Most articles about salary allowances are describing a tax regime that almost nobody is on, using section numbers that no longer exist, and quoting two exemptions that were abolished in 2018.
Here is the position as it actually stands for FY 2026-27. The new regime is the default, and under it nearly every allowance on your payslip is fully taxable. HRA, LTA, and the allowance-based exemptions generally are old-regime benefits. If you have not opted out, the line items in your salary structure are labels rather than tax planning.
Two things did change this year, and both are worth knowing. The metro list that governs the HRA calculation was expanded from four cities to eight, which is a real increase for anyone renting in Bengaluru, Hyderabad, Pune or Ahmedabad. And the meal voucher exemption was raised and extended to both regimes, making it the only allowance-shaped benefit that still does anything for a default-regime employee.
What follows is each major allowance, what it is exempt to, and which regime that exemption lives in.
Rates, thresholds and section references are those applying to tax year 2026-27 under the Income-tax Act, 2025 and the Income-tax Rules, 2026, current at August 2026, for a resident individual below 60. Perquisite valuation, surcharge and the position of specific industry allowances are summarised rather than set out in full. Verify against the current Act and Rules before configuring a payroll run. Nothing here is tax advice.
What an Allowance Is, and Why the Regime Decides Everything
An allowance is a fixed sum your employer pays you as part of salary, named for a purpose. Rent, travel, food, fuel, education. The name is a payroll convention. It carries no tax consequence by itself.
What creates the exemption is a specific provision saying so, and every one of those provisions has conditions attached. That is the whole subject. A component called "special allowance" is fully taxable no matter how it is labelled, and a component called "house rent allowance" is exempt only to the extent the three-limit formula allows, only if you actually pay rent, and only if you are on the old regime.
That last condition now does most of the work. Since the new regime became the default, the question "is this allowance taxable?" has a short answer for most people: yes. The exemptions did not disappear, but they were never carried into the default regime, and the standard deduction of ₹75,000 was raised partly in exchange.
So the honest order of questions is: which regime are you on, then what does the allowance qualify for, and only then how much. Most published guidance skips the first question entirely, which is why so much of it reads as though it were written in 2017.
One structural note before the components. The Income-tax Act, 2025 replaced the 1961 Act on 1 April 2026 and renumbered nearly everything. The exempt incomes that sat in section 10 are now in section 11 read with Schedule II. The new regime rates that were section 115BAC are section 202. The standard deduction that was section 16(ia) sits in the table under section 19. The substance is unchanged, but every template and policy document citing the old numbers is now citing a repealed Act.
HRA: the Three Limits, and the Four New Metros
House rent allowance is the largest exemption available to a salaried person who rents, and the only one substantial enough to change the regime decision on its own.
The exemption is the least of three figures:
| Limit | What it means |
|---|---|
| Actual HRA received | The HRA line on your payslip for the year |
| Rent paid minus 10% of salary | Rent actually paid, less a tenth of salary for the same period |
| 50% or 40% of salary | 50% in the listed cities, 40% everywhere else |
"Salary" here means basic pay plus dearness allowance, plus commission calculated as a fixed percentage of turnover if you receive any. It does not mean gross salary or CTC. Getting this wrong inflates the third limit and overstates the exemption, and it is the single most common error in self-calculated HRA claims.
The metro list expanded this year. The Income-tax Rules, 2026, notified by the CBDT on 20 March 2026 and in force from 1 April 2026, added Bengaluru, Hyderabad, Pune and Ahmedabad to the four cities that already qualified for the 50 per cent treatment. The list for FY 2026-27 is:
| 50% of salary | 40% of salary |
|---|---|
| Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | Every other city and town |
This matters more than it sounds. For an employee in Bengaluru on a basic of ₹60,000 a month, the third limit moves from ₹2,88,000 to ₹3,60,000 a year. Where the third limit was the binding one, that is ₹72,000 of additional exemption. The change applies to salary earned from 1 April 2026 onward. For FY 2025-26 those four cities are still at 40 per cent, so a return filed in 2026 for the previous year uses the old list.
