Tax Exemption Limits for Allowances, Reimbursements Paid to Employees

House Rent Allowance (HRA)

HRA is an allowance provided by your employer as part of the salary package to help you cover the cost of rented residential accommodation ^[1]. If you are a salaried individual living in a rented house, Section 10(13 A) of the Income Tax Act enables you to claim HRA exemption  under the old tax regime^[2]. The HRA exemption depends on a number of factors including your salary, rent paid, and HRA received as part of your Cost to Company (CTC). You should submit valid rent receipts and payment slips to claim the exemption. You can claim the minimum of the following amounts as HRA exemption^[1]:

 

• Actual HRA received
• 50% of annual salary - metro cities
• 40% of annual salary - non-metro cities
• Excess of rent paid in the year over 10% of annual salary

Keep in mind that the salary considered here, is the combined total of basic salary, Dearness Allowance (DA), and sales commission.

 

Dearness Allowance (DA)

 

DA is usually an allowance given by the government to public sector employees in the form of a cost-of-living adjustment. However, regardless of whether you are a public or private sector employee, you are liable to pay tax for DA. It is fully taxable for salaried employees . When filing your ITR, you must declare your tax liability for the DA^[1].

 

Leave Travel Allowance (LTA)

 

The LTA is designed to cover your travel expenses during a vacation. This deduction will be applicable on travel expenses incurred within India, provided you meet certain conditions. Section 10(5)^[3] of the Income Tax Act highlights that LTA is to be claimed when you are on leave, retired or after terminating your employment/service. Although, it covers travelling costs for yourself and your family, it does not include expenses for food and accommodation. The mode of travelling can be by air, train or public transport. The family members include your partner, children, parents, and wholly dependent siblings. You need to provide proof of travelling to avail this exemption. This exemption is available only for the utmost two journeys within a block of four years. The exemption amount allowed is either the actual expenditure to reach the destination via the shortest route available or the actual amount spent - whichever is lower. While you should opt economy class for air travel, A/C first class tickets have to be taken in the case of railways to avail the deduction^[3].

 

 

 

City Compensatory Allowance (CCA)

  ^[1]

 

The CCA is a monetary benefit provided by the company to employees to compensate for the higher cost of living in urban areas. Similar to DA, CCA is fully taxable .

 

Overtime Allowance^[1]

 

This allowance is offered to the employees to compensate for the work beyond their regular working hours. Any allowance received for working overtime is fully taxable.

 

 

 

 

Children Education Allowance

  ^[1]  

 

According to the Income Tax Act, you are eligible to claim tax exemption if you are receiving children allowance tax from your employer. You will be eligible to claim a tax exemption of up to Rs.100 per month for a maximum of two children. You can further claim for deductions on children's fees under section 80 C of the Income Tax Act.

 

Hostel Expenditure Allowance

  ^[1]

 

If you are receiving Hostel Expenditure Allowance from your employer, you are eligible for exemption up to Rs.300 per month up to a maximum of two children.

 

 

Fixed Medical Allowance

  ^[1]  

 

While medical allowance can be claimed without having to submit the bills, it is fully taxable. However, make sure that you do not confuse this exemption with medical reimbursement as when it comes to the latter, you are required to submit medical bills to claim tax exemption. The tax exemption on medical reimbursement was discontinued after the Financial Year 2017-18.

 

Phone Bills Reimbursement

  ^[1]  

 

This type of reimbursement involves both mobile phone and telephone bills along with a broadband internet connection. Although, the Income Tax laws have not set any limit on mobile phone bills, experts suggest that it should be a reasonable amount by factoring in the salary and grade of the employee.

   

Special Allowance

 

Any allowance received by the employee that does not fall under the above-mentioned allowances head is called a special allowance. This allowance is provided by the employer for various reasons, considering the employee's position and responsibilities, and is fully taxable^[1].

 

Keep in mind that these allowances and standard deductions are not the same. In fact, rather than an allowance, a standard deduction is the fixed amount deducted from your total salary income. In her Union Budget 2025 *, Finance Minister Nirmala Sitharaman announced a standard deduction of Rs.75,000 will be available to salaried employees^[4].

 

FAQs

 

1. I am a salaried taxpayer. Can I claim an HRA exemption in the new regime?

   ^[2]  

   Section 10(13A) of the Income Tax Act will enable you to claim HRA exemption. However, it is available only in the old tax regime

2. Is standard deduction applicable to old tax regimes?

    

   Yes, standard deduction is available for both old and new tax regimes. However, salaried taxpayers under the old tax regime are eligible for a standard deduction of Rs.50,000^[5].