Salary allowances in India, a guide for employers
A salary allowance is a named part of pay set beside Basic, like House Rent Allowance or a travel or meal head. Some are taxed in full, some are exempt within a limit, and some only when spent on duty. Under the new tax regime most of those exemptions fall away.
This page explains how allowances work for a private employer, then links a plain guide to each one. If you build offer letters and payslips, the useful thing is to know which head is taxed, which carries a real exemption, and where your job ends and the employee's return begins. Start here for the shape of it, then open the page for the head you are setting.
What is a salary allowance?
An allowance is a fixed cash amount paid as part of salary for a stated purpose, housing, travel, a meal, and it shows on the payslip under its own name. It is not the same as a reimbursement, which pays back a real expense against a bill, nor a perquisite, which is a benefit in kind like a company car. The three are taxed on different footings, so the label alone does not tell you the tax.
For a private employer the practical point is upstream of tax. You decide how a package splits across Basic, House Rent Allowance and the rest when you write the offer, and that split quietly shapes both the employee's take home and your statutory outgo. The salary structure guide lays out the order, and the what is CTC page explains why cost to company and in hand pay are two different numbers.
The three tax buckets
The Income Tax Department sorts allowances by how they are taxed, not by what they are called. Two heads with different names can sit in the same bucket. There are three.
| Bucket | What it means, with examples |
|---|---|
| Fully taxable | Added to salary and taxed in full. Dearness allowance, city compensatory allowance, the special allowance that balances a CTC, and other plain cash allowances. |
| Partly exempt | Exempt only up to a limit or against proof, mostly under the old regime. House Rent Allowance, leave travel allowance, children education allowance, and the meal voucher relief. |
| Exempt if spent on duty | Exempt to the extent actually spent for official purposes. Conveyance for official travel, uniform, helper and research allowances. |
The everyday special allowance sits in the first bucket, taxed in full, which is why loading a package toward it costs the employee. You can read the department's own list on the Income Tax Department allowances page.
Old regime versus new regime, the divide that matters most
One rule cuts across everything below. Under the old tax regime many allowances carry an exemption. Under the new regime, which is the default for most employees, almost all of those exemptions are removed. House Rent Allowance, leave travel allowance and the Section 80D deduction are old regime only. An employee on the new regime is taxed on those heads like ordinary cash.
A few reliefs survive. The one worth knowing for a private employer is the employer contribution to NPS under Section 80CCD(2), which still helps an employee who is on the new regime. Because your staff will be split across the two regimes, the honest way to describe any allowance is to tag its exemption as old regime, so nobody reads a benefit that is not there. Every page in this set does exactly that.
Why the split between Basic, HRA and special allowance matters
Two offers can quote the same cost to company and still leave the employee taxed on different amounts, because of how the heads are weighted. Special allowance is fully taxed and sits outside the reliefs the other heads earn, so a package leaning on it exposes more pay to tax. House Rent Allowance carries an old regime exemption worked on Basic plus dearness allowance, so a thin Basic quietly caps it.
A high Basic has its own trade off. It lifts the HRA base but also raises provident fund and gratuity, which are figured on Basic plus DA. There is real latitude here, and the right point depends on the salary and the regime the employee picks. To see the effect before you commit, run a split through the CTC versus in hand calculator.
Core salary heads
The heads that make up the spine of a structure. Set these first, since Basic anchors the statutory sums and the rest follow.
| Allowance | In short |
|---|---|
| House Rent Allowance (HRA) | Part can be exempt under the old regime, the least of three figures on the Basic plus DA base. Gone under the new regime. |
| Special Allowance | The balancing head of a CTC. Fully taxable, and it sits outside the HRA base. |
| Dearness Allowance (DA) | A cost of living head, mostly government and PSU, rare in private SMEs. Fully taxable where it is paid. |
| Conveyance and Transport Allowance | The old flat commute exemption is gone. Conveyance for official duty is exempt to the extent actually spent. |
Allowances tied to a claim
These carry a real exemption, but only under the old regime and only against proof or within a small cap. Set them for staff who value them, and be plain that the relief is the employee's to claim.
