What is Special Allowance? - Taxation and Calculation in India
What is Special Allowance? - Taxation and Calculation in India
The salary of the employee is designed considering various components such as basic salary, allowances, retirement benefits, and more. Allowances are one component paid by employers to compensate for monthly expenses of employees such as rent, cost of living, and more.
It is the sum that a company or organisation pays to employees to meet various purposes. A special allowance is an extra or additional money paid to an employee by an employer.
This salary allowance can vary depending on the employee's position and performance. In this guide, we will explore the special allowance and its calculation.
What is a Special Allowance?
An organisation or company pays a special allowance to an employee for doing exceptional work. Some companies refer it as a special allowance, while others call it a bonus.
Further, in some organisations it can also be paid depending on the profit employment concept.
Taxability of Special Allowance
Allowances are taxable under the hands of the employee receiving them unless specific exemptions are applied. These special allowance exemptions are listed under the Income Tax Act section sections 10(14)(i) and 10(14)(ii). For the allowances to be exempt from tax, the following conditions need to be met.
The allowance can be used or required for the job.
The allowance can only be used for the expenses related to the job.
The allowance is not allowed to be used for personal expenses.
The part or amount of the allowance that is used for doing the job is exempt from tax.
The lower of the two amounts (the amount actually incurred by the employee and the amount paid) is exempt from tax.
However, there are conditions where specific tax laws are applied.
Benefits like city compensating stipends are not exempt from taxation.
If an organisation incorporates HRA, as per Section 10(13)A, partial tax exemption is applied.
Payment or advances given to honourable justices of the Supreme Court and High Court
Special Allowance Categories and Taxation Exemption
The special allowance is divided into two main categories which are personal allowance and official allowance. Let's understand the official and personal allowance exemption.
| Personal Allowance Category | Exemption in Old Tax Regime | Exemption in New Tax Regime |
|---|---|---|
| Children Education Allowance | Maximum exemption of ₹100/month/child for two children. The excess amount is taxable. | Fully-taxable |
| Underground Allowance | For employees working in underground mines, the maximum is ₹800/month. The excess amount is taxable. | Fully-taxable |
| Hostel Allowance | Maximum exemption of ₹300/month/child for two children. The excess amount is taxable. | Fully-taxable |
| Tribal Area Allowance | For employees living in hilly, agency or scheduled areas, the maximum is ₹200/month. The excess amount is taxable. | Fully-taxable |
| Transport Allowance (commuting between residence and place of duty) | The maximum exemption is ₹1600/month. For a handicapped employee, the maximum exemption is ₹3200/month. | Actual expense incurred to perform duty. For a handicapped employee, the maximum exemption is ₹3200/month. |
| Island Duty Allowance | For members of the armed forces working in Lakshadweep and Andaman and Nicobar Island, the maximum exemption is ₹3250/month. | Fully-taxable |
| Outstation Allowance | Allowance is generally paid by India's rail, water, and roadways. Seventy percent of the amount received is exempt from taxation. | Fully-taxable |
| Travelling Allowance | This is a special allowance for covering the cost of travel or tours while doing a job. Actual expenses incurred for this purpose are exempt from tax. | Actual expense incurred for performing official duty. |
| Daily Allowance | The daily expenses incurred by employees while on tour come in the daily allowance category. Actual expenses incurred for this purpose are exempt from tax. | Actual expense incurred for performing official duty. |
| Research/Academic Allowance | It is the special allowance provided for conducting research and training. Actual expenses incurred for this purpose are exempt from tax. | Fully-taxable |
| Conveyance Allowance | This is the allowance incurred on conveyance for performing a job. Actual expenses incurred for this purpose are exempt from tax. | Actual expense incurred for performing official duty. |
| Uniform Allowance | This is the allowance for purchasing and maintaining a uniform while doing the job. Actual expenses incurred for this purpose are exempt from tax. | Fully-taxable |
| Helper Allowance | It is the special allowance offered for hiring and help for performing a job. Actual expenses incurred for this purpose are exempt from tax. | Fully-taxable |
Special Allowance Calculation in Salary
The special allowance in salary depends on the gross income and can vary from company to company. Let’s understand the calculation by special allowance example.
Let's understand the calculation of special allowances in salary via example. The basic salary of A is ₹45,000, and he receives a special allowance for transport ₹1600 per month. The maximum exemption on transport allowance is ₹1600/month. Hence, it is fully exempt from tax.
Taxable amount of A = Basic salary = ₹45,000 per month
Taxation on travel allowance = 0
Conclusion
Special allowance is a crucial component of the salary offered by the employer. It is the amount or allowances offered over and above the basic salary. However, its taxability depends on the specified condition.
Under the income tax, a special compensatory allowance exemption is offered to employees under various conditions. Hence, knowing tax implications is necessary for compliance with income tax regulations.
Tax Benefits of Medical Insurance Plan
Tax planning is an important pillar in a robust financial plan. One way to ensure your medical needs are addressed at the time of emergency and you avail of tax benefits is to buy a health insurance policy. A medicalim policy is eligible for tax exemption to the extent of premium paid. As per Section 80D of the Income Tax Act, individuals can claim a tax deduction of up to ₹25,000 on the premium paid for a medical insurance plan in a financial year.
Tata AIG, a renowned insurance provider, offers custom-made health insurance policies to individuals. From family health insurance to senior citizen health insurance to critical illness plans, we have plans for everyone. Visit the Tata AIG website to browse health insurance policies.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
Related Articles
Is a special allowance taxable?
Is a special allowance taxable?
The special allowance can be taxable depending on the applicable slab rate. However, you can get tax exemption to a certain extent.
Can special allowance be higher than basic salary?
Generally, the special allowance is lower than the basic salary.
Why does an organisation offer a special allowance?
Employers or organisations offer special allowances to address employees' various needs, offer financial support, and enhance the employee’s overall well-being and satisfaction.
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