Exempt Allowances in Salary Income AY 2026-27 Guide

Salaried employees often focus only on tax slabs while filing returns, but a large part of tax savings comes from understanding exempt allowances in salary income AY 2026-27. Several salary components such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), children education allowance, and special allowances can reduce taxable income under Section 10 of the Income Tax Act. However, the availability of these exemptions depends heavily on whether you choose the old tax regime or the new tax regime for FY 2025-26.

This guide explains the latest rules for salary exempt allowances under new tax regime FY 2025-26 and the old regime, how exemptions work, eligibility conditions, practical calculations, and common mistakes salaried taxpayers should avoid while filing ITR for AY 2026-27.

What Are Exempt Allowances in Salary Income AY 2026-27?

Exempt allowances are salary components that receive full or partial tax exemption under the Income Tax Act, 1961. Employers include these allowances in the salary structure to compensate employees for specific expenses.

These exemptions mainly fall under Section 10 of the Income Tax Act. You can check the official provisions on the Income Tax Department portal.

Common exempt salary components for income tax filing AY 2026-27 include:

• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Children Education Allowance
• Hostel Expenditure Allowance
• Transport allowance for specially abled employees
• Daily allowance
• Uniform allowance
• Special allowances for official duties

Under the new tax regime, most exemptions are not available. Therefore, comparing old vs new tax regime exempt allowances comparison 2026 is important before selecting a regime.

Salary Exempt Allowances Under New Tax Regime FY 2025-26

The new tax regime under Section 115BAC offers lower slab rates but removes many deductions and exemptions.

According to the CBDT, most Section 10 allowances are not allowed under the new regime. However, a few exemptions continue.

Allowances Still Allowed Under the New Tax Regime

These exemptions remain available even if you opt for the new regime:

• Transport allowance for specially abled employees
• Conveyance allowance for official duties
• Daily allowance during travel
• Transfer-related allowances
• Standard deduction of ₹75,000
• Employer contribution to NPS under Section 80CCD(2)
• Gratuity and leave encashment exemptions as per applicable rules

Exemptions Not Available Under New Regime

The following commonly used exemptions are generally not available:

• HRA exemption
• LTA exemption
• Children education allowance
• Hostel allowance
• Most special allowances under Section 10(14)

This is why employees with high HRA or deduction claims often compare tax liability under both regimes before making a choice.

Standard Deduction and Exempt Allowances for Salaried Employees

For FY 2025-26, salaried employees can claim a standard deduction of ₹75,000 under both old and new tax regimes.

The increase in standard deduction has become one of the major tax benefits for salaried taxpayers. The official Budget documents are available on the Union Budget portal.

Example

Suppose your gross salary is ₹12,00,000.

• Gross Salary: ₹12,00,000
• Standard Deduction: ₹75,000
• Taxable Salary before other deductions: ₹11,25,000

Under the old regime, additional exempt allowances and deductions may further reduce taxable income.

House Rent Allowance Exemption Calculation AY 2026-27

HRA remains one of the biggest tax-saving components under the old tax regime.

Conditions to Claim HRA Exemption

You can claim HRA exemption if:

• You receive HRA as part of salary
• You live in rented accommodation
• You actually pay rent

HRA Exemption Formula

The exempt amount is the least of the following:

1. Actual HRA received
2. Rent paid minus 10% of salary
3. 50% of salary for metro cities or 40% for non-metro cities

Salary for HRA calculation includes:

• Basic salary
• Dearness allowance forming part of retirement benefits
• Commission based on fixed percentage of turnover

House Rent Allowance Exemption Calculation AY 2026-27 Example

Rahul lives in Mumbai and receives:

• Basic Salary: ₹8,00,000
• HRA Received: ₹3,60,000
• Rent Paid: ₹25,000 per month

Step 1: Actual HRA received = ₹3,60,000

Step 2: Rent paid minus 10% salary

• Annual rent = ₹3,00,000
• 10% of salary = ₹80,000
• Eligible amount = ₹2,20,000

Step 3: 50% of salary for metro city

• 50% of ₹8,00,000 = ₹4,00,000

Least amount = ₹2,20,000

Therefore:

• HRA exempt = ₹2,20,000
• Taxable HRA = ₹1,40,000

You can verify HRA provisions under Section 10(13A) on the Income Tax India website.

Leave Travel Allowance Tax Exemption India 2026

Leave Travel Allowance (LTA) covers travel expenses incurred during leave within India.

Key Rules for LTA Exemption

• Exemption applies only to domestic travel
• Covers employee and eligible family members
• Available for 2 journeys in a block of 4 calendar years
• Current block: 2022-2025
• Unused exemption can be carried forward for one journey in the next block

Expenses Allowed

Eligible expenses include:

• Air fare
• Rail fare
• Public transport fare

Expenses Not Allowed

• Hotel expenses
• Food expenses
• Shopping
• Sightseeing costs

Example of LTA Exemption

An employee receives LTA of ₹50,000 and spends ₹38,000 on eligible domestic air tickets.

