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CMA Intermediate · Direct and Indirect Taxation · Salaries

Meera, a salaried employee of a private company, receives dearness allowance every month along with her basic salary. Which statement about the tax treatment of this dearness allowance is correct?

Dearness allowance is fully taxable as salary. No exemption applies to it, whether based on a percentage of salary, the city of residence or actual spending. Those conditions belong to other allowances, such as house rent allowance or allowances for official duties.

  1. AIt is fully taxable as part of salary incomeCorrect
  2. BIt is exempt up to 50% of basic salary
  3. CIt is exempt if she lives in a metropolitan city
  4. DIt is exempt to the extent it is actually spent

Explanation

Dearness allowance is a cash allowance given to offset a rise in the cost of living. No exemption is available for it, so it is added in full to salary income. The other options borrow conditions that belong to house rent allowance or to allowances for official duties.

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