Special allowance- Its taxability and conditions for availing exemption

Allowances are fully taxable in the hands of the employee receiving them unless specific exemptions have been provided under the Act. Certain special allowances are exempted through sections 10(14)(i) and 10(14)(ii) of the Act.

An allowance qualifies for exemption under 10(14)(i) if the following conditions are met:

  • The special allowance or benefit is not in the nature of perquisite as provided under section 17(2) of the Act,
  • The allowance received must be granted to meet the expenses incurred wholly and exclusively for performing official duties or duties of employment of profit,
  • Exemption of the allowance paid shall be restricted to the amount actually incurred by the employee for the specific purpose. i.e. lower of, these two amounts shall be exempted: amount received or an amount actually spent.
    E.g. Considering the following data, what is the amount of exemption allowed?
    Mr A receives a special allowance- INR 20,000
    Actual expenditure incurred- INR 15,000
    INR 15,000 (actual expenditure) shall be exempted from a taxable amount of INR 20,000.
  • Expenditure is incurred only for official purposes and not for any personal purpose.
    Section 10(14)(ii) of the Act exempts the allowance received to meet his personal expenses at a place where-
    - He performs official duties or duties of employment of profit or
    - He ordinarily resides.

Exemption of the allowance paid shall be restricted to the limit prescribed under Rule 2BB(2).i.e., lower of these two amounts shall be exempted: amount received or limit specified.

Types of special allowance and their exemption limits

The old regime of the Act enlists various exemptions and their limits in Rule 2BB of Income Tax Rules, 1962. However, the new regime provides for the exemption of only a few allowances. The taxability of allowances under both the regimes, the exemption limits as specified in Rule 2BB of Income Tax Rules, 1962 are summarised below:

Nature of Allowance Exemption limit Exemption under the new regime (section 115 BAC)
Conveyance Allowance- to meet conveyance expenditure incurred on conveyance while performing duties of office or employment of profit Up to the amount of actual expenditure incurred for official purposes   Allowed
Transport Allowance: to meet the cost of travel when on an official tour or your transfer, including packing cost and cost of transportation of personal belongings on such transfer. Up to the amount of actual expenditure incurred for official purposes Allowed
Daily/Per-diem Allowance- to meet the ordinary daily charges incurred by an employee on account of absence from his usual place of duty on account of tour or transfer Up to the amount of actual expenditure incurred for official purposes Allowed
Helper/Assistant Allowance: to meet the expenditure of a helper hired to assist you in your office work Up to the amount of actual expenditure incurred for official purposes Not allowed. Therefore, allowance is fully taxable
Research Allowance: For encouraging academic research and other professional pursuits like training etc., in research and educational institutions. Up to the amount of actual expenditure incurred for official purposes Not allowed. Therefore, allowance is fully taxable
Uniform Allowance: For purchasing and maintaining the official uniforms to be worn while performing his duties Up to the amount of actual expenditure incurred for official purposes Not allowed. Therefore, allowance is fully taxable
Children Education Allowance            Up to INR 100 per month per child (available for a maximum of two children) Not allowed. Therefore, allowance is fully taxable
Hostel Expenditure Allowance Up to INR 300 per month per child (available for a maximum of two children) Not allowed. Therefore, allowance is fully taxable
Transport Allowance: to meet his expenditure for commuting between his residence and place of duty An employee who is deaf and dumb or blind or orthopedically handicapped with disability of lower extremities- INR 3,200 per month. Allowed
Allowance granted to an employee of any transport business to meet his personal expenditure while performing his duty provided the employee does not receive a daily allowance. Usually offered to employees of railways, airways and roadways entities Lower of:
  1. 70% of allowance received or
  2. INR 10,000 per month
 Not allowed. Therefore, allowance is fully taxable
  1. Special compensatory Allowance (Hilly Areas)
  2. High Altitude Allowance
  3. Uncongenial Climate Allowance
  4. Snow Bound Area Allowance
  5. Avalanche Allowance
(Subject to certain conditions and locations)		 It varies from INR 300 to INR 800 per month, depending on the location. INR 7,000 per month in the Siachen area of Jammu and Kashmir Not allowed. Therefore, allowance is fully taxable
High Altitude Allowance: granted, for operating in high altitude areas, to armed forces (Subject to certain conditions and locations) a) For altitude of 9,000 to
15,000 feet: up to INR 1,060 per month
b) For altitude above 15,000 feet: up to INR 1,600 per month		 Not allowed. Therefore, allowance is fully taxable
Highly active field area allowance: is offered only to members of armed forces (Subject to certain conditions and locations) Up to Rs. 4,200 per month Not allowed. Therefore, allowance is fully taxable
Island Duty Allowance: Offered only to the members of armed forces in Andaman and Nicobar, and Lakshadweep group of Islands (Subject to certain conditions and locations) Up to INR 3,250 per month Not allowed. Therefore, allowance is fully taxable
Border area allowance Remote locality allowance or Disturbed area allowance or Difficult area Allowance (Subject to certain conditions and locations) It varies from INR 200 to INR 1,300 per month, depending on the location Not allowed. Therefore, allowance is fully taxable
Compensatory Field Area Allowance.
If this exemption is taken, the employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations)            		Up to INR 2,600 per month   Not allowed. Therefore, allowance is fully taxable
Compensatory Modified Area Allowance.
If this exemption is taken, the employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations)		 Up to INR 1,000 per month Not allowed. Therefore, allowance is fully taxable
Tribal Compensatory Modified Area Allowance. If this exemption is taken, the employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations)area allowance in the following states:
(a) Madhya Pradesh
(b) Tamil Nadu
(c) Uttar Pradesh
(d) Karnataka
(e) Tripura
(f) Assam
(g) West Bengal
(h) Bihar
(i) Orissa		 Up to INR 200 per month Not allowed. Therefore, allowance is fully taxable
Counter Insurgency Allowance: Granted to the armed forces members operating in areas away from their permanent locations.
If this exemption is taken, the employee cannot claim any exemption in respect of border area allowance.
(Subject to certain conditions and locations)		 Up to Rs. 3,900 per month Not allowed. Therefore, allowance is fully taxable
Underground Allowance: Offered to employees working in uncongenial, unnatural climates in underground mines Up to Rs. 800 per month Not allowed. Therefore, the allowance is fully taxable.