• Exempt amount = ₹38,000
• Taxable amount = ₹12,000

LTA exemption is not available under the new tax regime.

Children Education Allowance Exemption Income Tax India

Children education allowance remains a small but useful exemption under the old regime.

Exemption Limits

• ₹100 per month per child
• Maximum 2 children
• Maximum annual exemption = ₹2,400

Hostel Expenditure Allowance

• ₹300 per month per child
• Maximum 2 children
• Maximum annual exemption = ₹7,200

Though the exemption amounts are small, employees should still include them correctly while computing salary income.

Special Allowance Exemption Under Income Tax Act India

Special allowances are granted for official duties or specific work conditions. Tax treatment depends on the type of allowance.

Fully Exempt Special Allowances

These are exempt to the extent of actual expenses incurred:

• Travel allowance
• Conveyance allowance
• Helper allowance
• Research allowance
• Uniform allowance

Partially Exempt Allowances

Some allowances have fixed exemption limits.

Examples include:

• Children education allowance
• Hostel allowance

Taxable Special Allowances

General special allowance paid without specific purpose is usually fully taxable.

For example:

• Performance allowance
• Fixed monthly special allowance
• Management allowance

Many employees assume all “special allowance” components are exempt, which is incorrect.

Section 10 Allowances Exemption for Salaried Taxpayers India

Section 10 contains several salary exemptions relevant to employees.

Important Section 10 Salary Exemptions

Section	Exemption
Section 10(13A)	HRA
Section 10(5)	LTA
Section 10(14)	Special allowances
Section 10(10AA)	Leave encashment
Section 10(10)	Gratuity

The complete legal provisions are available on the Income Tax Department e-filing portal.

Old vs New Tax Regime Exempt Allowances Comparison 2026

Choosing the correct regime depends on salary structure and deductions.

Old Tax Regime

Advantages:

• HRA exemption available
• LTA exemption available
• Section 80C deductions allowed
• Home loan deductions available
• Suitable for employees with investments and rent payments

Disadvantages:

• Higher slab rates
• More documentation required

New Tax Regime

Advantages:

• Lower slab rates
• Simpler compliance
• Standard deduction available

Disadvantages:

• Most exempt allowances not allowed
• Limited deductions

Quick Comparison

Benefit	Old Regime	New Regime
HRA	Allowed	Not allowed
LTA	Allowed	Not allowed
Standard Deduction	₹75,000	₹75,000
80C Deduction	Allowed	Not allowed
NPS Employer Contribution	Allowed	Allowed

How to Show Exempt Salary Components in ITR Filing AY 2026-27

Employees should verify exempt allowances carefully before filing returns.

Documents Required

Keep these records ready:

• Rent receipts
• Rental agreement
• Travel tickets for LTA
• Salary slips
• Form 16
• Proof of eligible expenses

Common Mistakes to Avoid

• Claiming HRA without paying rent
• Claiming LTA for international travel
• Claiming exemptions under new regime incorrectly
• Ignoring taxable portion of allowances
• Mismatch between Form 16 and ITR

The Income Tax Department increasingly uses AIS and employer reporting systems to verify salary claims.

Which Salaried Employees Benefit More From Exempt Allowances?

The old regime generally benefits employees who:

• Pay significant house rent
• Invest under Section 80C
• Claim home loan interest
• Receive structured allowances

The new regime may suit employees who:

• Have fewer deductions
• Prefer simpler tax filing
• Have lower exempt allowance components

Example Comparison

Employee Salary: ₹15,00,000

Scenario 1: Old Regime

• HRA exemption: ₹2,50,000
• 80C deduction: ₹1,50,000
• Standard deduction: ₹75,000

Taxable income reduces significantly.

Scenario 2: New Regime

• Only standard deduction available
• Lower slab rates apply

Depending on deductions, the old regime may still provide lower tax liability.

Frequently Asked Questions on Exempt Allowances in Salary Income AY 2026-27

Is HRA exemption available in the new tax regime?

No. HRA exemption is generally not available under the new regime under Section 115BAC.

Can I claim both standard deduction and HRA?

Yes, under the old regime you can claim both.

Is LTA exemption available every year?

No. It is available for 2 journeys in a block of 4 calendar years.

Are all special allowances exempt?

No. Only specific allowances for official duties qualify for exemption.

Is children education allowance still available?

Yes, but only under the old regime and subject to specified limits.

Final Thoughts on Exempt Allowances in Salary Income AY 2026-27

Understanding exempt allowances in salary income AY 2026-27 can significantly reduce your tax liability if your salary structure includes eligible components. HRA, LTA, and Section 10 allowances still provide meaningful benefits under the old tax regime, while the new regime focuses more on lower slab rates and simplified taxation.

Before filing your return for AY 2026-27, compare both regimes carefully using your actual salary breakup, exemptions, and deductions. Employees with substantial rent payments, investments, or structured salary packages often benefit more from the old regime. Those with limited deductions may find the new regime more efficient. Reviewing your Form 16, exempt salary components, and Section 10 allowances exemption for salaried taxpayers India can help you optimize tax savings legally and accurately.