What is Special Allowance? - Complete Information
Special allowance is a fixed amount that is given to employees over and above the basic salary in order to meet certain requirements. There is a taxable allowance and an exempt allowance.
The employee's salary is structured with several components, including basic pay, allowances, retirement benefits, and more. Allowances are a part of the salary provided by employers to help cover the monthly expenses of employees, such as housing, rent and the cost of living.
It refers to the amount a company or organisation provides to employees for various purposes. A special allowance is an additional sum given to an employee by the employer.
This type of allowance may vary based on the employee's role and performance. In this guide, we will explain what a special allowance is and how it is calculated.
What is Allowance?
Allowance is a fixed quantity of money besides salary given regularly by employers to meet certain specific requirements of their employees.
All allowances are usually included in the total income of an employee unless exempted. The allowances are over and above the basic salary and taxable according to the guidelines set by the Income Tax Act.
What is a Special Allowance?
A special allowance is an additional amount paid by an organisation or company to an employee for outstanding performance or exceptional work. Some companies may refer to it as a special allowance, while others might label it as a bonus.
In certain organisations, it may also be tied to the concept of profit-based employment, where the allowance is paid based on the company's profits.
Difference between Perquisites and Allowance?
While the money received by an employee for any objective is known as allowance, perquisites are several facilities offered by employers.
Taxable Allowance and Exempt Allowance
Allowance can be divided into taxable allowance and exempt allowance. Exempt allowance can be further divided into the following:
- Exemption based on a specific computation method.
- Exemption based on the lower of amount of allowance or amount spent for the purpose of allowance.
- Exemption based on the prescribed amount or the lower of amount of allowance.
Special Allowance and Taxation
Special allowances are generally taxable in the hands of the employee unless specific exemptions apply, as outlined under Sections 10(14)(i) and 10(14)(ii) of the Income Tax Act.
To qualify for tax exemptions, the following conditions must be met:
- The allowance must be necessary or required for the employee's job.
- It can only be used for job-related expenses.
- The allowance cannot be used for personal expenses.
- Only the portion of the allowance used for job-related purposes is exempt from tax.
- The tax-exempt amount is the lower of the actual amount incurred by the employee or the amount paid as allowance.
Certain situations have specific tax rules:
- Benefits like city compensatory allowances are fully taxable.
- House Rent Allowance (HRA) is partially exempt under Section 10(13A).
- Payments or advances to honourable justices of the Supreme Court and High Courts are subject to different conditions.
Categories of Special Allowance
Special allowances are broadly categorised into personal allowances and official allowances. Here's a breakdown of exemptions under both the old and new tax regimes:
Personal Allowance Exemptions
Allowance | Exemption in Old Tax Regime | Exemption in New Tax Regime |
Children Education Allowance | Rs. 100 per month per child for up to two children; excess is taxable. | Fully taxable |
Underground Allowance | For underground mine workers, up to Rs. 800 per month; excess is taxable. | Fully taxable |
Hostel Allowance | Rs. 300 per month per child for up to two children; excess is taxable. | Fully taxable |
Tribal Area Allowance | Rs. 200 per month for employees in hilly or scheduled areas; excess is taxable. | Fully taxable |
Official Allowance Exemptions
Allowance | Exemption in Old Tax Regime | Exemption in New Tax Regime |
Transport Allowance (Residence to Work) | Maximum Rs. 1,600 per month (Rs. 3,200 for handicapped employees) | Actual expenses incurred for performing duty (Rss. 3,200 for handicapped employees) |
Island Duty Allowance | Up to Rs. 3,250 per month for armed forces in Lakshadweep and Andaman & Nicobar Islands | Fully taxable |
Outstation Allowance | 70% of the amount received by rail, water, and roadway employees is exempt. | Fully taxable |
Travelling Allowance | Actual expenses incurred for work-related travel are exempt. | Actual expenses incurred for official duty |
Daily Allowance | Actual daily tour expenses are exempt. | Actual expenses incurred for official duty |
Research/Academic Allowance | Expenses for research and training are exempt. | Fully taxable |
Conveyance Allowance | Actual expenses for conveyance are exempt. | Actual expenses incurred for official duty |
Uniform Allowance | Expenses for uniform purchase or maintenance are exempt. | Fully taxable |
Helper Allowance | Expenses for hiring help are exempt. | Fully taxable |
Special Allowance Calculation in Salary
Special allowances vary by company and are typically based on gross income. For example, if A has a basic salary of Rs. 45,000 and receives a transport allowance of Rs. 1,600/month, the entire transport allowance is exempt since it falls under the maximum exemption limit.
