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Income Tax Laws – I

Notes The allowances which are fully taxable in the hands of employee are:
1. Dearness Allowance, Additional Dearness Allowance and Dearness Pay: This is a very
common allowance these days on account of high prices. Sometimes Additional Dearness
Allowance is also given. It is included in the income from salary and is taxable in full.
Sometimes it is given under the terms of employment and sometimes without it. When it
is given under the terms of employment it is included in salary for purposes of determining
the exemption limits of house rent allowance, recognised provident fund, gratuity and
value of rent free house and is also taken into account for the purposes of retirement
benefits. Sometimes dearness allowance is given as ‘Dearness Pay’. It means that it is
being given under the terms of employment.
2. Fixed Medical Allowance: Medical allowance is fully taxable even if some expenditure has
actually been incurred for medical treatment of employee or family.
3. Tiffin Allowance: It is a fully taxable allowance. It is given to employees for lunch as
coupons or added as part of salary.

4. Servant Allowance: It is fully taxable even if it is given to a low paid employee, not being
an officer, i.e., it is taxable for all categories of employees.
5. Non-practicing Allowance: It is generally given to those medical doctors who are in
government service and they are banned from doing private practice. It is to compensate
them for this ban. It is fully taxable.

6. Hill Allowance: It is given to employees working in hilly areas on account of high cost of
living in hilly areas as compared to plains. It is fully taxable, if the place is located at less
than 1,000 meters height from sea level.
7. Warden Allowance and Proctor Allowance: These allowances are given in educational
institutions for working as Warden of the hostel and/or working as Proctor in the
institution. These allowances are fully taxable.
8. Deputation Allowance: When an employee is sent from his permanent place of service to
some other place or institution or organisation on deputation for a temporary period, he
is given this allowance. It is fully taxable.
9. Overtime Allowance: When an employee works for extra hours over and above his normal
hours of duty he is given overtime allowance as extra wages. It is fully taxable.
10. Other Allowances: Other allowances like Family allowance, Project allowance, Marriage
allowance, City Compensatory allowance, Dinner allowance, Telephone allowance etc.
These are fully taxable.

7.3.2 Partially Exempt Allowances

This category includes allowances which are exempt upto certain limit. For certain allowances,
exemption is dependent on amount of allowance spent for the purpose for which it was received
and for other allowances, there is a fixed limit of exemption.
1. House Rent Allowance (HRA): House Rent Allowance (HRA) is generally paid as component
of salary package. This allowance is given by an employer to an employee to meet the cost
of renting an accommodation. Section 10(13A) of the Income Tax Act provides for exemption
of HRA based on certain rules. In order to claim HRA exemption, the following basic
conditions should be met:

Assessee should be staying in a rented accommodation.

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