Everything You Need to Know About Special Allowance

We frequently encounter allowances such as transportation, conveyance, uniform allowance, and so on. These are additional benefits that an employer provides to its employees regularly. The taxability of these allowances is subject to various rules and conditions. We’ve gone over the different types, how they’re taxed, and how to claim exemptions in this article.

What is an Allowance?

It is a set sum of money offered by an employer to its employees. Employers pay it in addition to the basic salary and the dearness allowance. The goal is to fulfil the individual needs of the employees. These allowances are taxed because they constitute part of the pay. It is either exempt or taxable, depending on the type of allowance.

What is Special Allowance in Salary?

Employees are given a specific allowance to help them meet their financial obligations. These costs are incurred while they are executing the duties of an office or a profit-making job. The quantity fluctuates depending on the needs of each company. It is included in the fixed pay. The details of the allowance can be found in the offer letter or the monthly payslip. It is taxable in the hands of the employee because it is included in the salary.

Section 10(14) of the Income Tax Act of 1961 exempts special allowances from taxation.

• Any such exceptional allowance or benefit that is not like a prerequisite as defined in section 17 clause (2). The award is intended to cover expenses incurred entirely, necessarily, and solely in the performance of tasks of a profit-making office or employment. It is exempt to the extent that the expenses were incurred for that purpose.
• Any such stipend, whether to cover his expenses at his place of employment or where he generally dwells, or to compensate him for the higher cost of living. It is not subject to taxation.

Taxability of Special Allowance

The sorts of special allowances can be separated into two categories. To begin, a few allowances are completely tax-free. Others are either partially or completely exempt. The following conditions, however, must be met:

• The remuneration isn’t in the form of a stipend.
• It has nothing to do with you.
• Offered expressly to cover expenses incurred, unavoidably, and exclusively in the performance of tasks of a profit-making office or employment.
• The employee’s exemption is restricted to the amount received and spent for that purpose.
• The exemption limit is set by the Income Tax Act. It does not set a ceiling on the amount of pay that a company can give.

Can special allowance be higher than basic salary?

The special allowance is usually less than the basic income. Furthermore, after awarding fixed pay and variable pay in the form of monthly and performance bonuses, a special allowance is usually the remaining of the CTC. As a result, your special allowance may be greater than your base wage. There would, however, be an extremely unusual or specific scenario. Furthermore, the Income Tax Act makes no distinction between a basic salary that is lower or higher than a special allowance.

What is the difference between DA and special allowance?

The central government pays its employees a dearness allowance. A dearness allowance is only given to personnel in the public sector. Furthermore, the consumer price index is used to calculate the dearness allowance. The dearness allowance is subject to review by the Pay Commission. A special allowance, on the other hand, can be paid by both public and private sector employees. The purpose of a special allowance is to allow an employee to cover expenses that are entirely, necessarily, and exclusively incurred in the performance of tasks in a profit-making office or job. At the slab rate, dearness allowance is entirely taxed. When it comes to special allowances, they are either entirely taxable or partially taxable.

Which allowance is fully taxable in salary?

The benefits are either wholly taxed, partially taxable, or completely taxable. Dearness allowance, entertainment allowance, overtime allowance, city compensatory allowance, and lunch allowance are all completely taxable allowances. Interim, project, cash, warden, servant, and non-practicing allowances are also included.

Are allowances benefits?

Allowances, on the other hand, are benefits provided for specific objectives. These stipends are included in the overall compensation. These allowances, however, are not perks. Allowances and perquisites have different tax implications.