📑 Table of Contents
- What are Special Allowances?
- Types of Special Allowances
- Taxability of Special Allowances
- Exemptions under Section 10(14)
- Illustration: Special Allowance Calculation
- Reporting Special Allowances in ITR
- Tips for Employees to Save Tax on Allowances
- Internal & External References
- FAQs
💡 What are Special Allowances?
Special Allowances are components of salary paid to employees to meet specific expenses or compensate for certain conditions related to their job profile. These are paid over and above the basic salary and may be either fully taxable or partially exempt under the Income Tax Act, depending on their nature and usage.
Such allowances are not fixed and vary based on:
- Industry norms
- Employee roles
- Employer policies
- Geographic location
🗂️ Types of Special Allowances
Special Allowances can be broadly divided into:
1. Taxable Special Allowances
Fully added to taxable income unless specifically exempted.
| Allowance Type | Purpose |
|---|---|
| Overtime Allowance | Paid for extra hours worked |
| City Compensatory Allowance | To offset higher cost in metro cities |
| Project Allowance | For managing or executing specific projects |
| Attendance Allowance | For regularity in attendance |
| Servant Allowance | For hiring domestic help (taxable) |
2. Exempt Special Allowances (Under Sec 10(14))
Exempt to the extent of actual expenses or limit specified.
| Allowance Type | Nature | Max Exemption Limit (₹) |
|---|---|---|
| Transport Allowance | Commuting expenses | ₹1,600/month (only for disabled persons) |
| Children Education | School expenses | ₹100/child/month (max 2 children) |
| Hostel Allowance | Hostel fees | ₹300/child/month (max 2 children) |
| Uniform Allowance | Uniform expenses | Actual spent (if proof submitted) |
| Travelling Allowance | Business tours | Actual amount used |
🧾 Taxability of Special Allowances
| Allowance Type | Taxable? | Section Applicable |
|---|---|---|
| Transport Allowance | ✅ (partially exempt) | Sec 10(14) |
| Overtime Allowance | ✅ Fully taxable | As salary income |
| Academic Research Allowance | ❌ Exempt (with proof) | Sec 10(14)(ii) |
| Remote Area Allowance | ❌ Exempt up to limit | Sec 10(14)(ii) + Rule 2BB |
| Daily Allowance (Govt) | ❌ Actuals exempt | Sec 10(14) |
✍️ Note: Most allowances are taxable unless specifically exempt. Proof of usage is essential in most cases.
📘 Exemptions under Section 10(14)
Section 10(14) allows exemptions for:
A. Allowances for Performance of Duty [Sec 10(14)(i)]
Exempt up to actual expenses incurred.
Examples:
- Travel
- Uniform
- Helper/Attendant
- Conveyance
B. Allowances for Personal Expenses [Sec 10(14)(ii)]
Partially exempt up to notified limits.
Examples:
- Children education
- Hostel
- Transport
- Tribal area compensation
🔗 Visit the Income Tax Department Circular for detailed limits.
🔢 Illustration: Special Allowance Calculation
Let’s assume:
| Salary Component | Amount (₹/month) |
|---|---|
| Basic Salary | 40,000 |
| HRA | 15,000 |
| Special Allowance | 8,000 |
| Transport Allowance (disabled) | 1,600 |
| Children Education Allowance | 300 |
Taxable Salary = All components except exempt allowances.
Exemptions:
- Transport = ₹1,600 (fully exempt)
- Children Education = ₹200 (max 2 children × ₹100)
Taxable Special Allowance = ₹8,000 (fully taxable)
Net Additions to Income = ₹8,100/month
🧾 Reporting Special Allowances in ITR
While filing ITR:
- Special Allowances go under “Salary Income”
- Use Form 16 to identify taxable and exempt parts
- Enter exempt portion under ‘Exempt Income’ section
- Upload supporting documents if prompted during scrutiny
📎 Related: How to File ITR – Step by Step Guide
📌 Tips for Employees to Save Tax on Allowances
- Submit proof of actual expenses wherever allowed
- Utilize all Section 10(14) exemptions by declaring eligible claims
- Combine exemptions with 80C, 80D deductions for optimal savings
- Plan salary structure to include non-taxable special allowances
🔗 Internal & External References
Internal Links:
- Basic Salary Explained
- Understanding HRA
- Salary Breakup Components
- How to Choose ITR Form
- ITR Filing Mistakes to Avoid
External Link:
❓ FAQs
- • What are special allowances in salary?
These are extra payments made to employees apart from basic salary and may be taxed or exempt depending on their nature. - • Are special allowances fully taxable?
Not always. Allowances listed under Section 10(14) are partially or fully exempt if conditions are met. - • Is overtime allowance taxable?
Yes, it is fully taxable under salary income. - • What is the exemption for Children Education Allowance?
₹100 per child per month, up to 2 children only. - • Can private sector employees claim these exemptions?
Yes, if such allowances are part of your salary and supported by proof. - • What if I don’t submit proof for uniform/travel?
The exemption won’t apply, and the amount will be considered fully taxable. - • Where to report these in the ITR?
Report under ‘Salary Income’ and exempt portion under ‘Exempt Income’ section. - • Is servant allowance taxable?
Yes, unless paid to perform duties for office and proof is submitted. - • How to plan salary for tax saving?
Include exempt allowances like education, transport, or travel and avoid fully taxable ones. - • What if my employer wrongly reports the allowance?
You can correct it while filing your ITR, but maintain proper documentation for safety.
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