Salary and allowances are a thing of curiosity for many people because salary is generally well known in a job but allowances vary from one place to another and one type of job to another job. Total emoluments are the sum of salary and allowances and if allowances are more then the emoluments become very impressive. Traditionally the idea of giving allowances and reimbursements was basically to save taxes as there was a time when many reimbursements and allowances were treated as tax free. But today it is not like that and only a very few allowances and reimbursements are tax free so the situation is now drastically changed from that earlier perspective. Anyway, point wise answers to query are as follows -
1. Some allowances are related to inflation and are in the nature of dearness allowance. Other are like transport allowance for coming to and going back from office or workplace. Then there are allowances like washing allowance, overtime allowance, hard duty allowance etc which are actually job specific and sometimes are in the nature of reimbursement also. When the employees go outstation they are given travel allowances, hotel staying allowances, and daily pocket allowances etc. In some places, employees are given canteen allowance or canteen subsidy. Further, in some organisations instead of allowance some related items are issued to them. For example torch cells to the security people, free snacks, tea, and food to late working employees, holiday duty allowance etc. Some other allowances are Entertainment allowance, City compensatory allowance, Interim allowance, Project allowance, Uniform allowance, Cash allowance, Non-practicing allowance (generally given to doctors), Warden allowance, Servant allowance etc.
2. Most of the allowances are taxable except a few but with some limits like House Rent Allowance (up to 40% of basic salary, 50% in case of employees staying in 4 metros - Delhi, Mumbai, Chennai and Bangalore, subject to actual rent paid being more than HRA plus 10% of basic salary), Conveyance allowance up to Rs 1600 per month, Payments to government employees posted abroad, Sumptuary/Compensatory allowance paid to Supreme Court and High Court judges etc. Some allowances/reimbursements are also non taxable like stitching charges, food compensatory allowance, petty medical reimbursements, Children education allowance etc.
3. Some allowances like dearness allowance are fully taxable while HRA, CEA, Medical allowance, Conveyance allowance etc are partially taxable as some limits are there above which they do not qualify for tax rebate. On the other hand some allowance like payments to government employees posted abroad, allowance for UN employees, Sumptuary/Compensatory allowance paid to Supreme Court and High Court judges etc are fully non taxable.
4. Govt employees get various types of allowances depending on which department they work. For example Railways has its own allowance patterns. In general Govt employees get dearness allowance, medical allowance, CEA, HRA, TA/TTA etc.
5. Reimbursements are generally after the employee has done the expenditure and submits the receipt for the same. Some reimbursements are generally tax free but nowadays some of them are aded as perquisites to the employees salary making them taxable. Allowance are different from reimbursement and are in the nature of salary only.
6. Income tax defines salary and allowances separately as some allowances become partially tax free or fully tax free. Moreover, there are many payments which are based on salary and for that allowances are not taken into account. That makes a difference in calculating that benefit. For example if festival advance (loan) is limited to 10 times of the monthly salary then for calculation purposes only salary is taken which is generally called basic salary. In the pay scales what we see is this basic salary only.
There has been a big shift now in understanding the salary and allowances as Govt has clearly mentioned that anything given in indirect way either reimbursement or allowance is taxable until unless it is specifically exempted by the Income Tax department. In view of this the old charm of allowances (being non taxable) is not there now.
Knowledge is power.