Special Allowance

What is Special Allowance?

A fixed amount given to employees to meet certain necessities is referred to as Special allowance – this amount is over and above the basic salary. There are diverse classifications of special allowances, and it differs from organisation to organisation. In certain organisations, it comprises of any benefits or allowance provided to employees to meet their precise expenses towards competent performance. If it is explicitly allowed to employees, it is exempt to the degree of authentic expenditure incurred. However, in certain organisations, the number corresponding to special allowance in pay slips is typically the leftover element of the salary, after salary is allocated to different heads – HRA, conveyance allowance, Leave travel allowance and so forth. Therefore, the amount corresponding to special allowance is the money which is not covered under any other head in a pay slip – after all the diverse components in a pay slip are apportioned, the left behind amount which form part of the yearly cost to company (CTC), is covered under special allowance.

Categories of Special Allowance

Special allowances are taxable and paid on a monthly basis. Special allowance has two sub-divisions – personal allowances and official allowances

Types of Personal Allowances

Children Education Allowance

The maximum exemption limit is Rs. 100 for each month per child – maximum of two children, anything above this amount is taxable

Conveyance Allowance

The maximum exemption limit is Rs. 1,600 for each month – anything above this amount is taxable. The maximum exemption limit in case of handicapped employees is Rs. 3,200 for each month, anything above this amount is taxable.

Hostel Allowance

The maximum exemption limit is Rs. 300 for each month per child – maximum of two children, anything above this amount is taxable.

Underground Allowance

This allowance is available for employees operating in underground mines. The maximum exemption limit under this allowance is Rs. 800 for each month, anything above this amount is taxable.

Tribal Area Allowance

This allowance is available for residence of agency areas, hilly areas, and scheduled areas – states included are Assam, Karnataka, Madhya Pradesh, Odisha, Tamil Nadu, Uttar Pradesh, and Tripura. The maximum exemption limit under this allowance is Rs. 200 for each month, anything above this amount is taxable.

Outstation Allowance

Allowance paid airways, roadways, and railways to their employees’ in-lieu of daily allowance. Exempt amount is the least of 70% of allowance i.e. Rs. 10,000 for each month. Taxable amount is equivalent to allowance received minus exempt amount.

Island Duty Allowance

This allowance is available for officials of armed forces who are serving the Nation in Lakshadweep Group of Islands, and Andaman and Nicobar Islands and. The maximum exempt amount is Rs. 3,250 for each month.

Types of Official Allowances

Conveyance Allowance

Takes account of expenses incurred on conveyance while performing official responsibilities. For income tax purpose, this allowance is exempt while saving is taxable.

Daily Allowance

Takes account of daily charges incurred by a staff during a business tour. For income tax purpose, this allowance is exempt while saving is taxable.

Helper Allowance

This covers expense incurred on a helper hired to carry out duties of an office. For income tax purpose, this allowance is exempt while saving is taxable.

Research/Academic Allowance

This allowance is granted to encourage academic training and research pursuits in an institution. For income tax purpose, this allowance is exempt while saving is taxable.

Travelling Allowance

Takes account of cost of travel during business trips or relocation/transfer of duty. For income tax purpose, this allowance is exempt while saving is taxable.

Uniform Allowance

Takes account of expenses incurred on maintenance and purchase of uniform worn while performing duties of an office. For income tax purpose, this allowance is exempt while saving is taxable.

Special Allowance Calculation

To help readers understand the Special allowance computation, let’s break-down all the components of a pay slip. Though, the salary structure may differ from organisation to organisation, however, by and large it is made up of the following heads:

• Gross salary, variable pay, cost to company, total deduction and take-home pay

  • Gross salary is defined as pay before deductions and taxation
  • Basic salary is typically 40% of cost to company – this entire amount is taxable
  • Dearness Allowance is 20% of basic salary – depends on a public sector organisation’s policy, and is usually taxable. It is of two types – variable dearness allowance (VDA) and industrial dearness allowance (IDA)

  • House Rent Allowance is applicable if an individual is staying in a rented accommodation. It is least of the below mentioned three options:

    • Actual House Rent Allowance received by an employee for an employer
    • Actual rent paid subtracted by 10% of the salary (salary comprises dearness allowance, basic pay, and charge on revenue based on fixed percentage. The salary is considered from the time an employee joins an organisation)
    • 40% of the salary for non-metros; for metro cities it is 50%
  • Medical reimbursement which is Rs. 1,250 for each month
  • Leave travel allowance (LTA) can be claimed post submission of bills – LTA varies from organisation to organisation. LTA is incurred on travel during leaves (paid leaves etc.), and not holidays, and travel by the shortest route is exempt. LTA is subject to a maximum of AC 1st class fare or air economy fare. The exemption can be claimed for two journeys in a block of 4 calendar years
  • Special allowance – two categories personal allowance and official allowance
  • Food coupon such as Sodexo Meal Card – this is tax exempt

• Variable pay given by an organisation comprises of the following:

  • Bonus of individual performance (can range from 8.33% to 20% of gross); sales professional have a different bonus structure based on their monthly/quarterly/yearly targets
  • Employer’s contribution to Provident Fund (PF) (13.61% of basic salary)
  • Gratuity (subject to company norms)
  • Mediclaim (varies from organisation to organisation)
• Cost to company is equal to gross pay plus variable pay

• Deduction comprise of the below mentioned:

  • Employees contribution to PF
  • Professional Tax
  • Tax Deducted at Source (TDS)

Illustration for Special Allowance

Mr. Abhishek Jain, a social media executive, has a cost to company (CTC) of Rs. 4.75 lakh. The below mentioned break-up including special allowance:

1. Basic Salary – Rs. 14,000.00
2. House Rent Allowance – Rs. 7,000.00
3. Medical Reimbursement – Rs. 1,250.00
4. Special allowance – Rs. 9,570.00
5. Employee PF contribution – Rs. 1,905.00
6. Employer PF contribution – Rs. 1,905.00
7. Other allowances – Rs. 3,965.00
8. Cost to company, per month – Rs. 39,596
9. Cost to company, per annum – Rs. 4.75 Lakh