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  • Different types of allowances given to employees from his employer.

    Wondering what are the various types of aloowances disbursed by any employer? Searching for elaborate description of each of these allowances? Scroll through tihs Ask expert page and get all the required information.

    We all know about allowances like Food, Transportation, House Rent Allowance (HRA) given by the employer to his employees but there are many other different allowances given by the comply or employer. Here I would like our experts to throw more light on the different types of allowances concerning the question asked, like:
    1. What are the different types of allowance and please elaborate on them?
    2. Are allowances treated as part of the salary and are taxable or are exempted from tax?
    3. What are the Taxable, non-taxable, and partially taxable allowances?
    4. What are some of the special allowances given to government employees?
    5. Do reimbursement and an allowance the same or different?
    6. Do allowances affect the salary or are they separate and why?
    7. Any additional information about allowances.
  • Answers

    4 Answers found.
  • In a government job as well as in private jobs the total salary will not be paid as a basic salary. The total emoluments they pay will be divided into basic salary and other allowances. In government jobs, the scales are fixed and the allowances are fixed based on your designation. There will not any bargaining in these jobs. But in private jobs, the salary can be negotiated and if both come to an agreement only an appointment letter will be issued. These days in the majority of private jobs, Cost to the Company ( CTC) is calculated. CTC is the amount the company is spending to get your services to the company.
    The salary is split into basic salary and allowances. The allowances generally we see in many private organisations as well as in government jobs are as follow.
    Provident Fund, House Rent allowance, travel allowance, medical allowance, insurance, Leave travel allowance, performance bonus, bonus, shift allowance, food allowance, are some allowances generally we here. In this shift, allowance is not treated as a part of your salary. That will be given only when you attend duty in shifts on a day to day basis.
    A part of some allowances will be exempted from income tax. The rules pertaining to this will be mentioned in the IT rules. The PF contribution made by the employer is exempted from tax. The contribution you pay for PF is also exempted from tax under 80C. The house rent allowance they pay is also exempted to some extent based on the rent you pay and your basic salary. Leave travel allowance is exempted once in two years if you provide proof of expenses.
    All government and private jobs will have similar allowances. But the main difference between a government job and a private job is DA. The Dearness Allowance (DA) will be getting revised every six months to the government employees based on the rise in the Price index. But private employees will not get it. The minimum wages for the posts will be getting revised for the private employees also as per the labour rules once in 6 months. But once your salary crosses a particular limit those rules are not applicable to you.
    Allowances are different and reimbursement is different. In some companies, certain allowances will be paid as reimbursement. The medical allowance will be paid as reimbursement in some companies. This medical allowance is also exempted to some extent if paid as reimbursement.
    Mainly the actual expensed you make during the discharge of the duties will be paid as reimbursement. For example, you have to visit an office as a part of your duty. You may use your personal vehicle for this purpose. So the company will reimburse the expenses as per the rules of that company. This will not attract any tax. Similarly, when you go on tour the company will reimburse you TA and DA. This is not a part of your salary and no tax as you are getting the amount which you have spent.

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  • The solutions to your questions are as follows -

    1. What are the different types of allowances and please elaborate on them.
    Allowance is money that is given to improve the standard of living of the government employees of the country. In the whole world, many countries whose government employees are given this allowance. This money is given so that despite rising inflation, the level of living of the employee does not get disturbed due to the money. This money is given to government employees, public sector employees, and pensioners.

    2. Whether allowances are treated as part of salary and are taxable or exempt from tax?
    Starting with the basics of income tax, it is important to understand what is defined as income. According to the Income Tax Act, five categories of income have been prescribed, and based on these, the person earning the income is liable to pay. The payment received from your employer is placed in this category. This includes basic salary, annuity, advance, allowances, means of transport, special benefits, and retirement benefits, among others.

