Pagar Khata -Staff Payroll & Attendance Management
An allowance is a fixed amount of money given by employers to their employees to do specific duties. This amount is given in addition to the basic salary. In some situations, certain allowances may be tax-exempt. Otherwise, they are considered part of the employee's total income and are taxable.
Section 10(14) of the Income Tax Act of 1961 authorizes the release of certain allowances. Section 10(14) specifies that any specific allowance or benefit, as described in clause (2) of Section 17, is given to employees to meet specific expenses. These expenses must be incurred while doing the activities of an office or profit-making employment.
Allowance in salary is given to the employee to cover personal expenses at the office or for-profit produced by them or compensate them for the high cost of living. The amount provided could be tax-free, partially tax-free or fully taxable. Like LTA and HRA, any allowance is bound to vary depending on the employee's position and performance and the organization's financial health and existing employee benefits program. Continue reading our blog to learn how the special allowance, its classification and calculation process in this article.
A special allowance is a part of the total salary paid by an organization to its employees. This provision of adding a fixed and predetermined sum of an additional payment to an employee’s salary is found in all types of business entities, from large corporations to sole proprietorships.
The availability of a special allowance for employees to fulfil duties is mentioned in Section 10(14) of the Income Tax Act. The special allowance is included in the total salary. These allowances are based solely on an employee's basic pay. Therefore, any such payment made in addition to an employee's salary may have both tax-exempt and taxable components, with exemptions based on the grounds for the allowance.
As previously stated, special allowances differ among companies. For example, some employers pay it as an incentive to show their appreciation for an employee's exceptional job quality. On the other hand, some companies provide a specific allowance based on the principles of ‘profitable employment.'
The Income Tax Act of 1962 goes into great depth about the latter category.
Other firms may include a special allowance in the salary. After deducting all existing allowances, such as dearness and transport allowances, HRA, and LTA, among others, the remaining amount is recognized as a special allowance.
In other words, after an employee's CTC is calculated and all amounts have been accounted for, any remaining amount is termed a special allowance.
Allowances are categorized into two types: exempt allowance and taxable allowance. Exempt allowance is further subdivided as follows:
You can understand special allowance calculation by breaking down all the parts of a salary slip, which varies from business to business but often consists of the following components.
Gross Salary, Basic Salary, Variable Salary, Cost to Company(CTC), Net Salary, and deductions.
Gross Salary is defined as the total salary before any deductions and TDS (Tax deducted at source). It consists of the following:
Variable pay is an additional pay provided by the employer that includes the following:
CTC is the total salary comprising both gross and variable pay.
Net Salary is the amount you receive after all adjustments.
The total deduction includes:
Let’s look at an example:
Mr Kalra, a banking executive, staying in Delhi, has a CTC of Rs. 8 Lakhs
The following is a breakdown of his salary, including any special allowances:
Item (annual basis)
Amount (in Rs.)
(-) Basic salary
(-) Medical Reimbursement
Yearly Special Allowance = Rs 3,05,000 (Rs 25,416 per month)
It can then be categorized under different heads, as discussed in our next section.
Special allowances are taxable and paid monthly. There are two types of special allowances: personal allowances and official allowances.
Following allowances fall in the personal allowances category:
Following allowances fall in the official allowances category and are exempt from tax to the extent that expense is for official purposes:
Many individuals believe that a special allowance is included in variable income. You should be aware, however, that a special allowance is a part of the gross salary. Furthermore, the payment of a special allowance is determined by the company's policies.
To get the total amount earned under the special allowance part of your salary, add the amounts under each allowance head from the list that applies to you. Refer to your salary slip for more information on how the special allowance is given to you.
Allowances paid as part of a salary are taxable if the Income Tax Act and rules give no particular exemption. Certain allowances are free from income tax under Income Tax Act Section 10(14). There are two clauses in Section 10(14).
The allowance qualifies to be tax exempted with the following conditions:
There are also a few tax laws that apply in the following situations:
We hope you have now understood what a special allowance is and how to calculate a special allowance. It varies from employer to employer and depends on the work being done as well. Make sure to check if the special allowance you receive is fully or partially taxable.
1. What is the difference between Allowance and Perquisites?
While allowance refers to money received by an employee for any purpose, perquisites are various services provided by employers to employees.
2. Who is eligible for getting Special Allowance, and why is it given?
Any special allowance/benefit that is not a prerequisite, as defined in clause (2) of Section 17, is offered to employees for them to cover specific expenses entirely. These expenses must be incurred while performing the tasks of a profit-making office or employment.
3. Is Special Allowance taxable?
Allowances that are paid as part of a salary are taxable if no particular exemption is given by the Income Tax Act/Rules. Certain allowances are free from income tax under Income Tax Act Section 10(14).
4. Does the basic pay include Special Allowances?
In 2019, the Indian Supreme Court (SC) ruled that cash allowances paid to employees, such as a special allowance, conveyance allowance, education allowance, and medical allowance, should be included in basic pay for calculating Provident Fund (PF) contributions if they are paid universally and uniformly to employees by their employer.
5. How is special Allowance defined in a bank?
All existing banks pay a special allowance equal to 7.75% of the required wage. However, because this allowance has not been integrated with the basic, it is withheld at the time of retirement of bank workers, resulting in a reduction in terminal profits, i.e., pension granted to the retired personnel.
6. Is there a difference between Special Allowance and Dearness Allowance?
Both the special allowance and the dearness allowance are different. If your company does not provide a component for dearness allowance, you must calculate PF only on basic wages. One safe method would be to visit the PF department's Provident Fund Organisation (PRO) and obtain a written description.
7. What is Flexi Benefit Plan?
FBP, or Flexible Benefit Plan, is a manner of organizing an employee's salary. Employees can choose which components they wish to use and how much they need to take under each component, subject to some specified restrictions and balances.
8. Can basic pay be less than the special allowance?
The special allowance is rarely greater than the basic income. Special allowance is frequently regarded as an extra payment. The special allowance comes under CTC that cannot be allocated to another pay head.
9. Is the daily allowance taxable or tax-exempt?
The Income Tax Act explicitly provides that a daily allowance received by an employee is not taxable if the following conditions are met: It is a specific allowance granted just for completing responsibilities; it is provided when on tour and is apart from the typical place of duty, and the employee incurred expenses.
Pagar Khata -Staff Payroll & Attendance Management