Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. Definition of “Salaries” includes

(i)                  Wages

(ii)                Annuity or pension

(iii)               Gratuity

(iv)              Fees, Commission, perquisites or profits in lieu of salary

(v)                Advance of Salary

(vi)              Amount transferred from unrecognized provident fund to recognized provident fund

(vii)             Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit

(viii)           Leave Encashment

(ix)              Compensation as a result of variation in Service contract etc.

There are also allowances given regularly in addition to salary for meeting specific requirements of the employees. As a general rule, all allowances are to be included in the total income unless specifically exempted. Exemption in respect of following allowances is allowable to the extent mentioned against each:

House Rent Allowance: Provided that expenditure on rent is actually incurred, exemption available shall be the least of the following:

  • HRA received.
  • Rent paid less 10% of salary.
  • 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here means Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment.

Leave Travel Allowance: The amount actually incurred on performance of travel on leave to any place in India by the shortest route to that place is exempt. This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air) by such route, provided that the exemption shall be available only in respect of two journeys performed in a block of 4 calendar years.

Certain allowances given by the employer to the employee are exempt u/s 10(14). All these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:

For the purpose of Section 10(14)(i), following allowances are exempt, subject to actual expenses incurred:

  • Allowance granted to meet cost of travel on tour or on transfer.
  • Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee.
  • Allowance granted to meet conveyance expenses incurred in performance of duty, provided no free conveyance is provided.
  • Allowance granted to meet expenses incurred on a helper engaged for performance of official duty.
  • Academic, research or training allowance granted in educational or research institutions.
  • Allowance granted to meet expenditure on purchase/ maintenance of uniform for performance of official duty.

Under Section 10(14)(ii), the following allowances have been prescribed as exempt.

Type of Allowance Amount exempt
Special Compensatory Allowance for hilly areas or high altitude allowance or climate allowance. Rs.800 common for various areas of North East, Hilly areas of UP, HP. & J&K and Rs. 7000 per month for Siachen area of J&K and Rs.300 common for all places at a height of 1000 mts or more other than the above places.
Border area allowance or remote area allowance or a difficult area allowance or disturbed area allowance. Various amounts ranging from Rs.200 per month to Rs.1300 per month are exempt for various areas specified in Rule 2BB.
Tribal area/Schedule area/Agency area allowance available in MP, Assam, UP., Karnataka, West Bengal, Bihar, Orissa, Tamilnadu, Tripura Rs.200 per month.
Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place. 70% of such allowance upto a maximum of Rs.6000 per month.
Children education allowance Rs.100 per month per child upto a maximum 2 children
Allowance granted to meet hostel expenditure on employee’s child. Rs.300 per month per child upto a maximum two children.
Compensatory field area allowance available in various areas of Arunachal Pradesh, Manipur Sikkim, Nagaland, H.P., U.P. & J&K. Rs.2600 per month
Compensatory modified field area allowance available in specified areas of Punjab, Rajsthan, Haryana, U.P., J&K, HP., West Bengal & North East. Rs.1000 per month
Counter insurgency allowance to members of Armed Forces. Rs.3900 Per month
Transport Allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of residence & duty. Rs.800 per month
Transport allowance granted to physically disabled employee for the purpose of commuting between place of duty and residence. Rs.1600 per month
Underground allowance granted to an employee working in underground mines. Rs.800 per month
Special allowance in the nature of high altitude allowance granted to members of the armed forces Rs. 1060 p.m. (for altitude of 9000-15000 ft.) Rs.1600 p.m. (for altitude above 15000 ft.)
Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance Rs. 4,200/- p.m.
Special allowance granted to members of armed forces in the nature of island duty allowance.(in Andaman & Nicobar & Lakshadweep Groupof Islands)


Rs. 3,250/- p.m.