What are different allowances? How to calculate exempt allowances?

Allowance is generally defined as a fixed quantity amount given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service.

Tax treatment of different allowances is given below:-

1) House Rent Allowance (HRA):-  HRA is given by the employer for meeting the cost of living of the employee. HRA is exempt to the extent of least of the following amount:

            1) Actual HRA received,

            2) Rent paid - 10% of basic salary & DA,

            3) 50% of basic salary & DA for Mumbai, Delhi, Kolkata and Chennai Or  40% for other cities

2)  Entertainment Allowance:- It is taxable as salary income. In the case of Government employees, it is first added to salary and thereafter least of the following is deductible from salary in respect of entertainment allowance.

           a)  Rs.5,000/-  or

           b) 20% of Salary or  

           c) Amount of entertainment allowance

 Salary for this purpose excludes any allowance, benefit or other perquisites.

3) Special Allowances:- Under this allowances are divided into the following two categories.

  I) When exemption depends upon actual expenditure incurred by the employee (Official Allowances):- In these categories allowances are exempt u/s 10 to the extent of the amount of allowance is used for the purpose for which the amount is received. In simple, the amount of exemption under this category is the least of following

1. Amount of allowance; or

2. Amount used for the purpose for which allowance is given

On the above basis exemption is available in case of the following allowances:-

•   Travelling Allowance / Transfer Allowance
•   Conveyance Allowance
•   Daily Allowance
•   Helper Allowance
•   Research Allowance
•   Uniform Allowance

II) When exemption does not depend upon actual expenditure incurred by the employee (Special Allowances):- In this category, the amount of exemption does not depend upon actual expenditure incurred by the employee but depends upon the amount specified in the income tax rule in respect of concerned allowance specified under this category. Allowances received under this category are exempt to the extent of lower of following

1. The amount of allowance; or

2. The amount specified in the income tax rules

On the above basis, the exemption is available in case of the following allowances and limit of the amount of exemption as per income tax rule given against them as follow