| Allowance | In short |
|---|---|
| Leave Travel Allowance (LTA) | The travel fare within India, two journeys in a block of four years, old regime only. Unspent LTA is taxable. |
| Children Education Allowance | Exempt up to Rs 100 a month per child, up to two children, old regime. A minor line, not a real saving. |
| Meal Allowance and Food Coupons | The Rs 50 per meal voucher rule. A plain cash meal allowance is taxable like any cash pay. |
| Uniform Allowance | Exempt to the extent actually spent on a uniform worn on duty, old regime. Niche, for genuine uniforms. |
Reimbursements and benefits
Not cash lines but things the company provides or reimburses. Some are taxed at a small fixed value, one survives the new regime, and the split between a reimbursement and a plain cash allowance decides the tax.
| Head | In short |
|---|---|
| Mobile and Internet Reimbursement | Telephone including mobile, reimbursed against bills for official use, is not a taxable perquisite. A flat cash phone allowance is taxable. |
| Company Car and Fuel Perquisite | A company car with fuel is taxed at a small fixed monthly value under Rule 3, usually far below the real running cost. |
| Employer NPS Contribution, 80CCD(2) | The deduction for the employer NPS contribution. One of the few reliefs that survives the new regime. |
Health cover
Two pages, one for the tax and one for the design. For lower paid staff ESI is the statutory medical floor, covering employees who earn up to 21,000 rupees a month gross. Group health insurance is what employers add, mainly for staff above that ceiling.
| Page | In short |
|---|---|
| Employer Provided Medical Insurance | The tax view. Employer paid group premium is not a taxable perquisite, and how Section 80D differs for a policy the employee buys. |
| Employee Health Benefits | The design view. What employers provide, the family floater, parents as a buy up, and how cover is tiered by grade. |
Where the employer's job ends
Across every head in this set the division of labour is the same. You put the allowance in the salary structure, deduct the correct tax at source, and issue payslips and Form 16. You do not grant an exemption from the payroll desk. Whether an allowance is exempt for a given employee, and by how much, is settled under the Income Tax Act when that person files, against their proof and their choice of regime.
Offrd sits on the employer side of that line. It builds the salary structure and carries each head onto the offer letter and the payslip, with Basic defaulting to 50 percent of CTC and HRA to 40 percent of Basic, both editable, and EPF, ESI, professional tax and gratuity computed alongside. It does not compute anyone's exemption, file returns, or decide taxable income. That work stays with the employee and their CA. Build an offer letter with the heads split the way you chose, and keep the same figures flowing to exit.
More than 4,000 companies across 350 plus Indian cities use Offrd to structure and document pay.
Frequently asked questions
What are the different kinds of allowances in India?
The Income Tax Department sorts allowances by how they are taxed, into three groups. Fully taxable allowances like dearness allowance and special allowance. Partly exempt allowances like HRA and leave travel allowance, mostly under the old regime. And allowances exempt to the extent actually spent on official duty, like conveyance on duty and uniform.
Which allowances are still tax free under the new regime?
Most allowance exemptions fall away under the new regime, which is the default for most employees. HRA, leave travel allowance and the Section 80D deduction are old regime only. The employer contribution to NPS under Section 80CCD(2) is a notable relief that survives the new regime.
What is the difference between an allowance and a reimbursement?
An allowance is a fixed cash amount paid in salary. It is taxable unless a specific exemption applies to it. A reimbursement pays back an actual expense against a bill, and for genuine official use some, like telephone including mobile, are not a taxable perquisite. The form decides the tax, not the label.
Do private companies in India pay dearness allowance?
Dearness allowance is overwhelmingly a government and public sector pay component. Most private small and mid sized firms do not run a DA line, and no law compels a private employer to add one. Where it is paid, DA is fully taxable in the employee's hands.
Set your salary heads once, and keep them consistent
Offrd puts Basic, HRA and every allowance on the offer letter and payslip, with the statutory sums worked out, so your pay documents reconcile at year end. Setup takes about two minutes.