An allowance is a predetermined sum of money disbursed by employers to their employees at regular intervals. In essence, it constitutes a fixed amount provided to individuals on a weekly or monthly basis for specific purposes. To elaborate further, consider the scenario where employers compensate their employees with overtime pay, exceeding the basic salary, for additional hours worked.
Decoding Salary in the Realm of Income Tax
As per Section 17(1) of the Income Tax Act, salary encompasses any remuneration given to an employee in exchange for their services. This encompasses various forms, including hourly wages, annual salaries, commissions, tips, bonuses, and benefits. Additionally, salary includes several allowances.
Exploring the Spectrum of Allowances
Allowances can be broadly categorized into three types: taxable, non-taxable, and partially taxable.
Taxable Allowances
Taxable allowances fall within the purview of the Income Tax bracket, forming an integral part of an employee’s overall salary. These financial perks are granted by employers as a recognition of the services rendered.
Non-taxable Allowances
Non-taxable allowances represent financial benefits provided by employers that are exempt from Income Tax. These allowances, which are entirely tax-free, include specific disability-related expenses and travel costs associated with caring for dependents.
Partially Taxable Allowances
Partially taxable allowances are subject to taxation up to a defined limit. The income tax amount is levied on these allowances within specified limits. The limits vary for different non-taxable allowances.
- House Rent Allowance (HRA): Taxable up to the lower of the actual HRA received, rent paid less 10% of (Basic+DA), 40% of basic salary for non-metro cities, and 50% of basic salary for metro cities.
- Leave Travel Allowance: Partially taxable, subject to specific conditions.
- Children Education Allowance: Capped at a maximum of 1.5 lakh for two children per assessee.
- Conveyance Allowance: Taxable if exceeding 19,200 per annum (1,600 per month).
- Entertainment Allowance: Deduction of 1/5 of salary or 5,000, whichever is lesser.
In Conclusion
Understanding the intricacies of allowances in salary, their tax implications, and the diverse categories they fall into is crucial for both employers and employees. This clarity ensures compliance with tax regulations and empowers individuals to make informed financial decisions.
