Special Allowance In India - Taxation, Exemption Limit, Calculation

A special allowance is a sum of money that an organization provides to its employees for various reasons and objectives. This provision of a pre-determined and fixed sum of additional payment is found in all business entities, from large corporations to sole proprietorships. 

These allowances are based solely on an employee's basic salary. Any such payment made in addition to an employee's salary may have tax-exempt and taxable components, with exemptions based on the reasons for the allowance.

Any special allowance, like LTA and HRA, is bound to fluctuate substantially depending on the employee's position and performance, the organization's financial health, and existing employee benefit programs.

What is a Special Allowance?

As previously stated, special allowances differ significantly amongst companies. Some employers just pay them as a 'bonus' to show their appreciation for an employee's exceptional job quality. 

On the other hand, businesses pay a specific allowance based on the job and designation of the employee.

The Income Tax Act explains allowances given based on job and designation. There are various allowances that are partly exempt, some allowances are also fully exempt under the act. 

Other companies include a unique allowance on their pay stubs. After deducting all current overheads, such as conveyance and dearness allowances, LTA, and HRA, among others, the remaining sum is recognized as a unique allowance.

This amount is not subject to any overhead charges. In other words, after an employee's CTC has been computed and all sums have been accounted for, any remaining amount is termed a special allowance.

As an example, Section 17(2) of the Income Tax Act of 1961 exempts any such advance set aside by an employer and provided for a specific purpose. This payment, however, must be paid throughout the work term when the employee is actively performing his or her assigned duties.

It also illustrates the distinction between an allowance and a perk.

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. They are as follows:

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

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