If you get allowances exclusively for the performance of your duties, and use it entirely for that purpose, it is fully exempt from tax.
Raj received his first salary this week and a look at the pay slip left him flummoxed. Basic pay, dearness allowance (DA), house rent allowance (HRA), conveyance allowance, telephone reimbursement – the list of items was never ending. He never knew that the salary of Rs 30,250 could be split into so many components. He decided to meet his auditor-friend Deepak and get some clarity on this.
Dusting ‘A Beginner's guide to the Income Tax Act' off his shelf, Deepak began. “Salary in the Income Tax Act is defined under sec 17. According to this section, salary includes wages, annuity or pension, gratuity, fee, commission, perquisites, any advance of salary, …..”. “Wait!” cried Raj. “Look at my salary slip. I don't get any pension or commission or perquisite that you are talking about. What I have instead is several allowances. Your definition of salary doesn't include allowances. Does that mean that if I receive portions of my salary as allowances, it is not taxed?” This discovery thrilled Raj.
But it was too good to be true. “Ask any tax practitioner and he will tell you that allowances, as a thumb rule, are always taxed,” answered Deepak. Raj knew it was coming. Almost Rs 2,000 was deducted from his pay towards income tax. If allowances were not taxed, there was no way that the tax deduction could be such a big figure.
“Take DA for example”, continued Deepak, “There is no mention of any exemption anywhere for DA. So, applying the thumb rule, it is fully taxed.”
“Going by what you are saying, if the Income Tax Act mentions any allowance as specifically exempt in any of its sections, then, that allowance will not be taxed, isn't it?”. Raj was smart.
“True,” uttered Deepak turning his pages to sec 10. It was the section dealing with exempt income. “Your HRA is a good example, if you are living in a rented house. Sec 10(13A) mentions that any specific allowance granted to the employee to meet the rental expenditure towards accommodation is exempt.” After the DA disappointment, that was a relief to Raj.
But even this was short-lived. There seemed to be conditions on the exemption. The exemption was limited to the least of either the actual allowance received or two-fifth of the salary due or the excess rent paid over one-tenth of salary due.“ Similarly, if your office gives you leave travel allowance (LTA), it is exempt but subject to restrictions,” continued Deepak.
“Broadly, if you get allowances exclusively for the performance of your duties, and use it entirely for that purpose, it is fully exempt. Others like even the conveyance allowance (for commuting between office and home) that's on your pay slip are only partially exempt from tax,” he said, making it sound like a sermon.
“At least, the law is more open about perquisites. Unlike allowances, it has a definition in sec 17(2) and is included in the definition of salary too,” said a dismayed Raj, who had begun browsing through the book himself. “Yeah, that's one difference between them. Besides, there are also rules to calculate the taxable value of many perks,” explained Deepak. A third difference is that, since allowances find a mention under sec 10 dealing with exempt income, it can be classified as exempt and non-exempt allowances. But the right way to classify perks would be ‘taxable and not taxable'.”
Raj's eyes lit up. “You mean, there are perks that are not taxable? I assumed that since it is included in the definition of salary for tax purposes, all perks are taxable.”
“That assumption is not entirely correct,” said Deepak. “One good example is the provisions regarding medical facilities. If your company provides medical treatment for you or any of your family members in a hospital run by the company, or in any other approved hospitals for certain specific ailments, or pays or reimburses your medical insurance premium, then it is not considered a taxable perquisite. Some auditors will tell you that even telephone reimbursements are not taxed as perquisites.”
“Hmmm….That was a good revelation,” said Raj, standing up, knowing fully well that there could be a lot more to be discussed with Deepak. But he was running late for work. He would catch up with him another day.
(This article was published on March 3, 2012)