Special Allowance: Meaning, Taxation & Exemption Limit

Employers give a special allowance to their employees over and above their basic salaries for meeting specific requirements. This allowance varies between companies. Just like most other allowances such as LTA, travel allowance, and HRA, the special allowance is exempt in some cases.What are the cases in which special allowance is eligible for tax exemption ? How is the tax on special allowance calculated? Let us have a look-

There are a few cases in which the special allowance is fully exempt from income tax. These cases are as follows-● If the special allowance given to the employee satisfies Section 17 (2) of the IT Act and will be solely used by the employee for a certain expense, the allowance can be exempted● If the special allowance is given for meeting personal expenses at employment or office for the profit generated by the employee or for compensating his/her cost of living, it can be exempted.

In case if the special allowance is given to an employee for a specific reason, there are partial exemptions available. Some of the cases in which partial exemption is applicable are as follows-● Hostel allowance- Rs. 300/month per child for up to two children● Children education allowance- Rs. 100/month per child for up to two children● Outstation allowance- 70% of the allowance or up to a maximum limit of Rs. 10,000/month (whichever is lower)● Transport allowance - Rs. 1,600/month● Dearness allowance - Fully-taxable● Fixed medical allowance - Fully-taxableIn most of the other cases, the special allowance or any amount given to an employee under any of the heads ending with ‘allowance’ in the payslip is added to the taxable income of the employee and taxed as per the income tax slab.

There is no hard and fast rule for employers to fix the special allowance of their employees. The special allowance can considerably vary between employers. Moreover, even the ratio in which the allowance is distributed under categories can vary.Even within an organization, the allowances can be different for different employees. In your payslip, you can calculate every amount mentioned under the allowance head to know how much special allowance you are receiving.

Special allowances vary across the companies. In some cases, companies simply pay it as a ‘bonus’ amount to show their appreciation of an employee’s good work. In some companies, they pay a special allowance based on the principles of ‘employment of profit’.

Allowances or grants which are not expressly mentioned under any IT Act exemptions are the only ones that are taxable. Most of the exemptions are covered under Section 10(14) of the IT Act 1961.

The money received by the employee for any kind of objective is an allowance. Perquisites are the different facilities offered by employers.

Allowances are divided into two parts- taxable allowances and exempt allowances. Exempt allowances can be divided into exemptions based on:

1. Specific computation method
2. The lower of the amount of allowance or amount spent for the purpose of allowance.
3. The prescribed amount or the lower of the amount of allowance.

Special allowances are divided into two categories,

1. personal allowances
2. official allowances.

Different types of personal allowances include the following:

• Children Education Allowance
• Hostel Allowance
• Transport Allowance
• Underground Allowance
• Tribal Area Allowance
• Outstation Allowance
• Island Duty Allowance

Different types of official allowances include the following:

• Travelling Allowance
• Daily Allowance
• Conveyance Allowance
• Uniform Allowance
• Academic/ Research Allowance
• Helper Allowance

Mr X, a 30-year-old marketing executive, has a CTC of Rs. 4.75 lakh.The break-up of his salary is as follows, including special allowance.

• Basic salary - Rs. 14,000
• HRA - Rs. 7000
• Medical reimbursement- Rs. 1250
• Special allowance - Rs.9570.
• CTC - Rs. 39,596 (p.m.); Rs. 4,75,152 (p.a.).

If this is your first job, make sure that you carefully check your salary slip to know more about the different allowances offered by your employer. You can always talk to HR to know more about all the various components of your payslip.Only when you understand the allowances in detail, you can pay appropriate taxes and claim eligible exemptions and deductions.

A special allowance is a sum of money that a company gives its employees for a variety of reasons and objectives.These allowances are only calculated using a worker's base pay. Any such payment made in excess of an employee's compensation may include taxable and tax-exempt portions, with the tax-exempt portions dependent on the justifications used to grant the allowance.Any special allowance, like LTA and HRA, is likely to vary greatly depending on the job and performance of the employee, as well as the organization's financial situation and current employee benefit plans.
As was already established, special allowances differ greatly amongst businesses. Some businesses pay it as a "bonus" to express gratitude for an employee's excellent work output. However, other businesses have the option to provide a specific allowance based on "the employment of profit" principles.The Income Tax Act of 1962 has a detailed description of the latter type.The sum is often tax-exempt when an allowance is provided in appreciation of exceptional achievement, subject to the maximum expenses spent.

Special advances and allowances come in a variety of forms and might be either personal or official.
Keep in mind that every allowance must be paid each month and is subject to taxation under the relevant IT rules. Several types of such unusual concessions for personal use are listed below:1)Education of children: For a family with two children, the maximum exemption is Rs. 100 per child. The surplus is subject to taxation.2) Hostel allowance: For a household of two children, the maximum hostel allowance is Rs. 300 per child. Any surplus is subject to taxation.3) Transportation: Rs. 1600 per month/Rs. 3200 per month for personnel with disabilities. The remaining surplus is taxed.4) Island duties: Tax-free allowance for Armed Forces personnel stationed in Lakshadweep or the Andaman & Nicobar Islands is up to Rs. 3250 per month.

There are two different sorts of special allowance categories. A few allowances are fully taxed to begin with. However, others are either totally or partially exempt. The following requirements must be fulfilled, though:1) The payment is not a prerequisite in nature.2) It has no personal implications.3) Offered primarily to cover expenses that are totally, absolutely, and solely incurred in the execution of an office or profit-making employment.4) The exemption is only valid for the sum the employee received and used for that reason.5) The Income Tax Act establishes the exemption threshold. It does not specify a maximum allowance that an employer may provide.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.