💼 Complete Guide to Allowances in Salary: Types, Taxability & Exemptions (AY 2025-26)

📑 Table of Contents

1. What Are Allowances in Salary?
2. Classification of Allowances
3. Fully Taxable Allowances
4. Partially Exempt Allowances
5. Fully Exempt Allowances
6. Section-Wise Tax Exemption Chart
7. Tax Planning Tips for Salary Allowances
8. Common Mistakes to Avoid
9. Sample Calculation Table
10. Summary Table – Allowances & Taxability
11. Real Case Scenarios
12. Documentation for Exemption Claims
13. Internal & External Links
14. FAQs

1. 🧾 What Are Allowances in Salary?

Allowances are fixed amounts paid by an employer to an employee to meet specific expenses related to employment. They are usually paid in addition to basic salary and form part of the gross income.

2. 🧰 Classification of Allowances

Allowances can be broadly categorized into three types:

3. 💸 Fully Taxable Allowances

These are included in total income and taxed under “Income from Salaries”.

➡️ Read full article on Dearness Allowance

4. 🏠 Partially Exempt Allowances

These allowances are exempt up to a certain limit under specific sections:

➡️ Explore full article on HRA
➡️ LTA details and rules

5. 🌍 Fully Exempt Allowances

Some allowances are entirely exempt under certain employment types:

6. 📜 Section-Wise Tax Exemption Chart

7. 💼 Tax Planning Tips for Salary Allowances

• Submit rent receipts & PAN of landlord to claim HRA.
• Plan vacations smartly to claim LTA exemption.
• Use Children Education Allowance benefit by proper disclosure.
• Maintain documentation for all claimed allowances.

8. ⚠️ Common Mistakes to Avoid

• Misreporting taxable allowances as exempt
• Claiming HRA exemption without rent documents
• Reporting LTA for international travel (not allowed)
• Over-claiming education/hostel allowances beyond limits

9. 🧮 Sample Calculation Table – HRA Exemption

10. 📊 Summary Table – Allowances & Taxability

11. 📈 Real Case Scenarios

1. Private Employee Living in Rented House
   → Claim HRA exemption using rent receipts and salary slips.
2. Central Govt Employee with Two Kids in Hostel
   → Claim ₹1,200/month hostel exemption and ₹200/month education allowance.
3. Employee Travelled to Kerala by Flight on LTC
   → Claim LTA under Sec 10(5) only if within block year and submitted proof.

12. 📂 Documentation Required

1. Rent receipts + PAN of landlord (for HRA)
2. Travel tickets/boarding passes (for LTA)
3. Proof of school/college fees (for education allowance)
4. Official employer declaration on salary structure
5. Salary slips and Form 16
6. Form 26AS and AIS for cross-checking income

13. 🔗 Internal & External Links

Internal Links from TaxCrux:

• Basic Salary
• Dearness Allowance (DA)
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)

External Link:

• Income Tax – Exemptions

❓ FAQs

• What are allowances in salary structure?
  Fixed payments made for specific purposes like housing, travel, education, etc.
• Are all allowances taxable?
  No, some are partially or fully exempt under the Income Tax Act.
• How is HRA exemption calculated?
  Based on salary, rent paid, and city of residence using Sec 10(13A) rules.
• Can LTA be claimed for foreign travel?
  No, only domestic travel is allowed under LTA exemption.
• Is DA taxable?
  Yes, Dearness Allowance is fully taxable.
• What proof is needed for education allowance?
  Fee receipts and school documents of children.
• Is transport allowance still exempt?
  Yes, up to ₹1,600/month for non-disabled and ₹3,200/month for disabled employees.
• How to claim exemptions in ITR?
  Declare correctly in ITR-1 under Salary Schedule and provide documents to employer.
• Are these exemptions available under new regime?
  No, most exemptions are disallowed in the new tax regime.
• Can both HRA and LTA be claimed in the same year?
  Yes, if conditions are fulfilled and employer includes them in CTC.

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