Special Allowance in India – Taxation & Calculation

Allowance is a fixed quantity of money given by employers to their employees to meet certain special requirements. This amount is given besides the salary. These allowances may attract exemption in certain cases. Otherwise, they are considered as a part of the total income of employees and are taxable. Read through to know how special allowance is different.

What is a special allowance?

Certain allowances are exempted under Section 10(14) of the Income Tax Act, 1961. Section 10(14) says that:

• Any special allowance/benefit, not a perquisite, as per the meaning specified in clause (2) of Section 17, is granted for the employees to meet certain expenses wholly. These expenses must be incurred while performing the duties of an office or employment of profit.
• Any allowance granted to the employee either to meet personal expenses at the office/employment for profit performed by him or to compensate him for the high cost of living.
  In these cases, the allowance provided is exempted from taxes.

How is the special allowance taxed?

Certain categories of taxes are fully exempted such as allowances given to judges at the Supreme Court and the High Courts. Allowances such as house rent allowance are partially exempted as per Section 10(13A). Other allowances such as city compensatory allowance are fully taxable.

Special allowance categories and the corresponding exemptions

• Transport Allowance: You can get an exemption of up to Rs.1,600 per month is provided. In the case of handicapped employees, the exemption is extended up to Rs.3,200.
• Tribal Area Allowance: A special allowance is provided to the residents of hilly, scheduled, and agency areas such as Uttar Pradesh, Karnataka, Madhya Pradesh, Tamil Nadu, Odisha, Assam, and Tripura. You can get an exemption of up to Rs.200 per month.
• Outstation Allowance: This is an allowance provided by roadways, railways, and airways in place of the daily allowance. The exemption applicable is 70% of the allowance or Rs.10,000, whichever is lower.
• Hostel Allowance: An exemption of up to Rs.300 per month per child for two children.
• Island Duty Allowance: This allowance is provided to the members of the armed forces who are assigned duties in islands such as Lakshadweep and Andaman & Nicobar. A maximum exemption of up to Rs.3,250 is given per month.
• Children’s Education Allowance: A maximum exemption of up to Rs.100 per month per child for two children.
• Uniform Allowance: You can get an allowance for the expenses incurred in purchasing and maintaining the uniform to be worn to the employment of profit/office.
• Academic/Research Allowance: Academic/research allowance is given to encourage research/training in research institutions.
• Travelling Allowance: The allowance is applicable to supplement the cost of travel when you are out on a tour or on the transfer of duty to another city.
• Conveyance Allowance: This is the allowance on the expenses incurred for conveyance from the place of residence of the employee to the place of employment of profit/office.
• Daily Allowance: Daily allowance includes charges incurred on a daily basis when on a tour.
• Helper Allowance: If you have hired an assistant to fulfil the duties of your employment, the expenditures incurred can get an allowance.

Special allowance categories and the corresponding exemptions

Many people may think 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. Therefore, if company A provides a special allowance to all its employees, it does not mean that company B also must provide a special allowance to all employees in the same ratio.

To know 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 your salary slip to know more about the allocation towards special allowances.

Illustration

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 on the expenses incurred to travel from the place of residence to the place of work.

In another case, Mr C is a medical practitioner working in the public sector. He was deployed for duty at a medical camp in the rural side of Bidar, Karnataka. This place is inhabited by tribes. Now, Mr C gets an additional component in the salary – tribal area allowance.

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