Understanding Special Allowance in Salary: Meaning, Calculation, Exemption & Taxation

Introduction

In addition to basic salary and bonuses, employees often receive a special allowance as part of their salary structure. This allowance is intended to cover specific needs or reimburse certain expenses that the employee incurs during the course of their job. While the special allowance can vary widely depending on the company and industry, it is essential to understand how it works, whether it is taxable, and how it impacts the overall salary package.

This article provides a detailed explanation of the special allowance in salary, how it’s calculated, whether it’s taxable, and how you can claim exemptions for certain allowances.

What Is Special Allowance in Salary?

A special allowance is a non-essential addition to an employee's basic salary, granted for specific purposes such as compensation for extra work, covering certain job-related expenses, or fulfilling a unique requirement. Unlike regular allowances such as house rent allowance (HRA) or transport allowance, special allowances are often customizable and may not be part of the standard salary structure.

Examples of special allowances include:

• Attendance allowance

• Night shift allowance

• Relocation allowance

• Medical allowance

These allowances are usually provided to employees to address specific aspects of their role or lifestyle.

Special Allowance Percentage in Salary

The percentage of special allowance in a salary package can vary greatly depending on the employer and industry. In some cases, special allowance may constitute a significant portion of the total salary, especially in organizations where certain job-related expenses need to be covered.

• Typical range: Special allowance can range from 5% to 20% of an employee’s gross salary.

• Impact on Take-Home Salary: While the percentage may seem high, the final impact on the take-home salary depends on the taxation of the allowance.

Special Allowance in Salary Slip

The special allowance in salary slip is usually listed separately from other components like basic salary, HRA, and bonuses. It is essential to check the salary slip to understand the breakdown of the gross salary, which includes the special allowance.

In the salary slip, special allowances might be listed as:

• Special allowance for a specific department (e.g., marketing)

• Reimbursement for job-related expenses (e.g., travel, medical)

• Non-cash benefits like meal or fuel allowance

Is Special Allowance Taxable or Not?

The taxation of special allowance in salary depends on the nature of the allowance and whether it falls under the exemptions granted by the Income Tax Act.

Taxable Special Allowance:

If the special allowance is meant to cover expenses not directly related to the job (like a relocation allowance or a special performance-based allowance), it is taxable.

Examples of taxable special allowances include overtime allowance, city compensatory allowance (CCA), and special bonuses.

Non-Taxable Special Allowance:

Some special allowances are exempt from tax if they meet certain conditions, such as:

Medical allowance (up to a certain limit)

Conveyance allowance (up to a prescribed limit)

House rent allowance (subject to conditions)

Special Allowance Examples

Common examples of special allowances include:

• Medical Allowance: A fixed sum provided to employees to cover medical expenses. It is often part of the salary structure and may or may not be taxable.

• Travel Allowance: Paid to employees for travel-related expenses, typically related to business trips. It can be either fully or partially taxable.

• Special Performance Allowance: Paid based on the individual’s performance or targets achieved. This allowance is generally taxable.

• Relocation Allowance: Given to employees when they are transferred to a different location. It may be taxable, depending on the amount and the circumstances.

• City Compensatory Allowance (CCA): Given to employees working in metropolitan cities to cover the higher cost of living.

Special Allowance in Salary: Fixed or Variable?

Special allowance can be either fixed or variable depending on the nature of the allowance and the agreement between the employer and the employee.

• Fixed Special Allowance: A fixed amount is added to the salary regularly, such as medical or transport allowances.

• Variable Special Allowance: This allowance depends on specific criteria, such as overtime, performance, or sales targets. It varies each month based on the performance of the employee.

Special Allowance Exemption Under Section 10

Under Section 10 of the Income Tax Act, certain special allowances are eligible for exemption. The exemptions depend on the purpose of the allowance and how it is used by the employee.

For example:

• Conveyance Allowance: Up to ₹1,600 per month is exempt.

• Medical Allowance: Up to ₹15,000 per year is exempt (if the employee submits valid bills).

Other allowances, such as house rent allowance (HRA) and special bonuses, may also have exemptions based on the conditions met by the employee.

Special Allowance Calculation

The special allowance calculation is usually straightforward, as it is part of the salary package provided by the employer. However, the exact calculation will depend on whether the allowance is taxable or exempt.

Here’s a basic breakdown:

• Taxable Special Allowance: The employer adds it to the gross salary and deducts taxes accordingly.

• Exempt Special Allowance: The employer does not include the exemption in the taxable income, so it reduces the overall tax liability.

The calculation also depends on whether the employee is eligible for exemptions under Section 10 of the Income Tax Act.

Special Allowance Exemption Limit

The exemption limit for special allowances depends on the type of allowance:

• Medical Allowance: Exempt up to ₹15,000 per year.

• Conveyance Allowance: Exempt up to ₹1,600 per month.

• House Rent Allowance (HRA): Exempt as per specific rules, which depend on the rent paid, salary, and location.

These exemptions reduce the taxable income, resulting in lower taxes.

Taxation of Special Allowance

The taxation of special allowance depends on whether the allowance falls under the exemptions available under the Income Tax Act. Any allowance that doesn’t qualify for exemptions is considered taxable.

The taxable special allowances are added to the total income and taxed as per the applicable income tax slab rates. It’s important for employees to keep track of these allowances and ensure that they are correctly accounted for during income tax filings.

Common Misconceptions About Special Allowance

Some common misconceptions include:

• “Special allowances are always exempt from tax”: Not all special allowances are exempt. Only those mentioned in the Income Tax Act or those meeting specific criteria are exempt.

• “Special allowances are fixed”: Some special allowances, such as performance-based or overtime allowances, can vary each month.

• “Special allowances are the same as other allowances”: Special allowances are unique and serve specific purposes, unlike regular allowances like HRA.

Conclusion

Special allowances play a significant role in shaping an employee’s salary package, offering benefits that cater to specific needs such as medical expenses, transportation, or performance. It’s essential for employees to understand the special allowance percentage, exemption limits, and whether their special allowance is taxable.

This knowledge helps employees make informed decisions when managing their finances and filing their income tax returns.

Disclaimer

This article is intended solely for educational and informational purposes. It does not constitute financial, legal, or tax advice. BondScanner does not provide personalized advisory services through this content.

Readers are encouraged to consult with financial or tax advisors for specific guidance on special allowance-related tax implications and exemptions.