Allowance

Definition and Meaning

Employers may give employees a fixed or variable amount in addition to their base salary, known as allowances, to help pay for their work-related expenses or requirements. Allowances are included in the salary structure of an employee’s pay when calculating payroll, and so an employer will have to determine what type of allowance an employee receives in order for that allowance to be treated for taxation purposes. Types of allowances, taxable, partially taxable, or exempt from tax, are determined by the nature of the allowance given to the employee.

Key Highlights of Human Resources

• A major component of the salary structure.
• Paid to cover employees’ reasonable work-related expenses.
• Contributes to the payroll process and payroll calculations on a monthly basis for employees.
• Provides tax deduction opportunities under certain qualifications through the deductibles.
• Assigned and processed by way of payroll and HRMS modules.

Compliance with Legal Regulations

There is no one regulating all allowances. Instead, allowances generally fall under the following categories:

• Taxation/exemption as prescribed by the Income Tax Act of 1961.
• Provident Fund (PF) and the Employee State Insurance Act (ESI) are based on the type and nature of allowance.
• Companies’ compensation and benefits policies.

Employers should be diligent in categorizing all allowances so that proper taxes are withheld, and statutory compliance occurs for all employees.