GUIDESMONEY MATTERS
What Is Special Allowance in Salary? Meaning, Tax Rules
4 MIN • 
LAST EDITED BY PRANAV KARNAD ON SEPTEMBER 30, 2025.
LAST EDITED BY PRANAV KARNAD ON SEPTEMBER 30, 2025.
GUIDES LAST EDITED BY PRANAV KARNAD ON SEPTEMBER 30, 2025.
Special allowance is a common component you’ll find in most salary slips, but it often raises questions, what does it really mean, why is it included, and how is it taxed?
Understanding special allowance is important for employees to know their exact take-home pay and for employers to stay compliant with tax rules. In this guide, we’ll explain what special allowance in salary is, how it appears on your salary slip, its taxability, and examples to make it easy to understand.
Special allowance in salary is a fixed component paid to employees to meet specific expenses or as additional compensation. It appears on the salary slip and is fully taxable unless exempted under Section 10 of the Income Tax Act.
Here are some common types of salary allowances:
These allowances provide employees with extra support and are often included in compensation packages. Learn more about the different types of allowances that may be included in your salary.
The Indian income tax act of 1961 classifies allowances into three categories:
For an allowance to be either partially or completely exempt from taxation, it needs to satisfy certain conditions.
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.
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.
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.
Salary allowances can be broadly classified into three different types based on taxability - fully exempt allowances, partially taxable allowances, and fully taxable allowances.
No, special allowance is a separate salary component, not part of basic salary.
Yes, special allowance is fully taxable unless specifically exempted under the Income Tax Act.
Special allowance is usually a fixed amount or a percentage of basic salary, defined by the employer.
Yes, a special allowance is included in the Cost to Company (CTC) since it is part of total salary.
No, special allowance and Dearness Allowance (DA) are different. DA is linked to inflation, while special allowance is employer-specific.
