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Non Taxable Allowances

What are Non-Taxable Allowances?

Non-taxable allowances are payments for which employees do not have to pay tax. They are also known as fully exempted allowances. These allowances are extra compensation paid to employees for job-related costs like travel and accommodation.

Non-taxable allowances are integral components of the salary but enjoy full tax exemption. This implies that when calculating taxes, they are subtracted from the overall salary.

In other words, incomes that are fully exempted or are non-taxable are those that neither contribute to the total income nor are subject to income tax.

Fully Exempt Allowances

The allowances on which there is no taxation at all are known as fully exempt allowances. The Income Tax Act of 1961 lists the allowances of different services that are fully exempt from taxes.

Here are some examples:

  • Allowances received by a Judge as compensation under Article 222(2) of the Constitution
  • Allowances received by a teacher/professor from a SAARC member state.
  • House rent allowance
  • Education allowance
  • Travelling allowance
  • Conveyance allowance
  • Uniform allowance
  • Compensatory allowance
  • Allowance received by employees of UNO

What are the types of Non-Taxable Allowances?

There are various types of non-taxable allowances. However, they remain non-taxable as long as they are used. If they are not used, the unused amount becomes taxable.

Here is the list of non-taxable allowances:

Uniform Allowance

Any allowance provided to cover expenses related to the purchase or maintenance of uniforms worn during the performance of official duties is exempted from the actual amount spent on such expenses.

Allowances for Government Employees Abroad

Allowances or perquisites granted outside India by the Government to an Indian citizen for services rendered abroad are exempt from tax.

UNO Employees Allowances

Allowances paid by the United Nations (UNO) to its employees are not subject to tax under Section 2 of the United Nations (Privileges and Immunities) Act.

Judges of High Court and Supreme Court Allowances

Allowances paid to Judges of High Courts and the Supreme Court are not taxable.

Compensatory Allowances

Compensatory allowances received by judges under Article 222(2) of the Constitution are not taxable as they are neither considered salary nor.

Sumptuary Allowance

Sumptuary allowance granted to High Court Judges under Section 22C of the High Court Judges Act, 1954, is not liable to tax.

Helper Allowance

Helper Allowance is granted to employees to cover expenses incurred when engaging a helper for official duties.

Other Tax-Free Allowances

This category includes Daily Allowance, Academic/Research Allowance, Conveyance Allowance, Allowances for government employees posted outside India, Compensatory Allowances for Judges, Travelling Allowance, and more.

What are the benefits of Non-Taxable Allowances?

Non-taxable allowances provide individuals with additional income that is not subject to taxation, thereby increasing their take-home pay and financial well-being. Here are some more benefits of non-taxable allowances:

Cover essential expenses

Non-taxable allowances help individuals meet necessary expenses such as housing, transportation, and uniforms without reducing their after-tax income.

Stay financially afloat

By receiving income that is not subject to taxation, individuals can better manage their finances, ensuring a more stable and comfortable financial situation.

Qualify for government benefits

Non-taxable allowances may help individuals maintain eligibility for various government assistance programs, as these allowances are not considered when determining income thresholds for such benefits.

Encourage work-related engagements

Non-taxable allowances can motivate individuals to engage in specific work-related activities, such as remote assignments or duties requiring special attire, by providing financial support without the burden of additional taxes.

Enhance job satisfaction

Enjoying the perks of non-taxable allowances can contribute to overall job satisfaction, as employees feel supported in covering necessary work-related expenses, leading to a more content and motivated workforce.

Bottom Line

Non-taxable allowances help you to pay for things like lodging, meals, and phone calls without taxes. It organizes your salary in a way that helps you plan your taxes effectively.

Upon joining an organization, individuals receive a breakdown of their fixed salary and allowances. Unfortunately, many are unaware of the tax implications. However, strategic placement of allowances in the salary structure can enable employees to save on taxes.

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