Taxable Salary for A: Basic Salary = Rs. 45,000
Tax on Travel Allowance: Rs. 0 (as it's fully exempt).
Special Allowance Calculation
Special allowance calculation can be understood by breaking down all the components of a salary slip.
While salary structure varies from company to company but by and large consists of the following parts.
- Gross salary, variable, CTC, total deduction and net pay
- Gross Pay is total pay prior to deduction and taxation.
- Basic Salary (40% of CTC) (Full amount is taxable)
- DA (20 % of basic salary) (Depends on company policy. Mostly taxable).
- HRA (50% of basic) (Applicable if living in a rented house)
- Medical reimbursement (Rs. 1250 p.m)
- LTA (depends on company policy) (On submission of bills, exempt to a limit of certain sum)
- Special allowance (depends on company policy) (taxable)
- Food coupon (based on company regulations)
Variable is extra salary given by company comprising the following:
- Performance based bonus (8.33 to 20% of gross)
- Employer’s contribution to PF (13.61% of basic)
- Mediclaim (differs from company to company)
- Gratuity (depends on company norms)
CTC is equal to gross plus variable
Deduction includes the following:
- Employees contribution to PF
- TDS
- Professional Tax
Example:
Sanjeev Bhatia, 30-year-old advertising executive, has a CTC of Rs. 4.75 lakh.
The following is a break-up of his salary including special allowance.
- Basic salary - Rs. 14,000
- HRA - Rs. 7000
- Medical reimbursement- Rs. 1250
- Special allowance - Rs.9570.
- CTC - is Rs. 39,596 (p.m); Rs. 47,5152 (p.a).
FAQs on Special Allowance
- How are special allowances categorised?
Special allowances are generally classified into two categories: personal and official allowances.
- Are special allowances taxable under the old tax regime?
Yes, most special allowances are taxable unless specific exemptions apply. For example, the transport allowance has a maximum exemption of Rs. 1,600 per month, while other allowances like hostel or underground allowances have their own exemption limits.
- What changes in tax exemptions exist under the new tax regime?
Under the new tax regime, most personal allowances such as children education, underground, and hostel allowances are fully taxable. Official allowances like transport and travel-related expenses are only exempt if they are for actual expenses incurred during official duties.
- What is the tax exemption for children's education allowance under the old tax regime?
In the old tax regime, the children's education allowance has a maximum exemption of Rs. 100 per month per child, applicable for up to two children. Any amount beyond this is taxable.
- How are transport allowances treated under both tax regimes?
In the old tax regime, the transport allowance is exempted up to Rs. 1,600 per month, with a higher exemption limit of Rs. 3,200 for disabled employees. Under the new tax regime, exemptions are granted only for actual expenses incurred while performing official duties, with the same Rs. 3,200 limit for disabled employees.
- What is the exemption limit for underground allowance under the old tax regime?
For employees working in underground mines, the exemption limit is Rs. 800 per month. Any amount over this is subject to tax.
- Are allowances like island duty or outstation allowances taxable in the new regime?
Yes, in the new tax regime, allowances like island duty and outstation allowances are fully taxable, with no exemptions available.
- How are official allowances like conveyance or uniform allowances taxed?
Official allowances for job-related expenses like conveyance and uniforms are exempt from tax to the extent of the actual expenses incurred for performing official duties. In the new regime, however, some allowances like the uniform allowance are fully taxable.
- How is the special allowance calculated in salary?
The special allowance in salary varies based on the employee's gross income and company policies. For instance, if an employee has a basic salary of Rs. 45,000 and receives a transport allowance of Rs. 1,600 per month, the entire transport allowance is exempt from tax since it falls under the maximum exemption limit.
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