Special Allowance: Calculation, Taxation, and Exemption

A special allowance is one of the many allowances an employer provides to an employee as a part of their salary. While some of this allowance is exempted, certain parts are taxable under the Income Tax law. It mainly depends on the reason for which this allowance has been granted.

Details of special allowances in India and their taxation and calculation have been explained below.

What Is Special Allowance in India?

Special allowance is given to the employees to compensate for their expenses incurred while performing their duties or job. It is a fixed payment that varies from one company to another whose details are mentioned clearly on the employee’s salary slip and offer letter. Thus, since it forms a part of salary, it is taxable under Section 10(14) of the Income Tax Act, 1961.

However, there are also special conditions in which the Government of India provides an exemption from special allowance tax under Section 10(14). These include:

• The allowance should not be categorized as a pre-requisite defined under Section 17(2). The grant should meet employees’ expenses exclusively and wholly incurred against performing his/her duty or during employment of profit. Moreover, the exemption is up to the limit of expenses incurred for the same purpose.
• Any such special allowance is exempt under the law which is allotted to compensate for the personal expenses incurred at the place of work (office)/ employment/ residence.

What Is the Taxation for Special Allowance?

Section 10(14), clause (1), and clause (2) define whether a special allowance is taxable in India or not. According to it, those parts of the allowance that do not fall in the exempt income category as per the Income Tax Act rules are fully taxable. However, for those who are exempt, it can be either partially exempt or wholly. So, it depends on which category it falls into. Also, one must remember the following conditions while calculating tax:

• The income tax department mentions the exemption limit for different categories. However, it does not put a cap on the maximum amount employers can offer.
• The expense is not personal.
• Allowance should not be in the nature of a perquisite.
• The expense should be necessarily, wholly and exclusively used for performing one’s duty or employment of profit.
• The exemption limit of allowance is up to the amount an employee spends or the employer gives, whichever is lower.

How to Calculate Special Allowance?

Taxpayers will be able to understand the calculation of special allowances by breaking down the different parts of their CTC.

What Are the Different Categories of Special Allowance and Its Exemption?

The following are the different categories of special allowances in salary given by employers to meet employees’ expenses. It shows the limit to which it is exempted:

Illustration

Taxpayers will be able to understand the calculation of special allowances by breaking down the different parts of their CTC.

Categories that form fixed pay of the CTC

• Basic salary forms 40% of the CTC.
• HRA or House Rent Allowance can be 50% of the basic salary. It depends on where the employee stays.
• Dearness Allowance forms 20% of the basic salary. The company fixes it, and it is taxable.
• Medical Reimbursement is ₹15,000 annually, i.e., Rs. 1250 per month.
• The special allowance depends on the company policy and is taxable.
• LTA or Leave Travel Allowance varies from company to company. The exemption is only up to a certain limit.
• Food coupons (varies as per company policy).

CTC also often includes variable pay that employers provide additionally. It includes:

• Performance-based commission/bonus (8.33 to 20% of the Gross Pay).
• Employer’s contribution to PF or Provident Fund (13.61% of the Basic Pay).
• Mediclaim (Varies as per company policy and differs for multiple companies).
• Gratuity (varies according to government rules and company norms).

So, the calculation of the special allowance given to Mr A. will be as under if his CTC is ₹10 lakh.

Special allowance per month will be ₹32,083.

This allowance is then sub-categorised and calculated considering the exemptions mentioned below.

Final Word

This is all the information on ‘What is special allowance in India?’, its taxation, calculation and exemption. To sum up, employees receive this allowance as part of their total CTC in exchange for their expenses. Section 10(14) of the Income Tax Act provides different conditions under which certain amounts are exempt while others are taxable.

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