Special Allowance Tax Relief: How Rule 279 Changes Exemption Limits

The Government has introduced Rule 279, laying down clear limits for the amount that can be excluded from an assessee's total income in respect of the special allowance referred to in Schedule III (Table Sl. No. 11). The rule primarily impacts taxpayers claiming exemption on allowances linked to residential accommodation expenses, bringing greater clarity on calculation methodology.

What Rule 279 Says

Under Rule 279(1), the exempt amount for the special allowance will be restricted to the least of the following three amounts:

Actual allowance received: The total allowance actually received by the assessee during the relevant period.

Rent paid minus 10% of salary: The excess of rent actually paid for residential accommodation over 10% of the salary due for the relevant period.

Specified percentage of salary based on location: A percentage of salary depending on where the residential accommodation is located:

• 50% of salary for metro locations such as Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, and Bengaluru.
• 40% of salary for any other location.

Key Definitions Under the Rule

Rule 279(2) also clarifies important terms to avoid ambiguity:

• Salary: Includes dearness allowance if it forms part of employment terms, but excludes all other allowances and perquisites.
• Relevant period: The period during the tax year when the assessee occupied the residential accommodation.

Impact on Taxpayers

Tax experts say the rule essentially standardizes how exemption on such allowances is calculated, aligning it with a structured formula and location-based limits. Employees receiving housing-related allowances will need to carefully evaluate rent payments, salary components, and city classification to compute the eligible exemption correctly.

Why This Matters

The introduction of Rule 279 is expected to reduce interpretational disputes and bring uniformity in tax assessments related to special allowances. It also reinforces documentation requirements, making accurate rent records and salary break-ups crucial for claiming exemptions.