Non- Taxable Allowance

The second category of allowances companies provide to their employees are non-taxable allowances. It is not associated with the Income Tax Act of 1960. It helps reduce the financial burden on employees and encourages particular actions or behaviors by providing financial support for certain requirements or expenses.

Features:

• Particular Purpose: Non-taxable Allowances are usually provided for specific purposes, such as housing, travel, schooling, or medical costs.
• Regulatory Enforcement: Employers are responsible for ensuring that non-taxable allowances comply with all applicable tax rules and regulations to avoid legal issues and penalties.
• Paperwork: Non-taxable allowances require complete paperwork to prove eligibility and to show that tax laws have been followed.

Advantages:

• Cost Savings: A non-taxable allowance is an economical method for employers to provide employees with extra benefits without creating any extra tax burden.
• Employee Retention: Non-taxable Allowances are often used as an incentive to draw in and retain talented employees by giving additional incentives that do not affect their tax liability.
• Flexibility: Employers can design non-taxable allowances according to the requirements of employees or provide rewards for particular actions or behaviors.

Disadvantages:

• Complexity: These allowances are difficult to understand. Companies may need to obtain advice from professionals while deciding which allowances are not subject to tax.
• Possibility of Abuse: Employees may try to take advantage of non-taxable allowances by misrepresenting their costs or activities to obtain payments that are exempt from taxes.
• Tax Penalties: There may be an upper limit on the amount of non-taxable allowances that can be provided as tax-free; if those limits are exceeded, then the employer as well employee has to pay taxes.

Examples:

1. Allowances paid to Government Employees: Government employees receive allowances for providing services abroad which is completely exempted from taxation.
2. Judges’ Sumptuary Allowance: Judges of the Supreme and High Court are entitled to receive the sumptuary allowance on their salaries which is completely tax-free.
3. Judges’ Compensatory Allowance: The Indian Constitution’s Article 222(2) exempts judges of the Supreme and High Courts from paying taxes on their compensatory allowances.
4. Allowances Paid to UNO Employees: The United Nations provides allowances to UNO employees in India under the Privilege and Immunities Act.

The term “allowance” refers to the amount of money an employer offers to its employees for compensating expenses in addition to the base salary. Allowances are specific and are given to employees to fulfill their requirements. It is especially meant for paying day-to-day expenses such as food, transportation, education, and other necessities.

Key Takeaways:

• Well-designed allowances can help employees feel more satisfied and motivated by providing additional support for job-related expenses.
• Employers may be able to maximize tax efficiency for both themselves and their workforce by properly designing allowances, which can increase paychecks and raise the savings of employees.
• Generally, companies provide different types of allowances on a monthly, quarterly, or annual basis.
• Employers must be familiar with applicable tax rules and regulations when providing allowances to prevent legal and financial consequences.