The conditions that trip people up are procedural rather than arithmetical. Rent must actually be paid, and paying rent to a parent is allowed provided the arrangement is real and the parent declares the income. The landlord's PAN is required where annual rent exceeds ₹1,00,000. You can claim HRA and a home loan deduction in the same year if you genuinely rent in one city and own in another, or own a property that is let out. And HRA is claimed through your employer on Form 12BB with rent receipts, or directly in your return if you missed the payroll deadline.
None of it is available under the new regime. Our HRA calculator runs the three limits with the current city list.
Dearness Allowance: Taxable, and Still the Most Important Number on Your Payslip
Dearness allowance is a cost-of-living component, revised periodically, near-universal in government and public sector pay and increasingly rare in private sector structures.
Its tax treatment is simple: fully taxable, in both regimes, without exception. There is no exemption to discuss.
It earns a section here anyway, because DA is load-bearing in a way its own taxability does not capture. It sits in the base for almost every other calculation in Indian payroll:
- The HRA exemption's second and third limits are computed on basic plus DA.
- Provident fund contributions are computed on basic plus DA.
- Gratuity is fifteen days of last drawn basic plus DA for each completed year.
- Leave encashment values each day at a thirtieth of basic plus DA.
So a change in DA moves the employer's PF liability, the eventual gratuity payout, the encashment value of accrued leave, and the HRA exemption, all at once. In structures that carry DA, it is the component least worth treating as a rounding line.
Where private employers have no DA at all, every one of those calculations runs on basic alone, which is why a low basic keeps statutory cost down and why the wage definition under the Code on Wages exists to limit that. We take that apart in CTC breakup, component by component.
Medical Allowance: the Exemption That Died in 2018
This is where most published guidance is simply wrong, and it is wrong in a way that costs employees money through misdirected salary structuring.
Medical allowance is fully taxable. It has been fully taxable since FY 2018-19, in both regimes, without conditions.
The exemption people are remembering was medical reimbursement of up to ₹15,000 a year against submitted bills, which is a different thing from an allowance, and it was withdrawn by the Finance Act 2018 along with the transport allowance exemption. Both were replaced by the standard deduction, introduced at ₹40,000, raised to ₹50,000, and now ₹75,000 under the new regime. That is the trade that was made. You no longer submit medical bills because the deduction is given automatically instead.
You will still find articles, and a surprising number of payroll templates, quoting ₹1,250 a month of exempt medical reimbursement. That figure is the ₹15,000 annual limit divided by twelve, and it has been dead for eight years.
What does still exist is distinct from all of this:
- Employer-paid group health insurance premium is not treated as a taxable perquisite in the employee's hands. This is the benefit most people are actually thinking of.
- Deduction for health insurance premium you pay yourself, formerly section 80D, remains available on the old regime only.
- Medical treatment reimbursed for specified serious illnesses, and treatment in an employer-maintained hospital, remain outside the perquisite value on conditions.
A "medical allowance" line on a payslip does none of those things. It is ordinary taxable salary under a more reassuring name.
Conveyance and Transport: Two Different Things
These two get merged constantly, and they have opposite outcomes.
Transport allowance is money for commuting between home and office. The exemption of ₹1,600 a month, ₹19,200 a year, was withdrawn from FY 2018-19 in the same trade as the medical reimbursement. For ordinary employees it is now fully taxable in both regimes.
One carve-out survived and it is worth knowing because payroll teams miss it: an employee who is blind, deaf and dumb, or orthopaedically handicapped to the extent that it affects their ability to commute is exempt on transport allowance up to ₹3,200 a month. That exemption is available under the new regime as well as the old. It is one of a very small number that is.
Conveyance allowance for the performance of official duties is a different provision entirely and it is alive. Where an employer pays for travel undertaken in the course of the job, as distinct from getting to the job, the amount is exempt to the extent it is actually spent for that purpose. Field staff, service engineers, sales teams travelling between client sites. This is available in both regimes, because it is not really a benefit at all: it is reimbursement of the employer's own cost that happened to route through the employee.
The distinction that decides it is home-to-office versus office-to-elsewhere. The first is commuting and is taxable. The second is business travel and is not, provided it is genuinely incurred and evidenced. Paying a flat monthly "conveyance allowance" to everyone regardless of whether they travel does not qualify under the second head, however it is labelled.
