Allowance | Meaning and Definition

What is the meaning of allowance in salary?

An allowance is a fixed amount of money paid by employers to their employees periodically. In other words, it is a sum of money given to someone regularly, typically weekly or monthly, for a specific purpose. If you want to define them specifically, here is an example – employers pay employees overtime above and beyond their basic salary when they work more hours.

What is Salary in Income tax?

Salary is defined as per Section 17(1) of the Income Tax Act that it is anything paid to an employee in exchange for their work – whether it’s an hourly wage, annual salary, commission, tips, bonuses, or benefits. In addition to that, there are multiple allowances that comes under salary. 

Types of Allowances

They are categorized into three such as taxable, non-taxable, and partially taxable : 


Taxable Allowances Non-taxable AllowancesPartially taxable Allowances







City compensatory 



Other allowance in salary

 HRA Leave Travel 

Children Education 

Hostel Expenditure 

Books and periodicals 

Conveyance under section 10 14 ii of the income tax act

Entertainment – deduction under section 16 ii

Other allowance



Books and Periodicals 


Gifts in kind

Recreational and medical facilities

 For UN employees



1. Taxable Allowances

These are taxable under the Income Tax bracket. These are taxable and form a part of an employee’s salary. It is a kind of financial advantage that an individual gets from his employer in return for the services provided by him.

2. Non taxable allowances

They are financial benefits provided by the employer on which no Income Tax is charged. They are completely non taxable under the Income Tax bracket.

Some are fully exempt – the first is for certain disability-related expenses, and the second is for travel costs related to caring for a dependent.

3. Partially taxable allowances

They are taxable up to a certain limit. Income tax amount is charged on these kinds up to a certain defined limit. These limits vary for different non taxable ones.

  • House rent – Actual HRA received by employee from employer, Rent paid less 10% of (Basic+DA), 40% of basic salary for non metro cities and 50% of basic salary for metro cities. The lower of the three amounts is charged under Income Tax.
  • Leave travel 
  • Children education – It is subjected to a maximum of 1.5 lakh for two children per assessee.
  • Conveyance – It is taxable if the amount is above 19200 per annum that is 1600 per month.
  • Entertainment – Deduction of 1/5 of salary or 5000 whichever the amount is lesser.

FAQs (Frequently Asked Questions)

It is a kind of special payment made to employees to cover their expenses such as House rent , dearness , travel etc.

It is the financial benefit given to the employee by the employer over and above the regular salary.

There are two types of allowances- taxable  and non taxable.

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