In India, employees receive various allowances in addition to the basic salary to meet their needs. Organizations from the corporate to the private sector provide these allowances, which are supposed to help the employees meet the extra expenses incurred.

Supplementary allowance is one such benefit an employee receives from their company. The additional amount you receive after calculating the medical allowances and conveyance, HRA, and basic wage from the gross salary is basically known as the supplementary allowance or special allowance. This article helps you understand supplementary allowance, exemption limit, taxability, and more!

What is Supplementary Allowance?

Supplementary allowance is an additional monetary benefit provided to employees in their salary package to cover certain ext covers expenses not included in the basic salary, such as transportation, housing, etc.

An employer is not obligated to pay supplementary allowances to their employees. Besides, this allowance does not offer any tax exemptions. Generally, employers adjust an employee's salary to the gross wage by adding supplementary allowances into their salary structure. 

What is Supplementary Allowance in Salary?

Your gross salary includes the supplementary allowances in it. However, most companies avoid mentioning the term supplementary allowance on the payslips. Instead, they mention this as a special or other allowance on the payslip. 

If you want to know how supplementary allowance in salary is calculated, here is the representation:

Gross salary – (Basic wage + conveyance allowances + house rent allowances + medical allowances, etc.) = Supplementary allowance

Thus, supplementary allowance is the amount in your gross wage, excluding the basic salary, medical allowances, HRA (house rent allowance), conveyance allowances, etc. In some companies, the supplementary allowance includes TA, LTA, lunch allowance, telephone reimbursements, etc. Many companies pay supplementary allowance as a bonus, highlighting it as an appreciation for employees' work efficiency. However, in other companies, this allowance is based on the "employment of profit," as mentioned in the Income Tax Act of 1961.

Is Supplementary Allowance Taxable?

Supplementary allowances can be partially or fully taxable depending on the allowances they cover. The categories of expenses covered by supplementary allowances may vary from one company to another. 

Here is the list of supplementary or special allowances that are partially taxable as per the Income Tax Act:

• LTA

LTA or leave travel allowance is provided for travelling anywhere within the boundaries of our country. Some extent of the fare cost comes under deduction, while the remaining amount is taxable. 

• Children's Education

The company provides a monthly education allowance for the employee's children. The maximum exemption limit for a family of 2 children is Rs.100 per child. Expenses beyond this limit are taxable.

• Hostel Allowance

The company also provides an allowance for the hostel expenses of an employee's child. The maximum exemption limit for a family of 2 children is Rs.300 per child. Expenses above this limit come under taxation.

• Transport

For handicapped employees, a maximum of Rs.3200 monthly is tax-free. Any amount exceeding this limit is taxable as per law.

Supplementary Allowance Tax Exemption

Generally, the allowances eligible for tax exemptions are listed under section 10(14) of the IT Act 1961. According to that, some of the supplementary allowances are eligible for partial tax exemptions. However, there are certain circumstances under which an allowance becomes eligible for tax exemption. They are as follows:

• If the allowances offered to an employee are not a form of perquisite, it can be eligible for tax exemptions. 
• Allowances or benefits offered exclusively for excellent office performances meant for office profit are eligible for tax exemption.

Final Word

Including supplementary allowances in employees' salaries benefits them in many ways. These extra perks help them seamlessly meet their additional expenses. However, not every company offers this allowance to its employees, and not every employee is eligible for this benefit. Only permanent employees can avail of these benefits as a reward for their efficient service. 

Taxation of supplementary allowances in India is a complex area requiring careful consideration of various allowances and their respective tax treatments. Employers and employees need to be aware of the rules to effectively plan and minimize tax liabilities. Proper documentation and adherence to tax regulations are crucial for claiming exemptions and deductions legally and effectively.