Are you missing out? Discover transport allowance rules & tax exemptions!

Employers offer transport allowances to their staff as a way to assist in covering the cost of commuting. This stipend is meant to lessen the financial strain of regular travel costs. This allowance is subject to specific rules and tax exemptions, which we’ll explore in detail.

What is a transport allowance?

Transport allowance is a payment made by employers to employees to cover commuting expenses from home to work and back. It helps employees manage the costs associated with daily travel.

Those who do not receive transit benefits from their work would especially benefit from this stipend. Employers help employees meet their commuting demands and lessen their financial strain by offering this allowance.

For employees in the transport sector, transport allowance may cover personal expenses incurred during official duties. This is applicable if the employee is not receiving a daily allowance.

It is regulated by the Central Board of Direct Taxes (CBDT). This statutory body ensures that the rules are periodically updated and remain relevant. The allowance is an important component of an employee’s total compensation package, making daily commutes more manageable.

Transport allowance by 7th CPC

The transport allowance rate  proposed for Central Government Employees by the 7th Pay Commission is listed below.

Note: All amounts are subject to applicable Dearness Allowance (DA)

Source: Department of expenditure

Is the transport allowance taxable? What is the transport allowance exemption?

Transport allowance is added to the employee’s gross salary and is generally taxable, certain exemptions can be claimed to reduce the taxable portion of this income.

Transport allowance exemption

• The allowance for transport has tax exemption under the Income Tax Act’s Section 10(14). Up to ₹1,600 can be exempted each month.
• Workers with physical disabilities, such as those who are blind, deaf, or have orthopaedic impairments, are entitled to a larger exemption. They can claim an exemption of ₹3,200 per month, which totals ₹38,400 per year.
• For employees working in the transport sector, the exemption is lower than 70% of the allowance received or ₹10,000 per month. This applies if they are not receiving any daily allowance.

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Changes by the Finance Act, 2018

Starting from the financial year 2018-2019, the government merged the separate tax exemptions for medical and transport allowances into a standard deduction. The standard deduction is ₹50,000 per year and replaces individual exemptions for transport and medical allowances. Employees can claim this standard deduction when filing their income tax returns without needing to provide specific bills or documents.

Transport allowance rate under the new tax regime

Section 115 BAC amended the law and came with a new taxation regime that commenced in the 2020/2021 fiscal year. Even though the rates of taxation are lower in this scheme, most exemptions and deductions such as the transit allowance are prohibited in this type of scheme. But, some exemptions for travel expenses in visiting tours or transfers are allowed under some circumstances.

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How to calculate transport allowance?

Step 1: Determine the monthly transport allowance provided by your employer.

First, identify the amount of transport allowance your employer provides each month. Usually, your pay slip or job contract will specify this.

Step 2: Recognise the cap on exemptions.

Transport allowance is exempt from taxes up to ₹1,600 per month or ₹19,200 annually. For physically challenged employees, the exemption limit is higher at ₹3,200 per month or ₹38,400 per year.

Step 3: Calculate the taxable amount.

Subtract the exemption limit from the total transport allowance you receive. For instance, if you receive ₹2,000 per month as transport allowance, the calculation would be:

• Total allowance: ₹2,000
• Exemption limit: ₹1,600
• Taxable amount: ₹400

Special cases:

For employees in the transport sector not receiving a daily allowance, the exemption is the lower of ₹10,000 per month or 70% of the allowance received.

Example:

If a transport sector employee receives ₹12,000 per month as transport allowance:

• 70% of allowance: ₹8,400
• Exemption limit: ₹10,000
• Applicable exemption: ₹8,400

Step 4: Apply the exemption to your taxable income.

Add the taxable amount of your transport allowance to your gross income. This total will be used to calculate your tax liability.

Example for a standard employee:

If your gross income is ₹50,000 per month, and your taxable transport allowance is ₹400:

• Gross income: ₹50,000
• Taxable transport allowance: ₹400
• Total taxable income: ₹50,400

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Bottomline

It’s important for companies and employees to understand transport  allowance and the associated tax exemptions. It helps in managing commuting expenses and ensures compliance with tax regulations. By knowing the exemption limits and how to calculate the taxable amount, employees can effectively plan their finances and reduce their overall tax burden.