0 hidden charges. 0 forex
Become a part of Fi's Salary program and manage your Salary without breaking a sweat

What is a Special Allowance in Salary

What is a Special Allowance in Salary

Table of Contents
Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.

Special allowance may be the least understood component among the many salary allowances that employers pay their employees. As a salaried individual, you must also be aware of how it is taxed.

What is the meaning of allowance in salary? 

When we talk about "allowance," we're referring to those extra financial perks given by an employer to an employee on top of their basic salary and Dearness Allowance. The purpose behind these allowances is to help employees cover specific expenses they may have. Now, let's take a look at some of the common types of salary allowances: House Rent Allowance (HRA), Conveyance Allowance, Transport Allowance, Uniform Allowance, Leave Travel Allowance, and Special Allowance. These allowances provide employees with additional support and are an integral part of many compensation packages.

What is a special allowance?

It is usually a fixed amount offered over and above the basic salary. Unlike other allowances with a specific purpose, the special allowance doesn’t have a fixed goal. Some companies provide special allowances to their employees to recognise & encourage their exemplary performance. Other companies, however, tend to categorise leftover components of an employee’s salary as a special allowance. For instance, components that do not fit into other salary allowance sectors may be clubbed together and categorised as special allowances.

Taxability of special allowance

The Indian income tax act of 1961 classifies allowances into three categories:

  • Completely exempt from taxation
  • Partially exempt from taxation
  • Fully taxable

For an allowance to be either partially or completely exempt from taxation, it needs to satisfy certain conditions.

Conditions for an allowance to become tax exempt

  • The allowance must not be a prerequisite (a benefit one enjoys or is entitled to on account of their job).
  • The allowance must be used to cover expenses that an employee may incur exclusively for the performance of their duties. 
  • The allowance must not be for personal expenses. 
  • Only the amount of allowance received by the employee (and used for the purpose for which it was issued) would be exempt from tax.

There's no maximum limit to the amount of allowance that an employer may offer their employees. However, there's an upper limit to the exemption amount that the employee may claim.

Salary allowances categorised as special would be eligible for partial or complete exemption from tax if they satisfy the above criteria. If they don't meet the above criteria, they will be fully taxed under the Income Tax Act of 1961. 

Categories of special allowances and their taxation 

Some allowance categories may be personal, and others may be official. Depending on the nature of the salary allowances, their taxability may differ.


In conclusion, special allowances, a component of salary offered by employers, can often be misunderstood when it comes to taxation. These allowances, given on top of the basic salary, aim to cover specific expenses. However, their taxability depends on certain conditions, such as being used exclusively for work-related purposes and not for personal expenses. Only the portion of the allowance meeting these criteria is exempt from tax. It is important for both employers and employees to understand the tax implications of special allowances to ensure compliance with tax regulations.

Frequently Asked Questions

1. What are examples of allowances?

Depending on your employer, you may be entitled to a multitude of different allowances. Some of the most common examples are House Rent Allowance, Leave Travel Allowance, Uniform Allowance, Conveyance Allowance, and Transport Allowance, among others. 

2. What are the 3 types of allowances?

Salary allowances can be broadly classified into three different types based on taxability - fully exempt allowances, partially taxable allowances, and fully taxable allowances.

A banner showing incoming calls
Time to switch to Fi. Smart banking and only that.
Related Posts
Get the Fi app