What are different allowances? How to calculate exempt allowances?

Allowance is generally defined as 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 employer for meeting the cost of living of the employee. HRA is exempt to the extent of least of 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 case of Government  

   Employees it is first added to salary and thereafter  least of 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 in following two categories.

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

     i) Travelling Allowance / Transfer Allowance

    ii) Conveyance Allowance

   iii) Daily Allowance

   iv) Helper Allowance

   v)  Research Allowance

  vi)  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 amount specified in the income tax rule in respect of concerned allowance specified under this category. Allowances received under this category exempt to the extent of lower of following

1. The amount of allowance; or

2. The amount specified in the income tax ru

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