When allow-symlinks is ON, Fossil sees symlinks on disk as a separate object class that is distinct from files and directories. When a symlink is added to a repository, Fossil stores the target filename. In other words, Fossil stores the symlink itself, not the object that the symlink points to.
Symlinks are not cross-platform. They are not available on all operating systems and file systems. Hence the allow-symlinks setting is OFF by default, for portability.