0 hidden charges. 0 forex

Special Allowance in India: Taxation, Exemptions, Calculation, and More

Reviewed by
Created on
January 20, 2023


What’s Inside

In this article, we will discuss special allowances in salary slips and their taxability. We'll explore what special allowances are, what their tax implications are, and the criteria that determine their taxability. Understanding special allowances and their taxability is crucial for both employers and employees, as compliance with tax regulations is essential. So, let's dive in and learn more about special allowances in salary slips.

Speaking of Salary Slips, we’ve got an article on accessing and downloading your salary slips. It’s a quick 3-minute read, so make sure to bookmark it for later.

What Is the Meaning of Allowance in Salary?

When we talk about "allowance," we mean the extra money that an employer pays an employee on top of their basic salary and Dearness Allowance (if applicable). These allowances are meant to help employees with specific expenses.

Here are some common types of salary allowances:

  • House Rent Allowance (HRA)
  • Conveyance Allowance
  • Transport Allowance
  • Uniform Allowance
  • Leave Travel Allowance
  • Special Allowance

These allowances provide employees with extra support and are often included in compensation packages. To learn more about the different types of allowances that may be included in your salary, check out this guide.

What Is a Special Allowance?

A special allowance is extra money added to an employee's salary. It doesn't have a specific purpose like other allowances. Some companies give special allowances to employees who do a great job. Other companies might give a special allowance to use up extra money in an employee's salary that doesn't fit in other categories.

Taxation 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 cannot be required for the job.
  • The allowance can only be used for expenses related to the job.
  • The allowance cannot be used for personal expenses.
  • Only the amount of allowance that is used for job-related expenses is tax-exempt.

There is no limit to how much allowance an employer can offer, but there is a limit to how much can be exempt from taxes for the employee.

If a salary allowance meets the criteria above, it may be partially or fully exempt from taxes. If it does not meet the criteria, it 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.



Transport Allowance

₹1,600 a month/₹3,200 a month for handicapped employees. Excess is taxable.

Tribal Area Allowance

Exemption up to ₹200 per month for residents of hilly, scheduled, and agency areas.

Outstation Allowance

Exemption of 70% of the allowance or ₹10,000, whichever is lower.

Hostel Allowance

Exemption of up to ₹300 per month per child for two children.

Island Duty Allowance

Maximum exemption of up to ₹3,250 per month for members of the armed forces assigned duties in islands such as Lakshadweep and Andaman & Nicobar.

Children’s Education Allowance

Maximum exemption of up to ₹100 per month per child for two children.

Uniform Allowance

Allowance for expenses incurred in purchasing and maintaining the uniform to be worn to the employment of profit/office.

Academic/Research Allowance

Allowance given to encourage research/training in research institutions.

Travelling Allowance

Applicable to supplement the cost of travel when on a tour or on the transfer of duty to another city.

Daily Allowance

Includes charges incurred on a daily basis when on a tour.

Helper Allowance

Allowance for expenditures incurred when hiring an assistant to fulfil the duties of employment.


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.

Get On The Fi Salary Program For Extra Benefits!

Now that you've understood special allowances and their taxability, it could be good to explore other non-tax related benefits that your salary account can offer. For example, Fi and its licensed partner Federal Bank provide a salary program with many perks such as 2% cashback when you shop using Fi, 4x Fi-Coins on all your spends via Fi that can be redeemed for vouchers and cool merch, flat 20% of your Debit Card spends as Fi-Coins, no minimum balance requirement, a free VISA Platinum debit card with zero forex charges, priority customer service and more. And, as a joining bonus, you can get a ₹500 Amazon voucher. P.S. If you're a salary user on Fi, you can now top-up your Health Insurance up to ₹20L!

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.


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.
Share this article
Copied Link!
Work & Money
Special Allowance in India: Taxation, Exemptions, Calculation, and More


View similar articles in
Work & Money
Get the Fi app