Cost of Living Allowances and its Taxability

An allowance is a fixed amount given periodically in addition to the salary for the purpose of meeting some specific requirements connected with the service rendered by the employee or by way of compensation for some unusual conditions of employment.

Cost of Living Allowances (allowances) is a salary supplement paid to employees to cover differences in the cost of living in abroad as a result of employment outside India. The allowances enable an employee to maintain the same standard of living in the host country as they could have in their home country.
These allowances are relatable to the extra expenditure that the employee would required to undergo expenditure on food, etc., which was wholly, necessarily and exclusively for the purpose of duties, and as such the allowance is in the nature of reimbursement which would be exempt from tax. The employee, however, can claim exemption of expenses which are actually incurred for such stay in the foreign country.
Any allowances granted to an assessee to compensate him for the increased cost of living are exempt. However, the allowance should not be in the nature of a personal allowance granted to the assessee to remunerate or relating to his office or employment unless such allowance is related to his place of posting or residence.
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