Tax free allowances in India (fully exempt allowances)

Tax-free allowances in India

There are 3 types of allowances

• Fully taxable allowances
• Partially taxable allowances
• Fully exempt allowances

Here you will get a basic idea about fully exempt allowances which will help you save your income tax.

Fully exempt allowances

The following fully exempt allowances are spelled out in Rule 2BB(1) of the Income tax rules

•     Conveyance allowance: If you have to travel around the city for discharging your official duties, you may be provided with an allowance every month which is termed as Conveyance allowance. As the name itself suggests, it is an allowance paid to you to meet your expenses on conveyance for discharge of your duties.

•     Uniform allowance: Do you wear a particular uniform while going to your workplace? If you wear, then you might get this allowance called Uniform allowance. It is given to reimburse you for the expenses on your uniform, be it purchasing a new one or maintaining it.

•     Daily allowance: This is an allowance offered to you when you are absent from your normal place of duty and is discharging your duty somewhere else. For eg. you are sent to Bangalore by your company for official purposes. The expenses that you incur on your lodging, food etc are covered by this allowance. 

•     Academic Allowance: if you want to undertake a training or an educational course, your employer may grant you this allowance which is fully exempt!

•     Travelling allowance: You may have to travel to a different place for which your employer will pay you an allowance called travelling allowance which will help you pay your expenses on any trip that you undertake.

•     Helper Allowance: If you have hired a staff/helper for discharging your official duties, you may be provided with a monthly allowance called as helper allowance which acts like a reimbursement to the salary paid to your helper.

Dont get confused between Conveyance allowance and Transport allowance!

While both the allowances may sound similar, there are differences between the two.

Transport allowance is paid to you for commuting from your house to your workplace and vice versa. But conveyance is paid to you for commuting within the city for official purposes. 

The similarity is, in both cases you can get exemption only when you have not been offered any vehicle or a transport perquisite by your employer.

Transport allowance along with Medical allowance had been replaced by the Finance Act 2018 with a standard deduction of Rs 40000. (Increased to Rs 50000 this year). You can still claim exemption for your conveyance allowance. 

A case analysis of Sun Outsourcing Solutions Pvt Ltd vs CIT (2018)

The taxpayer Sun Outsourcing Pvt Ltd had deputed some of its employees abroad to carry on some official duties. They were paid a lumpsum daily allowance to meet their cost of lodging and other expenses. Due to this no TDS was deducted on the allowances paid to them as the taxpayer took the monetary amount to be tax free as daily allowance is an exempt allowance. But the Assessing officer was not contended and treated the amount as perquisite to the employees. The matter was taken to the High Court.

What were the rulings of the case?

The High Court opined that the lump sum payment was granted to the employees in order to meet their cost of accommodation and other personal expenses. The living allowance must be used for official purposes. Also additional amounts were sent overseas in order to meet the high cost of living there. (City compensatory allowance). But such allowance must be granted with reference to the nature of duties and not with reference to the nature of posting. Also no expenditure log was maintained by the employees that could demonstrate that the expenses were used for carrying out official duties for which they were sent for. They failed to provide any documentary evidence.

It does not matter whether the expenses were reimbursed or necessary disbursement was provided to be regarded as a taxable perquisite. It only matters what purposes such money had been used for. If any personal advantage had been derived from the amount offered as allowance, it will be taxed as a perquisite.

Hence the taxpayer was liable for the deduction of TDS at the time of disbursement, the failure of which made the taxpayers liable to penalty and the interest amount too!

Thus it is always important to have proper documentations in place whether you are an individual or a company if you don't want to fall into troubles.

Know more about the standard deduction.

Also know how to save tax through relief system u/s 87A