85. Clarification regarding taxability of transport allowance
References have been received as to whether the transport allowance granted to the Central Government employees on the recommendations of the Fifth Central Pay Commission forms part of taxable salary for the purposes of deduction of tax at source.
2. The matter has been considered by the Board. The transport allowance granted to the employees of the Central Government is to compensate them for the cost incurred on account of commuting between the place of residence and the place of duty. This allowance cannot be said to have been granted to meet expenses incurred wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. The said allowance is, therefore, not covered by the provisions of section 10(14)( i) of the Income-tax Act, 1961, read with rule 2BB(1)(c ) of the Income-tax Rules, 1962. It is further clarified that any allowance, by whatever name called, granted by an employer, which has the element of compensation of the expenditure incurred on commuting from residence to office or vice versa, will also not qualify for the benefit under section 10(14)( i).
3. Accordingly, the persons responsible for paying any amount of the above nature, should treat the same as part of taxable income and deduct tax at source at the appropriate rates under the relevant provisions of the Income-tax Act, 1961.
Circular : No. 764, dated 20-2-1998.
Note : See rule 2BB, as amended w.e.f. 1-8-1997, which exempts transport allowances (to the extent of Rs. 800 p.m.) granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty.