Hello, in this post we are going to discuss the different types of allowances in the salary slip of an employee.
We will cover the following topics:
- What is an Allowance?
- Types of Allowances in the salary slip
- Difference between Basic salary and Allowance
- Difference between Allowance and Reimbursement
What is an Allowance?
An allowance is a fixed amount received by a salaried employee from his employer to meet specified needs or expense other than his/her basic salary.
The allowance amount is calculated on the basic salary of the employee. According to the law, the basic pay will be 30% to 60% of the salary. For example, if employees work more than their fixed working hours, they get overtime allowance.
Allowances are a part of the salary and it is taxable, except for some exemptions provided under various sections of the Income Tax Act.
Types of Allowances in the salary slip
The different types of allowances in the salary slip for the benefit of an employee are:
- Taxable Allowances
- Partly Taxable Allowances
- Non-taxable Allowances
- Dearness Allowance (DA): DA is provided to compensate for the inflation impact on the employee during his/her employment period. It is based on the cost of living. Dearness allowance is usually revised twice in a year, first in January and then in July. So it is taxable under ITA.
- City Compensation Allowance(CCA): It is for the employee to meet his/her high costs of living in a metropolitan / Tier-1 city like Delhi, Mumbai or Bangalore.CCA is also applicable for Tier-2 city employees and it changes from one city to another. The employer need not provide CCA as it is taxable if the amount is above Rs.900.
- Entertainment Allowance: It is given to the employees for expenses like the meal, beverages, hotels, etc. for the business clients of the company. Government employees can claim the exemption u/s 16(ii) for it but not non-government employees.
- Overtime Allowance: The amount provided when an employee does extra working hours than his regular working hours.
- Tiffin Allowance: It is provided for the food expenses of the employee.
- Cash Allowance: The employer provides cash allowance like marriage allowance, holiday allowance, etc. to the employee and it is taxable.
- Project Allowance: The amount provided to carry out the expenses for the project by the employee.
- Servant/helper Allowance: The employee gets an allowance for hiring a servant/helper and it is fully taxable.
Partly Taxable Allowances
- House Rent Allowance (HRA): HRA is to meet the accommodation expenses of the employee. It is partially exempt u/s 10(13A), and the remaining amount is taxable.
- Leave Travel Allowance (LTA): It is offered for an employee for travelling anywhere in India for the company purpose. The company can only provide a part of the fare and the balance amount is taxable.
- Conveyance Allowance: The amount offered to the employees for travelling from home to office, and vice versa. However, any expense over Rs.1,600 per month is taxable.
- Medical Bills Reimbursement Allowance: The amount given by the employer for the treatment of the employee or his/her family. If the amount is above Rs.15,000 then it is taxable.
- Education Allowance: Here the employees get an allowance to educate their children in India. If the amount is more than Rs.100 per month for a child (maximum of 2 children) then it is taxable.
- Hostel Allowance: It provides you with Rs. 300 per month for a child. You can claim it for a maximum of 2 children.
- Allowance to Government Employees: Any amount paid for rendering services outside India by the Government.
- Allowances given to Supreme Court / High Court judges.
- Benefits received by the people working in the UNO.
Note: These non-taxable allowances can become taxable allowance if the employee do not use them.
Difference between Basic salary and Allowance
The base income of an employee which is constant and fixed. This entire amount is a part of your in-hand salary. So, basic salary depends on the employee’s designation and their area/industry of work.
Allowances are an integral part of the salary structure of an employee. It is provided besides the basic salary. It mainly depends on the employer and can also vary from company to company.
These allowances also include HRA (house rent allowance), LTA (leave travel allowance), DA (dearness allowance), medical, vehicle, mobile phone, incentives and special allowances.
Difference between Allowance and Reimbursement
The amount to cover the expenses of an employee during his/her employment period. For example, if an employee uses his/her vehicle to travel, then the company will provide him with a transportation allowance.
When the employer covers the business expenses of the employees. They add nothing to the employee’s income. So, it is not taxable if you submit the bill or any proof of payment.
With that, we have come to an end of this post on types of allowances.
Share with us your views and opinions in the comment section below.