    3. What are the taxable, non-taxable, and partially taxable allowances?
    The taxpayer has to bear financial problems to ensure the future of his family, bear medical, educational expenses, and provide convenience to the family; Tax laws allow deductions from gross income. So by deducting the deductions from your gross income, you get net taxable income.
    According to the new tax rules, under the new tax regime, taxpayers will be given some of the following tax-exemptions and deductions:
    House rent allowance
    Daily expenses for employment
    relocation allowance
    Ancillary allowance
    Education allowance for children

    4. What are some special allowances given to government employees?
    Dearness allowance - is the most important allowance that an employee is given keeping in mind the daily needs of his / her daily life so that the employee can live a healthy life.
    Traveling Allowance - The government also provides this allowance with certain conditions, but currently many governments are reducing or eliminating it significantly.
    Medical Allowance - This allowance is also according to certain rules and conditions but it is mostly given to employees so that they or their family will never have any problem related to a healthy life.

    5. Is reimbursement and an allowance the same or different?
    No, there is a big difference between the two, in the case of reimbursement, it is that first, the employee has to bear his expenses himself, and then submit the application with all the bills to the department concerned, after some time you will get back your money. Most of the time this happens in the case of medical treatment. The first patient has to pay to the hospital, later the company returns the money to the employee.

    6. Do allowances affect salaries or are they different and why?
    In general, allowances are not added to your basic salary, but your basic income and allowances will be included in your overall income.

  • 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.

  • Allowances are the additional benefits given by the employer to the employee, so that the worker can meet his other expenditures. The reason behind these allowances is to retain the employees in the organization and to increase their standard of living. Each allowance is provided for a specific expenditure. Coming back to your questions, the solutions are:-

    1. There are a lot of allowances out of which the most common allowances are:-
    a) Dearness Allowance (DA) - The most common allowance given to the employee in order to improve his standard of living. Almost every organization gives this allowance to its employees.
    b) House Rent Allowance (HRA) - This is an allowance given to meet the rent expenditures of the employee, if he is living in a rented house.
    c) City Compensatory Allowance (CCA) - CCA is provided to meet the high inflationary rates and the cost of living in the metropolitan cities and other major cities.
    d) Daily Allowance - To help the workers in meeting their daily expenses.
    e) Children Education Allowance - For the purpose of education of the employee's children.
    f) Conveyance Allowance - To meet the travelling and stay expenses, if the employee is going outstation or to some other place for work.
    g) Travelling Allowance - Unlike conveyance allowance, this aids for the travel expenses of the employee from home to office and office to home.
    h) Medical Allowance - To meet the expenses of medical ailments.
    i) Entertainment Allowance - To meet the entertainment expenditures of the employee so that he could be stress-free, which in turn helps him to be productive.
    These are only a few. Other than this, there are uniform allowance, food allowance, leave travel concession, and many more. Also, allowances differ from work to work. Special allowances are given for judiciary works.

    2. Allowances are generally treated as part of salary. Basic salary along with the allowances and perks forms the salary income. Some of them are partially taxable, some are fully taxable and some are fully exempted.

    3. Certain allowances such as Dearness allowance, City compensatory allowance, Uniform allowance are fully taxable. Allowances like House rent allowance, Conveyance Allowance, Children education allowance are partially taxable. Conveyance allowance is exempted upto the expenditure incurred or the allowance given, whichever is least. Children education allowance is exempted upto Rs. 100 p.m each for 2 children ( Maximum of 2 children is allowed). House rent allowance is exempted on a certain calculation, i.e a) the actual allowance given, b) Rent paid less 10% of salary, c) 40% and 50@% of salary for normal cities and metropolitan cities respectively. The least of three is exempted. It is important to note that the meaning of salary for the purpose of calculating the exemption limit differs for each allowance.

    4. Some special allowances are given for government officials and higher officials. These include servant allowance, gas allowance, water allowance, sweeper allowance, etc. Other than this, they avail the benefit of perquisites such as car perks, food meals etc.,

    5. No, Reimbursement and allowances don't mean the same. Reimbursement are done by the employers after the employee has incurred certain expenditures from his own money. The employee has to submit the payment bills as a proof to the employer in order to avail the reimbursement from the latter. For example, sometimes, in case of outstation works, employee will submit the bills for his stay expenses and claim the amount.

    6. Allowances affect the salary.(to be precise, not the basic salary) . Allowances form part of the gross total salary and also some allowances are taxable.

    7. People has a perception that allowances are non-taxable. This is wrong and they should be aware of the taxability and do tax planning accordingly.

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