LTA: Two Journeys, Four Years, Fare Only
Leave travel allowance covers the cost of travelling within India while on leave, for you and your family.
The rules are narrow and each one excludes something people assume is covered:
- Travel fare only. Not hotels, not meals, not sightseeing, not local transport at the destination. The fare, and nothing around it.
- Domestic travel only. An international trip earns no exemption, including the domestic leg of it.
- Two journeys in a block of four calendar years. The current block runs from 1 January 2026 to 31 December 2029. Blocks are calendar years, not financial years, which catches people out.
- You must actually be on leave, and you must actually travel. It is claimed against evidence.
- Capped by class. Air travel is limited to economy fare on the shortest route; rail to first class air-conditioned.
- Family means spouse, children, and parents, brothers and sisters mainly dependent on you. The exemption for children is limited to two, with an exception for multiple births after the first child.
If you do not use both journeys in a block, one can be carried into the first year of the next block, provided it is used in that first year.
LTA is an old-regime benefit. On the new regime the entire amount is taxable salary.
It is also the component with the widest gap between what is budgeted and what is claimed. Employers structure a month of basic as annual LTA, employees never travel or never keep the fare evidence, and the whole amount is taxed at year end anyway. On the default regime that gap is total, because there was never anything to claim.
What Survives in the New Regime
This is the short list, and it covers what remains available to roughly the whole of the salaried workforce.
| Benefit | Position under the new regime |
|---|---|
| Standard deduction | ₹75,000, automatic, no proof required |
| Meal vouchers and free food at the workplace | Exempt up to ₹200 per meal from 1 April 2026 |
| Employer contribution to NPS | Exempt within the prescribed percentage of salary |
| Employer contribution to PF | Exempt within the aggregate annual limit |
| Gratuity on exit | Exempt up to ₹20,00,000, lifetime |
| Leave encashment on exit | Exempt up to ₹25,00,000, lifetime, on the four limits |
| Transport allowance for specified disabilities | ₹3,200 a month |
| Conveyance for official duties | Exempt to the extent actually spent |
The meal voucher change is the notable one. Under the Income-tax Rules, 2026 the per-meal limit for free food and non-alcoholic beverages provided at the workplace or through vouchers usable only at eating joints rose from ₹50 to ₹200, and the earlier bar on claiming it under the new regime was removed. At two meals a working day, that is roughly ₹1.05 lakh a year of exempt value.
For a default-regime employee it is now the only meaningful structuring lever left. We cover it, and the rest of the reimbursement menu, in employee reimbursements and flexible benefit plans.
Everything else, HRA, LTA, the Chapter VI-A deductions including the old 80C and 80D, professional tax, and the allowance-based exemptions generally, requires opting out of the default.
What This Means for Salary Structure Design
Most Indian salary structures were designed for a tax regime that most employees are no longer on. They have not been redesigned, because nothing breaks visibly when they are not.
The symptoms are consistent:
- An elaborate allowance schedule, eight or ten components, delivering nothing to the majority of the workforce because they are all old-regime exemptions.
- Annual LTA budgeted for everyone, claimed by a fraction, taxed for the rest.
- A "medical allowance" line that has been fully taxable since 2018 and is still described to candidates as a tax benefit.
- Basic pay held artificially low to suppress PF and gratuity cost, which reduces the HRA exemption for the employees who do use the old regime, and now runs against the wage definition under the Code on Wages.
- Meal vouchers not offered at all, because the last time anyone reviewed the structure they were worthless under the new regime, which is no longer true.
None of the fixes are complicated. The starting point is finding out what proportion of your workforce is actually on each regime, which payroll knows exactly and most HR teams have never asked. From there it is mostly subtraction: drop the components that were withdrawn during the last decade, keep the ones that work in both regimes, and size HRA properly for employees renting in the eight listed cities, since that is where the real money is. It is also worth saying plainly in the offer letter what is taxable, because a candidate comparing two offers on CTC alone is comparing the wrong number.
