written by Khatabook | July 16, 2021

All About Special Allowance - its Taxation & Calculation in India

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. 

What is Special Allowance?

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. 

Exempt and Taxable Allowance

Allowances are categorized into two types: exempt allowance and taxable allowance. Exempt allowance is further subdivided as follows:

  • Exemption based on a specific method of computation.
  • Exemption based on the lesser of the allowance amount or the amount spent for the allowance.
  • Exemption based on the required amount or the lesser of the permitted amount.

Also Read: How to Claim Relief Under Section 89(1) On Salary Arrears

Special Allowance Calculation

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:

  • Basic Pay is 40% of CTC.
  • House Rent Allowance (HRA) could be up to 50% of the basic salary, depending on the employee's place of residence.
  • Dearness Allowance(DA) is 20 % of the basic salary (It is optional and depends on the company policy and is taxable).
  • Medical Reimbursement is Rs 15000 per year (Rs.1250 per month)
  • Leave Travel Allowance (LTA) is dependent on the company policy and exempted till a certain amount on the submission of invoices.
  • The special allowance depends on the business and is taxable
  • Food coupon depends on the company policy

Variable pay is an additional pay provided by the employer that includes the following:

  • Performance-based commission or bonus (8.33 to 20% of the Gross Pay)
  • Mediclaim (depend on the policy and differs for various companies)
  • Employer’s contribution to Provident Fund (13.61% of the Basic Pay)
  • Gratuity (depends on the company norms and Government rules)

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:

  • Tax Deducted at Source(TDS) as per the Income Tax rules
  • Employees contribution to the Provident Fund
  • Professional Tax

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.)

CTC

8,00,000

(-) Basic salary

3,20,000

(-) HRA

1,60,000

(-) Medical Reimbursement

15,000

Special Allowance

3,05,000

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.

Also Read: How To Generate Form 16 A For Payments Other Than Salary

Special allowance classifications

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: 

  • Transport Allowance: If granted, you may be eligible for a monthly exemption of up to Rs.1,600. The exemption for disabled personnel is doubled to Rs.3,200.
  • Children Education Allowance: This is a monthly exemption of up to Rs.100 per child for up to two children.
  • Outstation Allowance: This is an allowance provided by railways, roadways, and airline companies in addition to the general allowance. The tax exemption is 70% of the allowance of Rs. 10,000, whichever is less.
  • Hostel Allowance: A monthly payment of up to Rs.300 per child for up to two children.
  • Tribal Area Allowance: Residents in hilly and remote areas in states such as Karnataka, Uttar Pradesh, Tamil Nadu, Madhya Pradesh, Odisha, Assam, and Tripura are eligible for a special allowance. You can claim a monthly exemption of up to Rs.200.
  • Island Duty Allowance: This allowance is paid to members of the military forces with duties in islands such as Andaman and Nicobar. A monthly allowance of up to Rs.3,250 is offered. 
  • Underground Allowance: An allowance of up to Rs 800 is given to employees who work in unfavourable, unnatural conditions in underground mines.

Following allowances fall in the official allowances category and are exempt from tax to the extent that expense is for official purposes: 

  • Daily Allowance: Charges incurred daily while on tour are included in the daily allowance.
  • Travelling Allowance: The allowance is provided for meeting travel expenses when you are on an official trip or being transferred to a new place.
  • Helper Allowance: If you have chosen an assistant to help you with your job, the company can reimburse the expenses.
  • Uniform Allowance: You can deduct expenses incurred in buying and maintaining a uniform for use at work.
  • Conveyance Allowance: This allowance is given to cover the transportation costs incurred from the employee's place of stay to the work location.
  • Academic/Research Allowance: Academic or research allowance supports research and training in research institutions.

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.

Is Special Allowance Taxable?

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).

  • Any special allowance or benefit, not a perk, as per the meaning specified in clause (2) of Section 17, is granted for the employees to meet certain expenses wholly. These expenses must be incurred while performing the duties of an office.

The allowance qualifies to be tax exempted with the following conditions:

  • Personal allowances are not included for exemption
  • Allowance should not be seen as a perk.
  • Allowance is given for expenses incurred only for performing the tasks of an office or profit-making occupation.
  • There is no upper limit specified for allowances covered by this section.
  • Restricted to the amount provided by the employer and the actual expense incurred by the employee for a specific purpose.
  • Any allowance granted to the employee either to meet personal expenses at the office or employment for profit performed by him or compensate him for the high cost of living.
  • Any allowance notified under sub-clause (ii) of section 10(14) is exempt from Income Tax to the extent specified in the relevant clause.
  • Only allowances or grants that are not expressly included in any IT Act exemptions are taxable. The majority of exemptions are covered by Section 10(14) of the IT Act 1961.

There are also a few tax laws that apply in the following situations:

  • Section 10 allows for partial tax exemption if a company's special allowance also includes HRA (13A).
  • Any advances or payments made to the Honorable Justices of the High Courts and the Supreme Court are fully exempt from taxation.
  • Any other benefit, such as a city compensating allowance, is never exempt from taxation.

Conclusion

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. 

FAQs

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.

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