Special Allowance

An allowance can be a fixed amount of money or a certain percentage of an employee’s gross salary which is given by the employer to compensate for a specific requirement. However,  this amount or percent is over the basic salary offered to the employees and one such allowance is a special allowance. In some cases, the allowances might be exempted from taxation but usually, they are added to the basic salary and taxed according to the tax bracket an individual falls in. 

This article is curated to give you comprehensive information about special allowance and how it is different from other allowances. 

What is Special Allowance?

Special Allowance can be different for different companies. In some organisations, a special allowance could be the compensatory sum of money given to an employee to meet the cost of means that help in getting better performance or in generating profits. However, looking at the salary slips, you will find that the special allowance is the remaining part of the salary after it has been bifurcated into HRA allowance, transport or conveyance allowance, LTA allowance, and other components. Thus, a special allowance is the sum of money that does not fall in any of the categories mentioned in the salary slip or the remaining part of the salary. This remaining part, after all the allowances are divided, makes up the total CTC of the employee.

Taxation and Special Allowance

Under the Income Tax Act or Rules, if there is no specific exemption provided for the allowance, every allowance that is a part of the basic salary, is taxable. There are some of the allowances that have an exemption from taxes under Section 10(14) of the Income Tax Act. Section 10(14) of the Income Tax Act has two clauses-(i) and (ii). The first clause states that the items given in the (i) are stated in Rule 2BB and includes that “any special allowance or benefit, not in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose.”

If any of the allowances is exempted by following the given conditions:

• The nature of the allowance should not be a perquisite.
• The nature of the allowance should not be personal.
• Allowance is given only for expenses, exclusively and necessarily for better performance, profit or office employment.
• Limited to the sum given by the employer and the expense incurred by the employee for a purpose.

The second clause states that “any allowance granted to the assesses either to meet his personal expenses at his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, and to the extent. Any allowance notified under the sub-clause (ii) of subsection 14 of section 10 is exempted from Income Tax to the extent it has been provided in the respective clause.”

The allowances can further be divided into three types:

• Fully Exempted
• Partially Exempted
• Fully Taxable

Special Allowance: Categories and their Exemptions

• Conveyance Allowance – It is given to cover the expense of coming to work from home and vice versa. In this allowance, you can get an exemption for upto ₹1600 and if the employee is physically disabled then the exemption can be for upto ₹3200.
• Tribal Area Allowance – The residents of agency, scheduled, and hilly areas like Odisha, Tripura, Assam, Karnataka, Uttar Pradesh, and Madhya Pradesh are given a special allowance. In this case, an exemption of upto ₹200 is provided.
• Outstation Allowance – As a replacement for daily allowance, the railways, roadways, and airlines provide this allowance. The allowed exemption is 70% of the allowance or of ₹10,000 which is less.
• Hostel Allowance – For two children, an exemption of upto ₹300 is provided per child.
• Island Duty Allowance – This type of allowance is offered to the armed personnel who have duties in the islands of Andaman and Nicobar and Lakshadweep. The upper limit of exemption in such cases is ₹3,250 per month.
• Children’s Education Allowance– For two children, the maximum exemption of upto ₹100 is provided per child.
• Uniform Allowance –This type of allowance is given to compensate for the expense of purchasing or maintaining the uniform required for your office or workplace.
• Research/Academic Allowance – In research institutions, the research/academic allowance is given to encourage and promote training/research.
• Travelling Allowance – This allowance is given to compensate for the expense of being on a work tour or in case of transfer of duty to another city.
• Daily Allowance – While being on a tour, the daily expenses are compensated through this type of allowance.
• Helper Allowance – In case you have hired some help for performing your employment duties, the costs incurred can get the allowance.

Special Allowance Calculation

One can understand the special allowance calculation by looking at the bifurcations of their salary. Though the salary structure differs from company to company, it is mainly comprised of the following components:

• The total deduction, CTC, gross salary, variables, and net pay
• Gross salary is the complete salary before any taxation or deductions
• The basic salary which is 40% of the total salary and it is completely taxable
• DA is 20% of the basic salary and it depends on the policies of the company and is majorly taxable
• HRA is 50% of the basic salary and is applicable if living in a rented accommodation
• Medical Reimbursement of up to ₹1250 per month
• LTA depends on company policies
• Special Allowance is taxable and depends on the policies of the organisation
• Food Coupons which are based on the company’s regulations

Example of Special Allowance

Consider a situation where Mr. X works for an organisation B. In his salary slip, the bifurcation of conveyance allowance is ₹1600. This is the allowance given to cover the cost of coming to the office daily from his home. In another situation, where Mr. Y is working in the public sector and is a medical practitioner. He is assigned to work in the rural areas of Karnataka which are inhabited by the tribals. In his salary slip, the bifurcation of tribal area allowance is to compensate for living in such areas.

Conclusion

Special allowance as the name suggests is given out for special conditions or situations and proves to be a boon for employees. Therefore, the next time you want to check your special allowance, do get access to your salary slips.

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