Question

I am trying to create a function as per my requirements.

But, when am creating or drop #tempTable, it is giving an error as:

invalid use of a side-effecting operator ‘drop object’ within a function

My understanding is that we can’t have create, drop or insert operations on #temptable in a function.

Is that correct?

My SQL:

CREATE FUNCTION [dbo].[RT_ResultFunction]
(
    Id VARCHAR(4000)
)
RETURNS @RT_ResultFunction TABLE 
(   
    Id VARCHAR(20)
    , Name varchar(20)
    ,Balance Int
)
AS
BEGIN
    IF OBJECT_ID('tempdb..#tempTable') IS NOT NULL  
       DROP TABLE #tempTable

    SELECT Id, COUNT(Balance) 
    INTO  #tempTable
    'Balance' FROM Table1

    INSERT  @RT_ResultFunction 
        SELECT T1.ID,T1,NAME,T2,Balance 
        FROM    Table2 T1, 
                #tempTable T2
        WHERE T1.ID = T2.ID

    RETURN
END

Answer 1

That is correct – you cannot have side effecting statements:

From here: http://msdn.microsoft.com/en-us/library/aa175085(v=sql.80).aspx

The statements in a BEGIN…END block cannot have any side effects.
Function side effects are any permanent changes to the state of a
resource that has a scope outside the function such as a modification
to a database table. The only changes that can be made by the
statements in the function are changes to objects local to the
function, such as local cursors or variables. Modifications to
database tables, operations on cursors that are not local to the
function, sending e-mail, attempting a catalog modification, and
generating a result set that is returned to the user are examples of
actions that cannot be performed in a function.

What you would find, even without your DROP statement, is that any attempt to access a temp table will give you the message (such as a SELECT ... INTO #TMP):

Cannot access temporary tables from within a function

As @Dems points out, you can use table variables. Because these are variables, they are scoped within the function, and therefore aren’t side effecting.

Your function might run as:

...

BEGIN
    DECLARE @tempTable table (id varchar(20), rows int)

    insert @tempTable
    SELECT Id, COUNT(Balance) 
    FROM Table1

    INSERT  @RT_ResultFunction 
        SELECT T1.ID,T1,NAME,T2,Balance 
        FROM    Table2 T1, 
                @tempTable T2
        WHERE T1.ID = T2.ID

    RETURN END

Not tested or anything, but you get the gist.