What is Special Allowance: Meaning, Example and Tax Exemption
Reviewed by: Fibe Research Team
- Updated on: 26 Sep 2025
Reviewed by: Fibe Research Team
When you receive your monthly salary slip, you might notice various components listed separately, such as basic salary, house rent allowance (HRA), conveyance allowance and special allowance in salary. Among these, special allowance in salary often creates confusion for many employees. What exactly is it? Why is it provided? How is it taxed? This blog will explain the special allowance meaning, its example and the rules around special allowance tax exemption in simple terms.
Special allowance in salary refers to any additional amount given by the employer to an employee to cover miscellaneous expenses that do not fall under other predefined allowances, such as HRA, conveyance allowance, or medical allowance. It is a flexible component of your salary structure meant to compensate employees for various costs incurred during work or for their performance.
Unlike statutory allowances like HRA or medical allowance, special allowance is discretionary and can vary depending on the organisation’s HR policy or the employee’s role and designation. The purpose of this allowance is to motivate employees and meet specific job-related expenses.
Let us take an example to understand this better. Suppose Ravi works for a software development company and receives the following monthly salary structure:
In this case, the special allowance of ₹5,000 is part of Ravi’s overall salary but is provided separately to cover costs that are not part of predefined allowances.
Some companies also use a special allowance in salary as a performance-linked incentive, meaning an employee may receive a higher special allowance depending on work delivered, targets achieved or additional responsibilities taken up.
Employers provide a special allowance in salary for several reasons:
One of the most important questions about special allowance in salary is regarding its taxation. By default, special allowance is fully taxable under the Income Tax Act, 1961, as part of the employee’s total taxable income.
This is because the allowance is provided without a specific exemption clause under tax rules, unlike HRA or conveyance allowance, which have clear exemptions up to certain limits.
However, there are cases where a portion of the special allowance tax exemption can be claimed if the allowance is given for official work-related expenses and proper documentation (such as bills, receipts and travel logs) is submitted to the employer. In such cases, only the non-reimbursed part becomes taxable.
For example, if an employee receives a special allowance to cover official travel expenses and submits travel bills, the employer may exclude this from taxable income, treating it as a reimbursement rather than a salary component.
A frequently asked question is:
What is the difference between DA and special allowance?
Another commonly asked question is:
What is the meaning of special pay?
Special pay refers to additional remuneration given to an employee for specific roles or responsibilities that go beyond the normal job description. For example, an employee handling hazardous working conditions or managing extra projects may receive special pay as recognition of their extra work.
While special allowance is more general and flexible, special pay is often structured and specifically tied to a role or task.
Special allowance in salary serves as a flexible component of the salary structure, designed to help employees meet diverse expenses or reward performance. While fully taxable by default, exemptions may be available under specific conditions, making it essential for employees to maintain proper records and submit valid proofs.
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DA is a statutory allowance given to employees to offset inflation and is usually a fixed percentage of the basic salary. Special allowance in salary is discretionary, varies by organisation and is provided for miscellaneous expenses.
Special pay refers to additional remuneration given for handling specific tasks, roles, or projects that require extra responsibility. It differs from special allowance as it is often structured and role-specific.
By default, special allowance is taxable. However, a portion of the special allowance tax exemption may apply if expenses are work-related and proper bills are submitted.