Illustration

Mr A has two children. He receives a children education allowance of INR 300 p.m. for his elder one and INR 70 p.m. for his younger one. He also receives the following allowances: Transport allowance: INR 1,800 p.m.

Special compensatory tribal area allowance for his posting in West Bengal: INR 500 p.m. His taxable allowances shall be computed as under:

Particulars Exempt Allowance Taxable Allowances

Children Education Allowance:
Elder child: (300-100) p.m. x 12 months
Younger child: (70-70) p.m. x 12 months

 

INR 1200
INR 840

 

INR 2400
Nil

Transport allowance (INR 1,800 p.m. × 12 months)
Note: exempt to the extent of ` 3200 per month only in case of an employee who is deaf and dumb/blind/orthopedically handicapped with disability of lower extremities.

Nil

INR 21,600

Tribal area allowance: (500 – 200) p.m. × 12 months

INR 2400

INR 3600
Taxable allowances INR 4,440 INR 27,600

Goods and Services Tax (GST)

In 2017, the Indian government enacted the Goods and Services Tax (GST) Act. To consolidate numerous indirect taxes schemes into a single taxation system. GST is levied on the delivery of products and services from the producer to the customer, effectively replacing various indirect taxes such as service tax, entertainment tax, excise duty, and customs duty.

GST is furthermore categorized based on states and union territories,

  • State goods and services tax (SGST)
  • Central goods and services tax (CGST)
  • Integrated goods and services tax (IGST)
  • Union territory goods and services tax (UTGST)

Effects of GST on Indian economy

  • GST has simplified the taxation system of the country by unifying multiple indirect tax methodologies into one globally acceptable tax collection system, reducing compliance of tax and cost to a great extent.
  • GST has empowered many small businesses by reducing tax burdens and simplifying them. For firms with a turnover of more than Rs. 20 lakhs in case of supplier of services and Rs. 40 lakhs in case of supplier of goods, required to register under GST. Small businesses can register for a composition scheme, if they have businesses with an annual turnover of not exceeding Rs. 1.5 crores. Prior to now, Indian logistics companies had several warehouses throughout different states in order to avoid CST and state entry taxes. Due to the increase in buffer stock requirements and storage costs, they incurred significant expenditures. However, with the implementation of GST, the restrictions on interstate travel have been considerably removed and paved way for a better flow of goods across PAN India.
  • There will be more transparency in the system because customers will be able to determine exactly what taxes they are being charged.
  • Goods and services taxation provides tax credits for tax payments made by producers. Producers will be more likely to pick up raw materials from different sellers and more vendors will come under taxation jurisdiction by this measure.
  • Customs tariffs on exports have been abolished as a result of GST. Because of decreased transaction costs, the country's competitiveness in global markets will improve.

Disadvantages of GST implementation

  • The registration, maintenance of papers, invoicing, and filing of returns is a time-consuming procedure. As a result, several businesses outsource the GST filing procedure, incurring additional compliance costs.
  • In contrast, the late filing penalty is Rs. 50 (Rs. 20/day in case of NIL Return) for every day the failure continues, up to a maximum of 0.25% of the firm's annual turnover. The penalty imposable on non-GST compliance firms might affect small businesses drastically.
  • The government has made the GST registration and filing of returns online. While some urban and rural companies are progressively speeding their digital solutions, small businesses are unfamiliar with changing and advanced technology and solutions. Many firms may find it difficult to implement the GST system and such technological advancement will incur unnecessary operational costs.