Budget 2018 update
Effective Financial Year 2018-19 (Assessment Year 2019-20), exemption for Transport Allowance upto Rs 19,200 has been scrapped (together with Medical Reimbursement upto Rs 15,000) and has been replaced with Standard Deduction of Rs 40,000.
Thus from 1st April 2018, both Medical Allowance and Medical Reimbursement would be fully taxable. Article given below talks about the situation prior to this amendment.
Allowance is fixed amount of money given to an employee regularly in addition to salary, for the purpose of meeting specific requirements. As a general rule, all allowances by whatever name called are taxable unless specifically exempted.
What is Transport or Conveyance Allowance?
Transport allowance or Conveyance allowance is an allowance granted to an employee to meet his/her expenditure for the purpose of commuting between the place of residence & duty.
Transport allowance exemption is provided in Section 10(14)(ii) of the Income Tax Act and Rule 2BB of Income-tax Rules. Transport allowance is exempt to the extent to Rs 1,600 per month, i.e. upto Rs 19,200 is exempt for a year. Any amount paid over this limit is taxable. For example if an employee is getting Rs 3,000 as Transport or Conveyance allowance every month, Rs 1,600 is exempt and Rs 1,400 is taxable per month. Thus out of Rs 36,000 transport allowance received for the year, Rs 19,200 would be exempt and Rs 16,800 would be taxable.
It is to be noted that the exemption limit for transport allowance was Rs 800 per month till March 2015 (i.e. FY 2014-15 corresponding to AY 2015-16). Increase in the limit from Rs 800 per month to Rs 1,600 per month was announced in Union Budget 2015 and the same is effective April 2015 (i.e. FY 2015-16 corresponding to AY 2016-17).
Also note that previously transport allowance granted to physically disabled employee had higher exemption limit of Rs 1,600 per month compared to Rs 800 per month for others. With this amendment, transport allowance exemption is now uniform at Rs 1,600 per month for all employees.
Proof of Utilisation
Proof of utilisation of the transport allowance is not required to avail the exemption. Entire amount paid as transport allowance upto maximum of Rs 1,600 per month is exempt from tax.
Name is important
Name matters. While cost for the employer remains same, what it calls the allowance paid to the employee can have potential tax implications for the employee. Let’s understand this point through an example. Suppose apart from Basic salary and HRA, a company is paying Rs 10,000 per month to an employee as Special Allowance and is not paying any Transport Allowance. Just by carving out transport allowance of Rs 1,600 per month and reducing the Special Allowance to Rs 8,400 per month, such that total cost for the company remains same at Rs 10,000 per month, employee is able to save Rs 5,933 every year in tax liability.