What is Special Allowance in Salary?

Special allowances are additional payments employees receive from their organizations for various reasons. These payments are typically fixed sums and can differ greatly depending on several factors:

·      Employee's Role and Performance: Some companies reward outstanding performance with special allowances.

·      Company's Financial Health: Organizations with strong finances might offer plenty of allowances.

Companies can adjust special allowances like HRA and LTA based on current employee benefits.

Tax Implications of Special Allowances:

Special allowances can be tax-exempt or taxable depending on the purpose and specific conditions. 

The Income Tax Act, 1961 does not tax some allowances. Employers reimburse employees for work-related expenses that employees must pay during employment.

Taxable allowances are generally subject to tax unless specifically exempted under the Income Tax Act. Some allowances are exempt under Section 10(14) of the Act, but conditions are attached to these exemptions.:

o  The allowance cannot be a perquisite (a benefit enjoyed under the position).

Employees must receive the allowance solely for superior work performance or holding a position of profit.

o  The allowance cannot be a personal expense.

Examples of Special Allowances:

You can categorize special allowances into personal and official allowances. Here are some common examples:

·      Personal Allowances (May be partially or fully taxable):

o  Children's Education Allowance

o  Hostel Allowance

o  Transport Allowance

o  Outstation Allowance (partially exempt)

o  Island Duty Allowance (partially exempt)

·      Official Allowances (Generally tax-exempt):

o  Travelling Allowance (TA)

o  Daily Allowance

o  Conveyance Allowance

o  Research Allowance

o  Uniform Allowance

Impact on Provident Fund:

The Supreme Court said employers must add basic salary and special allowance when calculating Provident Fund contributions. This increases the employee's Provident Fund corpus, providing a larger retirement benefit.

Key Takeaways:

·      Special allowances are additional payments to employees beyond their base salary.

·      The purpose and specific conditions determine whether the allowance is taxable or exempt.

·      Special allowances can be personal or official in nature.

·      Recent court rulings can impact how special allowances affect Provident Fund contributions.