85. Clarification regarding taxability of transport allowance
Circular No. 764 was issued by the Central Board of Direct Taxes on 20 February 1998. Its subject is 85. Clarification regarding taxability of transport allowance.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Holds transport allowance to be taxable salary. Asked whether the transport allowance given to Central Government employees on the Fifth Central Pay Commission's recommendations is part of taxable salary for deduction at source, the Board says it is granted to compensate the cost of commuting between residence and place of duty, and cannot be said to be granted to meet expenses incurred wholly, necessarily and exclusively in the performance of the duties of the office or employment. It is therefore not covered by section 10(14)(i) read with rule 2BB(1)(c). The Board goes further: any allowance, whatever it is called, that carries the element of compensating expenditure on commuting between residence and office will equally not get that benefit, and the person paying it must treat it as part of taxable income and deduct tax at the appropriate rates.
References had been received asking whether the new transport allowance formed part of taxable salary for the purpose of deduction at source.
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.
In a short-deduction proceeding against an employer that treated a commuting allowance as exempt, and in an employee's salary assessment where the exemption is withdrawn.
Rules it names. Rule 2BB of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.