Allowances & Perquisites

under the Head of ‘Salary’

(A General Introduction)
BY
DR. VIJAY SRIVASTAVA
DIRECTOR & PROFESSOR
IPEM LAW ACADEMY
SYNOPSYS
 Introduction to Allowances
 Essential features of Allowances
 Kinds of Allowances
 Fully Taxable Allowances
 Fully Exempted Allowances
 Partly Taxable Partly Exempted Allowances
 Computation procedure of Certain Important Allowances
 Introduction to Perquisites
 Essential features of Perquisites
 Kinds of Perquisites
 Fully Taxable Perquisites
 Fully Exempted Perquisites
 Partly Taxable Partly Exempted Perquisites
 Computation procedure of Certain Important Perquisites
Introduction

Allowance is a fixed monetary amount paid by the

employer to the employee for meeting some particular
expenses, whether personal or for the performance of his
duties. These allowances are generally taxable and are to
be included in the gross salary unless a specific exemption
has been provided in respect of any such allowance.
 Fully Taxable Allowances
 This category includes all the allowances, which are fully taxable. So, if an allowance is
not partially exempt or fully exempt, it gets included in this category. The main
allowances under this category are enumerated below:
 (i) Dearness Allowance and Dearness Pay 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. When a part
of Dearness Allowance is converted into Dearness Pay, it becomes part of basic salary
for the grant of retirement benefits and is assumed to be given under the terms of
employment.
 (ii) City Compensatory Allowance This allowance is paid to employees who are posted in
big cities. The purpose is to compensate the high cost of living in cities like Delhi,
Mumbai etc. However, it is fully taxable.
 (iii) Tiffin / Lunch Allowance It is fully taxable. It is given for lunch to the employees.
 (iv) Non practicing Allowance This is normally given to those professionals (like medical
doctors, chartered accountants etc.) who are in government service and are banned
from doing private practice. It is to compensate them for this ban. It is fully taxable.
Iv-Non practicing Allowance This is normally given to those professionals (like medical doctors,
chartered accountants etc.) who are in government service and are banned from doing private
practice. It is to compensate them for this ban. It is fully taxable.
(v) Warden or Proctor Allowance These allowances are given in educational institutions for
working as a Warden of the hostel or as a Proctor in the institution. They are fully taxable.
(vi) Deputation Allowance When an employee is sent from his permanent place of service to
some place or institute on deputation for a temporary period, he is given this allowance. It is
fully taxable. (vii) Overtime Allowance When an employee works for extra hours over and above
his normal hours of duty, he is given overtime allowance as extra wages. It is fully taxable.
(viii) Fixed Medical Allowance Medical allowance is fully taxable even if some expenditure has
actually been incurred for medical treatment of employee or family.
(ix) Servant Allowance It is fully taxable whether or not servants have been employed by the
employee.
(x) Other allowances There may be several other allowances like family allowance, project
allowance, marriage allowance, education allowance, and holiday allowance etc. which are not
covered under specifically exempt category, so are fully taxable.
II. PARTIALLY EXEMPT ALLOWANCES
 This category includes allowances which are exempt upto 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 assesse
 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’ an amount equal to 40% of salary (if accommodation
is situated in any other place). Salary for this purpose includes Basic Salary, Dearness
Allowance (if it forms part of salary for the purpose of retirement benefits), Commission
based on fixed percentage of turnover achieved by the employee.
 The exemption of HRA depends upon the following factors:
(1) Basic Salary (3) Rent paid (2) Place of residence (4) HRA received If an employee is living
in his own house and receiving HRA, it will be fully taxable.
 Patil Vijay Kumar v. UOI, 1985 ITR 48
 All India Laxmi Commercial Bank Officer’s Unoion v.
UOI, 1984 ITR 1
( It was held that, HRA paid to a person , who is living
in his own house for which he does not actually pay
any rent , is not exempt from tax)
 (ii) Entertainment Allowance 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).

 (iii) Special Allowances for meeting official expenditure 38 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, research
allowance and uniform allowance.

 (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 orthopaedically handicapped persons, it
is exempt up to Rs. 1600p.m.

d) Out of station 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 upto 70% of such allowance or Rs.6000
per month, whichever is less.
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 organisation to its employees are fully exempt from tax.
 Perquisites

“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or
wages.
“Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.

(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.

(iv) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer,
or former employer, free of cost or at concessional rate to the assesssee.

(v) The amount of any contribution to an approved superannuation fund by the exployer in respect of the assessee, to the
extent it exceeds one lakh rupees; and

(vi) the value of any other fringe benefit or amenity as may be prescribed.
 CLASSIFICATION OF PERQUISITES For tax purposes, perquisites specified under Section 17
(2) of the Act may be classified as follows:
(1) Perquisites that are taxable in case of every employee, whether specified or not
(2) (2) Perquisites that are taxable in case of specified employees only.
(3) (3) Perquisites that are exempt from tax for all employees
(1) Perquisites Taxable in case of All Employees The following perquisites are taxable in case of every

employee, whether specified or not:

1. Rent free house provided by employer

2. House provided at concessional rate

3. Any obligation of employee discharged by employer e.g. payment of club or hotel bills of employee,
salary to domestic servants engaged by employee, payment of school fees of employees’ children etc.

4. 4. Any sum paid by employer in respect of insurance premia on the life of employee

5. 5. Notified fringe benefits (on which fringe benefit tax is not applicable) – it includes interest free or
concessional loans to employees, use of movable assets, transfer of moveable assets.
 Perquisites taxable in case of Specified Employees only The following perquisites are
taxable in case of such employees:

 1. Free supply of gas, electricity or water supply for household consumption

 2. Free or concessional educational facilities to the members of employees household

 3. Free or concessional transport facilities

 4. Sweeper, watchman, gardener and personal attendant

 5. Any other benefit or amenity Specified employee is an employee who is either a director
or has substantial interest in the company where he is employed or is drawing monetary
salary of more than Rs.50, 000 during the previous year.
THANK YOU