If you receive a salary, chances are you also receive a host of allowances—HRA, transport, medical, and more. These are fixed monetary benefits given by employers to help cover work-related or personal expenses. But here's the catch: not all allowances are tax-free. Some are fully taxable, others partially, and a few completely exempt.

Understanding which is which can help you save on taxes and plan your finances better. This guide breaks down the different types of allowances, how they affect your salary, and what you can do to make smarter money decisions.

Allowances are broadly classified into three categories:

• Taxable allowances – fully added to your income and taxed.
• Partially taxable allowances – partly exempt under specific conditions.
• Non-taxable allowances – fully exempt if conditions are met.

Let’s look at the most common ones:

1. Travel Allowance

This is paid to cover costs of official travel. If the travel is for work, it can be fully or partially exempt based on documentation. For example, travel for a client meeting or site visit may qualify for exemption. Always retain proof like tickets or bills.

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2. House Rent Allowance (HRA)

If you live in rented accommodation, HRA can be a major tax-saver. Part of it is exempt under conditions like rent exceeding 10% of your salary. You’ll need valid rent receipts and landlord details to claim it.

Note: HRA is partially taxable, and exemptions depend on your salary, rent paid, and city of residence.

3. Transport Allowance

This allowance helps cover daily commute expenses between your home and office. A small portion is exempt under income tax laws, but anything beyond that is taxable.

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4. Uniform Allowance

Employees required to wear uniforms get this allowance to purchase and maintain their attire. It’s non-taxable if used solely for official uniforms and documented with bills.

5. Tool and Equipment Allowance

For technical roles, this allowance covers tools and machinery expenses. Like uniforms, this is non-taxable if used strictly for work and if bills are maintained.

6. Medical/Health Allowance

This helps cover minor medical expenses during employment. Typically, it’s taxable, but partial exemptions are allowed for reimbursements up to a certain limit. Bills are necessary to claim this benefit.

Protect your health and wealth—while medical allowances cover routine expenses, Bajaj Finance FDs help you prepare for future medical needs with reliable returns. Check the latest rates and invest now.

Taxable Allowances

These allowances are fully added to your income and taxed:

• Dearness Allowance (DA)
• City Compensatory Allowance
• Overtime Allowance
• Entertainment Allowance
• Cash Allowance
• Meals and Refreshment Allowance
• Project Allowance
• Family and Servant Allowance
• Fixed Medical Allowance
• Leave Travel Allowance (LTA)
• Conveyance Allowance (beyond exemption limit)

Non-Taxable Allowances

These are fully exempt if used as intended and proper documentation is provided:

• HRA (under qualifying conditions)
• Travel Allowance (for official travel only)
• Uniform Allowance
• Helper/Servant Allowance (for official duties)
• Academic Research Allowance
• Tribal Area Allowance
• Special Compensatory Allowance
• Children’s Education Allowance (up to a limit)

Use your tax savings wisely—consider locking in your funds in a Bajaj Finance Fixed Deposit and enjoy guaranteed returns with minimal risk. Open FD. 

Bonus Insight: What is Rule 132 of Income Tax Act?

Rule 132 of Income Tax Act came into force in October 2022. It allows tax assessors to revise past tax returns and claim previously disallowed deductions, especially under section 40(a)(ii), which relates to cess and surcharge payments. This amendment mostly impacts legal professionals and aims to bring more clarity and flexibility to the tax structure.

 Allowances form an essential part of your salary and can significantly impact your tax outgo. Knowing what’s taxable and what isn’t—plus maintaining proper records—can go a long way in reducing your tax burden. And when you do save on taxes, make sure to invest those savings wisely.

A Bajaj Finance Fixed Deposit is a safe and rewarding option. With AAA-rated stability and interest rates up to 7.30% p.a. for senior citizens, it’s an ideal choice for those looking to grow their money without risk. Check latest rates.