The Income Tax Act: Allowances with marginal benefits

Arnav Pandya

There are a few allowances that have some marginal benefits under the Income Tax Act so this is something that the individual will have to consider but the main point is that the amount involved here is not significant. Considering the overall inflation and the position in the economy the amount that is provided as an exemption from taxation for several of these allowances is so small that it does not have even a tangible impact on the overall tax amount that has to be paid by the individual. Here is a look at three such allowances which might be present in the salary structure of several people but which end up giving marginal benefit.

Children education allowanceThere are several companies that provide an amount to the individual employee for the purpose of the education of the children of the employee. This is done under the head of children’s education allowance and the amount is meant so that the fees and education cost of the children is met. When it comes to the issue of taxation then the manner in which the tax impact will be visible is that the total amount of the allowance would have to be first considered and from this figure the amount that is allowed as an exemption would have to be removed. The law provides that a sum of Rs 100 per month per child subject to a maximum of two children would be the figure that would be allowed as an exemption. This means that 1,200 per year per child so if there are two children then the amount here would go up to 2,400. This is the figure that would be exempted and here the actual amount that is spent for this purpose does not enter into the calculations.

Hostel expenditure allowanceSeveral employers also give an allowance for the purpose of meeting the hostel expenditure of children who are studying and then staying in a hostel because they are outside the home and in some other city or town. There is also a benefit for this allowance in the same form as was witnessed for the children’s education allowance though this is in addition to the children’s education allowance. The manner of working is that the total amount of the allowance is added up and from this figure the amount that is not taxable which represent Rs 300 per month per child would be removed and the net figure would then be the amount that is actually taxed. This means that the relief on this front is Rs 3,600 per year per child which will come to a maximum of Rs 7,200 per year if there are two children. In both these cases the actual amount spent has no relation to the amount that is exempt.

Transport allowanceThis is the amount that is given to an employee to meet his expenditure for commuting between office and residence. The amount that is exempt here is Rs 800 per month and once again the actual amount that is spent for this purpose is not taken into consideration. This represents a total of Rs 7,200 per year and often this is the figure that is provided to the employee under this head so the entire amount becomes tax free in their hands. A look at the amount shows that the total figure is not enough to actually meet the needs of commuting between the residence and the office in many cases. If there is a figure that is higher than the exempt amount that is received then it would be taxable in the hands of the employee under the head of salaries.