What is Special Allowance in Salary - Exemptions & How it is Taxed

A Special Allowance is a fixed is a fixed sum of additional money provided by an organization  to its employees over their basic salary or wages.  Each company has different policies regarding Special Allowance where some may offer it as a reward for achieving outstanding results and others may determine what a Special Allowance will be based on the employees job function. 

How is the Special Allowance Taxed?

There are several instances under which extraordinary allowances are not taxed; these are detailed in the IT sections below. 

1. Exemptions apply only if the allowance is not a perquisite. Tax treatments of a perquisite entirely differs from that of allowance.
2. Advances or payments to the Honourable Justices of the High Courts and the Supreme Court are exempt from taxation.
3. If a company also incorporates HRA, Section 10(13A) allows for partial tax exemption.
4. Any unusual payments of a personal nature are fully taxable.
5. Any other benefit, such as a city compensating stipend, is fully taxable.
6. Dearness allowance is also fully taxable.

Special Allowance Categories and Exemptions Under New and Old Tax Regimes

Here's a reference table showing how special allowance are treated under both the old Tax and new Tax regime. 

How to Save Tax in Special Allowance ?

Many companies offer allowances as part of salary these includes House Rent Allowances, Travel Allowances, or Meal Allowance. Under the Old tax regime, these allowances are either partially or fully exempted from tax which means a higher allowance component in your salary directly reduces your taxable income.

The most effective way to utilize this benefit is to request your employer to restructure your CTC by increasing the allowances component while reducing your basic pay. Your total salary remains same, but your tax liability decreases significantly. 

This benefit is exclusive of the Old Tax Regime. The New Tax Regime does not offer these exemptions. 

Example of Special Allowance

Example 1: Consider the scenario in which Ms V is an employee at company A. When she checks her salary slip, she realises that a conveyance allowance of Rs.1,600 per month. This allowance is provided for the expenses incurred to travel from the place of residence to the place of work. This allowance is fully taxable and no exemption is available in the Income Tax Act.

Example 2: Mr C is a public-sector medical practitioner who was deployed for duty at a medical camp in the rural side of Bidar, Karnataka. Tribes inhabit this place. Now, Mr C gets an additional component in the salary—a tribal area allowance.

Example 3: Ms S is an employee in Company A, and she incurs education and hostel expenses for her children. However, she can claim children’s education and hostel allowance for Rs 4800 per child.

Example 4: Ms B works in an educational institution on a research project, and she can claim a research allowance for the amount incurred. 

Final Word 

In general, it is presumed that a special allowance is a part of variable income. However, you must know that a special allowance is considered as part of the gross salary. In addition, the allocation of a special allowance depends on the company’s policies.

To determine the total amount you have received under the special allowance component of the salary, you must sum up the figures provided under each eligible allowance head from the above list that is applicable to you. Refer to your salary slip to know more about the allocation towards special allowances.

Related Articles :

1. Income tax Allowance and Deductions for Salaried Individuals
2. Transport Allowance for Salaried Employees
3. Children's Education and Hostel Allowance