This drifts for structural reasons more often than from any lack of knowledge. The structure lives in an offer letter template, the regime declaration lives in a form, and the payslip comes out of a third system, so nobody sees the three together. Our payroll management system runs them off one record, which is why it comes up here at all.
Questions People Ask
Which salary allowances are tax free in India?
Under the old regime: HRA within the three limits, LTA for two journeys in a four-year block, and conveyance for official duties. Under the new default regime the list is much shorter: meal vouchers up to ₹200 per meal, employer contributions to NPS and PF within limits, transport allowance of ₹3,200 a month for specified disabilities, and conveyance actually spent on official duties. Everything else on a typical payslip is fully taxable.
Is medical allowance taxable?
Yes, fully, in both regimes. The ₹15,000 a year medical reimbursement exemption was withdrawn from FY 2018-19 and replaced by the standard deduction. Guidance still quoting ₹1,250 a month is eight years out of date. Employer-paid group health insurance premium is a separate matter and is not taxed as a perquisite in your hands.
Which cities count as metro for HRA in FY 2026-27?
Eight. Mumbai, Delhi, Kolkata and Chennai, plus Bengaluru, Hyderabad, Pune and Ahmedabad, which were added by the Income-tax Rules, 2026 notified on 20 March 2026. Those eight allow 50 per cent of basic plus DA as the third limit; everywhere else is 40 per cent. The change applies from 1 April 2026, so FY 2025-26 still runs on the old four-city list.
Can I claim HRA under the new tax regime?
No. The HRA exemption sits in section 11 read with Schedule II of the Income-tax Act, 2025, formerly section 10(13A), and is available only to those who opt out of the default regime. Since a salaried employee can choose the regime when filing, an HRA claim missed through payroll can still be made in the return if you are on the old regime for the year.
Is conveyance allowance still exempt up to ₹1,600 a month?
No. That exemption was withdrawn from FY 2018-19 and folded into the standard deduction. Two things survive: transport allowance of up to ₹3,200 a month for employees with specified disabilities, available in both regimes, and conveyance for the performance of official duties, exempt to the extent actually spent. Ordinary home-to-office commuting allowance is fully taxable.
How many times can I claim LTA?
Twice in a block of four calendar years. The current block is 1 January 2026 to 31 December 2029. Only domestic travel fare qualifies, not hotels or meals, you must actually be on leave, and it is an old-regime benefit only. One unused journey can be carried forward and used in the first year of the next block.
Is dearness allowance taxable?
Yes, fully, in both regimes. Its importance is indirect: DA sits in the base for provident fund, gratuity, leave encashment and the HRA exemption limits, so a DA revision changes four other calculations at once.
Where This Leaves You
For employees: check which regime you are on before reading any allowance guidance at all, because most of it assumes the old one. If you are on the default, your allowance schedule is decoration, with the meal voucher as the exception worth asking about. If you rent in one of the eight listed cities and you are near the point where the old regime competes, HRA is the component that decides it, and it is worth calculating rather than estimating.
For employers: the two failures that cost real money are budgeting for withdrawn exemptions, which quietly misrepresents the offer, and not revisiting meal vouchers after the 2026 change, which leaves an exemption on the table for your entire default-regime workforce. Both are cheap to fix and neither shows up in any report.
Run the rent piece in our HRA calculator, and the regime comparison in the TDS calculator. To see how the components land on the document employees actually read, the payslip generator will build it. If the structure itself is the problem, that is what our payroll management system is for, and a free demo is the fastest way to see it against your own numbers.
The related pieces: the full structure in CTC breakup, component by component, the monthly deduction in TDS on salary, old regime versus new, the reimbursement menu in employee reimbursements and FBP, and what has to be disclosed in payslip format and mandatory components.
Sources
- Income-tax Act and Rules, bare text and section-wise search, incometaxindia.gov.in. The Income-tax Rules, 2026 were notified on 20 March 2026 and took effect on 1 April 2026.
- Slab rates, surcharge, cess and the standard deduction for individuals, incometax.gov.in.
Section numbers cited are those of the Income-tax Act, 2025, with the corresponding 1961 Act provision noted where it helps. Verify against the current Act and Rules before configuring a payroll run.
