Buy a Life Insurance Plan in a few clicks
A plan that offer guaranteed returns and financial protection for your family.
Kotak Guaranteed Fortune Builder
A plan that offers guaranteed income for your future goals.
Thank you
Our representative will get in touch with you at the earliest.
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Allowances play a significant role in our lives, and understanding the tax implications of these allowances is crucial to managing your finances effectively.
Are you curious about the various allowances you may receive as part of your salary in India? Whether you are a working professional or a business owner, understanding the types of allowances and their tax implications is essential. This will help you plan your taxes more effectively.
Allowances are a vital component of your salary, providing financial assistance for specific expenses. Your employer can pay these on top of your basic salary to meet various needs and necessities. Allowances are added to an individual’s salary and subject to tax under the head Income from Salaries under the Income Tax Act of 1961. Salary allowances are categorized into three groups: partially taxable, non-taxable, and taxable. However, not all allowances are treated the same regarding taxation. Several types of tax allowances can be availed of if you have the proper knowledge about them.
There are two broad categories of allowances: taxable and non-taxable allowances. However, there is a mixed category where partially taxable allowances are covered. Here are the details for these three categories:
Allowances that are included in salary and are not covered by the Income Tax Act in any way are considered taxable. These are subject to taxation based on the employee’s tax slab. The following are a few well-known taxable allowances:
Dearness Allowance is a part of a salary that is a set percentage of the basic pay that can be affected by inflation. As DA and the cost of living are directly correlated, the DA component varies depending on the employee’s location. This means DA is different for employees in the urban sector, semi-urban sector, or rural sector.
CCA or City Compensatory Allowances refers to a benefit that employers—public or private—offer to their staff as a way to offset the higher cost of living in Tier-1 or metropolitan areas. There is no upper or lower limit for CCA, and if the amount exceeds ₹900/-for all taxation purposes, CCA is fully taxable.
Medical allowance is a monthly fixed benefit that employees of a company receive regardless of whether they provide bills to support the expense or not. This benefit is fully taxable for individual salaries.
These allowances are considered part of an employee’s salary but are fully exempt from income tax. This means that when calculating taxable income, these allowances are deducted from the gross salary. Here are some commonly known tax-exempt allowances:
This allowance covers purchasing or maintaining uniforms required for work. It is exempt from the actual amount spent on these expenses.
Sumptuary allowances granted to High Court judges under Section 22C of the High Court Judges Act, 1954, are not taxable.
Compensatory allowances received by judges under Article 222(2) of the Constitution are not taxable because they are not considered part of salary or perquisites.
Helper Allowance compensates employees for the expenses incurred on hiring a helper for official duties.
LTA is non-taxable for the expenses incurred on actual travel, subject to certain rules and restrictions.
These allowances are exempt from tax to a certain limit, as instructed in the Income Tax Act. Here are a few commonly known partially taxable allowances:
HRA is taxable if you live in your own house or do not incur any rent expenses. The amount of HRA exempt from tax is determined based on your actual rent paid and your salary structure. It can be partially or fully tax-free. The least of the following is exempt:
HRA is taxable if it is received by an employee living in their own house or if they do not pay any rent. Employees must report the PAN of their landlord to their employer if the rent paid is more than ₹1,00,000 [Circular No. 08/2013 dated October 10, 2013].
Up to ₹100 per month per child, up to a maximum of 2 children is exempted. As per section 10(14), hostel expenditure allowance is up to ₹300 per month per child to a maximum of 2 children is exempted from the taxes.
Employees receive this allowance to help with living expenses related to entertainment, etc. Only government employees are eligible for an entertainment allowance deduction under the Act; entertainment allowances for non-government employees are fully taxable. The deduction amount will be less than 1/5th of the basic pay or ₹5000, or entertainment allowance received by the employee
Understanding the types of allowances in India and their tax implications is crucial to plan your finances effectively. It is important to note that tax laws and regulations can change, so it is advisable to consult a tax professional or refer to the latest tax guidelines for the most accurate and up-to-date information.
In the field of taxation, keeping up-to-date with the rules and regulations can help you make informed financial decisions and ensure you are not caught off guard when it is time to file your tax returns. So, keep these distinctions in mind and make the most of the non-taxable allowances while being prepared for the taxable ones in the fiscal year 2022-23.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
