hostel Allowance
Hostel Allowances exist to cover expenses incurred by employees whose children are living in the hostel! Here, the taxes can be exempted for up to 300 months and this exemption is also applicable for two children only!
Special Allowance
A special allowance is a grant for employees that covers certain special expenses against which the employee can avail their allowance! For example, here in this section, one can avail of Underground Allowances, Car Maintenance Allowances, and many more!
3. Non-Taxable Allowances
Uniform Allowance
When a company offers their employees to wear a uniform in their workspace, they provide allowances to meet the expenditure; and it will be completely exempted from your taxation!
Allowances Paid to Government Employees Abroad
The payroll process in India can be quite strained in taxes, but the allowance Indian citizens are getting from the government of India is exempt from taxation [Maybe that is why our parents are keen to make us government employees]!
Allowances Paid to UNO Employees
Types of Allowances that UNO employees are getting are taxable as per the Income Tax Act!
Allowances Judges of the High Court and Supreme Court
The allowances of Supreme Court and High Court Judges are not taxable [maybe because they keep carrying the burden of law over their shoulders, just to make sure they doing justice with everyone with the help of the law]!
Other Tax-Free Allowances
Compensatory Allowances
Helper Allowance
Compensatory Allowance
Sumptuary Allowance
Bonus Tips To Save Taxes By Using Payroll Software!
Here, we are wrapping up by letting you know all the crucial inputs regarding the types of allowances for employees. So you can have a better understanding of how to manage your cash flow and more importantly how to manage your taxes!
So moving now, be that person who does the magic with his money, and knows all the perks of tax-free methods of payment! Moreover, you should stay updated with the union budget, because that can really help you to stay ahead of the game! Try Superworks, the best HRMS software, which is designed to accomplish your needs, and the payroll software here is quite resourceful as per the taxes!
Written By :
Alpesh Vaghasiya
The founder & CEO of Superworks, I'm on a mission to help small and medium-sized companies to grow to the next level of accomplishments. With a distinctive knowledge of authentic strategies and team-leading skills, my mission has always been to grow businesses digitally. The core mission of Superworks is Connecting people, Optimizing the process, Enhancing performance.
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