A special allowance is a sum of money that an organisation provides to its employees for various reasons and objectives. This provision of a pre-determined and fixed sum of additional payment is found in all business entities, from large corporations to sole proprietorships.
These allowances are based solely on an employee's basic salary. Any such payment made in addition to an employee's salary may have tax-exempt and taxable components, with exemptions based on the reasons for the allowance.
Any special allowance, like LTA and HRA, is bound to fluctuate substantially depending on the employee's position and performance, the organization's financial health, and existing employee benefit programs.
What is a Special Allowance?
As previously stated, special allowances differ significantly amongst companies. Some employers just pay them as a 'bonus' to show their appreciation for an employee's exceptional job quality. Other businesses, on the other hand, can pay a specific allowance based on the concept of "profit employment.”
The Income Tax Act of 1962 profoundly explains the latter category. When an allowance is provided to appreciate exceptional achievement, the sum is usually tax-free up to the maximum incurred expenses.
Other companies include a unique allowance on their pay stubs. After deducting all current overheads, such as conveyance and dearness allowances, LTA, and HRA, among others, the remaining sum is recognised as a unique allowance.
This amount is not subject to any overhead charges. In other words, after an employee's CTC has been computed and all sums have been accounted for, any remaining amount is termed a special allowance.
These gifts are governed by a number of legal considerations.
As an example, Section 17(2) of the Income Tax Act of 1961 exempts any such stipend or advance set aside by an employer and provided for a specific purpose. This payment, however, must be paid throughout the work term when the employee is actively performing his or her assigned duties.
It also illustrates the distinction between an allowance and a perk.
A corporation may reward its top performers with higher pay, stock options, and other benefits. If the company or the employer so desires, it can also arrange for a special allowance that permits their valued employees to retain their living standards.
Income Tax is not payable on allowances paid in either of these cases.
How is the Special Allowance Taxed?
There are several instances under which extraordinary allowances are not taxed; these are detailed in the IT sections below. They are as follows:
1. Exemptions apply only if the allowance is not a perquisite. It is a crucial distinction that only permanent staff obtain.
2. Only advances paid completely and wholly for exceptional office performance and occupying a profit-making office will be exempt.
3. Any unusual payments of a personal nature or angle are not tax-free.
There are also a few tax laws that apply in the following situations:
1. Advances or payments to the Honourable Justices of the High Courts and the Supreme Court are exempt from taxation.
2. If a company also incorporates HRA, Section 10(13A) allows for partial tax exemption.
3. Any other benefit, such as a city compensating stipend, is never exempt from taxation.
In the final caveat, the laws of Dearness Allowance, or DA, automatically apply because living costs vary by city.
Special Allowance Categories and Exemptions Under New and Old Tax Regimes
Nature of Allowance | Exemption in Old Tax Regime | Exemption in New Tax Regime |
Conveyance Allowance - Expenditure incurred while performing office duties | Actual expense incurred for official purpose | Actual expense incurred for official purpose |
Transport Allowance | Actual expense incurred for official purpose | Actual expense incurred for official purpose |
Daily / Per Diem Allowance | Actual expense incurred for official purpose
| Actual expense incurred for official purpose |
Helper / Assitance Allowance - For Office work | Actual expense incurred for official purpose
| Fully Taxable
|
Research Allowance | Actual expense incurred for official purpose | Fully Taxable |
Uniform Allowance | Actual expense incurred for official purpose | Fully Taxable |
Children Education Allowance | Rs. 100 per month per child (Upto 2 children) | Fully Taxable |
Hostel Expenditure Allowance | Rs. 300 per month per child (Upto 2 children) | Fully Taxable |
Transport Allowance - Residence to Place of duty | Rs. 3200 per month for employees with disability | Rs. 3200 per month for employees with disability |
Allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place, provided that such employee is not in receipt of daily allowance | 70% of such allowance with maximum limit of Rs 10,000 per month | Fully Taxable |
Special compensatory Allowance (Hilly Areas) High Altitude Allowance Uncongenial Climate Allowance Snow Bound Area Allowance Avalanche Allowance (Subject to certain conditions and locations) | Rs. 300 to Rs 800 per month depending on location Rs. 7000 per month | Fully Taxable |
High Altitude Allowance | a) For altitude of 9,000 to 15,000 feet: up to INR 1,060 per month b) For altitude above 15,000 feet: up to INR 1,600 per month | Fully Taxable |
Highly active field area allowance | Up to Rs. 4,200 per month | Fully Taxable |
Island Duty Allowance | Up to Rs. 3,250 per month | Fully Taxable |
Border area allowance, Remote locality allowance or Disturbed area allowance or Difficult area Allowance | It varies from Rs. 200 to Rs. 1,300 per month, depending on the location | Fully Taxable |
Compensatory Field Area Allowance | Up to Rs. 1,000 per month | Fully Taxable |
Tribal Compensatory Modified Area Allowance. | Up to Rs. 200 per month | Fully Taxable |
Counter Insurgency Allowance | Up to Rs. 3,900 per month | Fully Taxable |
Underground Allowance | Up to Rs. 800 per month | Fully Taxable |
Example of Special Allowance
Example 1: Consider the scenario in which Ms V is an employee at company A. When she checks her salary slip, she realises that a conveyance allowance of Rs.1,600 per month. This allowance is provided for the expenses incurred to travel from the place of residence to the place of work. This allowance is fully taxable and no exemption is available in the Income Tax Act.
Example 2: Mr C is a public-sector medical practitioner who was deployed for duty at a medical camp in the rural side of Bidar, Karnataka. Tribes inhabit this place. Now, Mr C gets an additional component in the salary—a tribal area allowance.
Example 3: Ms S is an employee in Company A, and she incurs education and hostel expenses for her children. However, she can claim children’s education and hostel allowance for Rs 4800 per child.
Example 4: Ms B works in an educational institution on a research project, and she can claim a research allowance for the amount incurred.
Final Word
In general, it is presumed that a special allowance is a part of variable income. However, you must know that a special allowance is considered as part of the gross salary. In addition, the allocation of a special allowance depends on the company’s policies. Therefore, if ‘company A’ provides a special allowance to all its employees, it does not mean that ‘company B’ must also offer a special allowance to all employees in the same ratio.
To determine the total amount you have received under the special allowance component of the salary, you must sum up the figures provided under each eligible allowance head from the above list that is applicable to you. Refer to your salary slip to know more about the allocation towards special allowances.
The Union Budget 2018 has replaced the transport allowance exemption of Rs 1,600 per month with Rs 3,200 per month and medical reimbursement with the standard deduction. Currently, a standard deduction of Rs. 50,000 is applicable for all salaried individuals.