Ad hoc allowance - Definition, Analysis of Payslip, Ad hoc tax, & Deduction

An allowance is a monetary benefit to employees to meet specific requirements or compensate for their efforts and contributions. An ad-hoc allowance is one such allowance where the employee receives special compensation for a particular purpose as necessary. 

It is not a part of the basic salary. Keep reading to learn about the diverse aspects of ad hoc allowance, its meaning, tax benefits, deductions, and exemptions.

What is an Ad hoc Allowance?

An ad hoc allowance in the salary is a one-time compensation given to the employees for a specific purpose in an unplanned manner. This allowance is disbursed in response to unique scenarios like exceptional performance, additional job responsibilities, project costs, missed payments, tax payments, and advances. 

It falls out of the normal payroll processing cycle as it is disbursed to cater to specific and immediate requirements. In simple terms, for example, if you make a remarkable contribution to a specific project, your employer may offer you an ad hoc incentive. 

Ad hoc allowances are offered to compensate employees for a particular purpose and are taxed at the same rate as basic pay. Other ad hoc allowances, as per the Indian payroll system, are Diwali bonuses, salary advances, incentives, petrol allowances, service fees, overtime, gift vouchers, etc.

Is an Ad hoc Allowance a Part of the Basic Salary?

Ad hoc allowance is not a part of an employee’s basic salary package and is not given on a regular monthly basis. It is considered an additional allowance paid on a specific payroll month, which is outside the normal invoicing system. An ad hoc allowance is not an obligatory salary component that the employer must pay to the employees. 

Common Instances of Ad Hoc Allowance

• Special Performance Incentives: Given as a reward for exceptional performance or achievements.
• Project-Based Payments: Provided for working on a special project that requires additional effort.
• Emergency Expenses: To cover unexpected personal or professional expenses.
• Festive Bonuses: Granted during festivals or special occasions as a goodwill gesture.
• Temporary Duties: Given for temporarily taking on additional responsibilities or roles.

Ad hoc Allowance in Income Tax

As per section 10 of the Income Tax Act, 1961, ad hoc allowances are taxable. Accordingly, the ad hoc allowance received by you shall be taxable in your hands as income from salary.

The income tax calculated on ad hoc allowance earnings is deducted only for the specific month the employee receives the same. The income tax paid on such specific allowances is ad hoc tax. In short, ad hoc allowances are fully taxable as applicable under the Income-tax slab.

Ad hoc Allowance Arrears

Arrear is an outstanding payment where the employee does not receive a specific amount even after the specified due date has passed. If a particular payment, such as an incentive, bonus, salary, or overtime, is still outstanding after the due date, organisations clear those arrears under ad hoc allowances. For example, if your last month's overtime amount is still outstanding, your employer clears the arrear or overdue in the following month under the ad-hoc allowance in your payslip.

Ad hoc Allowance is Taxable

As per the Income Tax Act of 1961, the ad hoc allowance in the salary is completely taxable at the same rate as your basic salary. Since it is a part of your additional compensation in salary, you need to pay taxes on the ad hoc allowance value.

Ad hoc Allowance Rate

Ad hoc allowances are not part of the normal invoicing and check request envelope process. There is no specific rate, as the allowance is not part of the regular compensation package. The allowance rates are not planned in advance; they are given as per the requirement based on the organisation's hierarchy, employee performance, work requirements, and arrears. 

Ad hoc Allowance in Payslip

Ad hoc allowances appear on payslips as separate line components, listed as additional compensation to the employee's regular basic wage. They are usually paid in a lump sum in a particular month and not carried forward over a period or tenure. 

Ad hoc Allowance Exemption Limit

Ad hoc allowance comprises compensation from various sources which are fully taxable. The entire disbursed value is taxable. The ad hoc allowance value is taxable at the same rate as salary under the particular income tax slab.

 Ad hoc Allowance Deduction

Ad hoc allowance taxes are deducted only for the specific month when the employee has received the same. Let's understand the ad hoc tax allowance deduction with the help of an example:

Raj is working with a private limited company and has a monthly take-home salary of Rs.1 lakh. However, he received an incentive of Rs.3 lakh on April 1, 2023. He has opted for the Old tax regime under the tax bracket of 30%, here is the calculation:

 Hence, the total tax payable on the month when Ad Hoc is received is Rs.1, 08,550. 

Final Words

Now that you have gained an in-depth understanding of ad hoc allowances, it becomes easier to plan your income taxes and review your payslips better. However, remember ad hoc allowance is not a part of your normal invoice component; it is a special compensation provided on specific occasions.