The Income Tax Department has released a detailed reference on the benefits available to salaried employees for Tax Year (TY) 2026-27, covering allowances, perquisites, deductions, retirement benefits and other salary-related exemptions. The document incorporates provisions of the Income-tax Act, 2025, as amended by the Finance Act, 2026.
For salaried taxpayers, understanding these provisions can help in determining the taxable portion of salary and identifying benefits that may be fully or partially exempt.
House Rent Allowance (HRA)
HRA remains one of the key salary allowances for employees who live in rented accommodation. The exemption is available to the least of:
- Actual HRA received;
- 40% of salary, or 50% where the house is situated in specified cities including Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad or Bengaluru; and
- Rent paid minus 10% of salary.
For this purpose, salary generally includes basic salary, eligible dearness allowance and turnover-based commission. HRA becomes fully taxable where the employee lives in their own house or does not actually pay rent. Employees paying more than Rs 1 lakh in annual rent are also required to report details such as the landlord's name, address, PAN and relationship to the employer.
Education, Hostel and Transport Allowances
The document provides specific exemptions for certain employee allowances. Children Education Allowance is exempt up to Rs 3,000 per month per child for a maximum of two children, while Hostel Expenditure Allowance is exempt up to Rs 9,000 per month per child for a maximum of two children.
Transport allowance for eligible employees with specified disabilities can be exempt up to Rs 15,000 per month in metro cities and Rs 8,000 per month in other cities. Employees working in the transport business may also claim an exemption equal to the lower of 70% of the allowance or Rs 25,000 per month, subject to the prescribed conditions.
Other allowances such as conveyance allowance for official duties, travel allowance on tour or transfer, daily allowance and helper, research and uniform allowances are exempt to the extent of actual expenditure incurred, subject to the applicable provisions.
Special Allowances for Remote and Difficult Locations
Employees working in specified difficult or remote locations may qualify for special compensatory allowances. Depending on the applicable category, Tough Location Allowance ranges from Rs 1,500 to Rs 7,000 per month.
Other allowances include Compensatory Field Area Allowance of Rs 13,500 per month, Compensatory Modified Field Area Allowance of Rs 8,000 per month and Counter-Insurgency Allowance of Rs 22,000 per month, subject to conditions and restrictions on claiming overlapping exemptions.
For eligible armed forces personnel, the document also specifies exemptions for high-altitude, highly active field area, island duty and Siachen allowances. Siachen Allowance, for example, is listed at Rs 42,500 per month, subject to the prescribed conditions.
Perquisites: Rent-Free Accommodation, Vehicles and Other Benefits
Salary taxation is not limited to cash salary. Various benefits provided by employers can qualify as taxable perquisites.
For rent-free unfurnished accommodation provided to employees other than Government employees, the taxable value depends on the population of the city and whether the property is owned, leased or rented by the employer. The prescribed valuation can range from 5% to 10% of salary in the case of employer-owned accommodation.
Furnished accommodation is valued by first calculating the value applicable to unfurnished accommodation and then adding the prescribed value of furniture and fixtures. Hotel accommodation provided to employees is generally valued at the lower of actual charges paid by the employer or 24% of salary, subject to specified exceptions.
Motor car facilities are also subject to specific perquisite valuation rules depending on factors such as engine capacity, whether the car is employer-owned or employee-owned, and whether it is used for official, personal or mixed purposes.
ESOPs, Employer Contributions and Loans
Employee stock options and sweat equity shares can create taxable perquisites. The taxable value is generally based on the Fair Market Value of the shares on the date of exercise, less the amount recovered from the employee. For listed shares, the prescribed valuation is based on the opening and closing price, while valuation of certain unlisted securities is determined by a merchant banker.
Employer contributions to recognised provident funds, the NPS scheme and approved superannuation funds become taxable to the extent the aggregate contribution exceeds Rs 7.50 lakh, subject to the applicable provisions.
Interest-free or concessional loans provided by an employer can also be taxable perquisites. However, no taxable perquisite arises where the aggregate loan does not exceed Rs 2 lakh or where the loan is provided for specified medical treatment, subject to the conditions prescribed in the document.
Free Meals, Gifts and Club Facilities
Employee benefits such as meals, gifts, credit cards and club memberships can also have tax implications.
Free meals exceeding Rs 200 per meal are taxable to the extent prescribed. However, certain meals and beverages provided during working hours, including tea, coffee, snacks and specified meals costing up to Rs 200 per meal, can remain tax-free under the stated conditions.
Cash gifts or gifts convertible into money are fully taxable. Gifts in kind up to Rs 15,000 in aggregate per annum are exempt, with the excess becoming taxable.
Similarly, club facilities used for official purposes are exempt, while specified employee benefits relating to annual or periodic club fees may be taxable. Health clubs, sports and similar facilities provided uniformly to all employees are exempt under the stated conditions.
Standard Deduction Under Tax Regimes
One of the most relevant provisions for salaried taxpayers is the standard deduction.
For TY 2026-27, the document specifies:
| Tax Regime | Standard Deduction |
|---|---|
| Normal tax regime | Rs 50,000 or salary, whichever is lower |
| New tax regime under Section 202 | Rs 75,000 or salary, whichever is lower |
Professional tax actually paid during the year is also deductible. Where the employer pays professional tax on behalf of the employee, it is first included as a perquisite and then allowed as a deduction.
Leave Encashment, Gratuity and Retirement Benefits
Retirement-related payments receive separate tax treatment.
Leave encashment received by Government employees at retirement is fully exempt. For other employees, exemption is restricted to the least of the amount actually received, the prescribed leave and average-salary calculation, 10 months' average salary, or Rs 25 lakh.
For eligible non-Government employees covered by the Payment of Gratuity Act, the exempt amount is the least of the prescribed statutory calculation, Rs 20 lakh, or the gratuity actually received. Similar rules apply to employees not covered by the Gratuity Act, with the prescribed average-salary formula.
Commuted pension is also subject to different exemption limits depending on the employee category and whether gratuity is received. Family pension deductions differ between the normal and new tax regimes.
NPS and Unified Pension Scheme Benefits
Payments from the National Pension System Trust on closure of an account or opting out are exempt to the extent they do not exceed 60% of the total amount payable. Partial withdrawal from NPS is exempt to the extent of 25% of the employee's contributions, subject to the applicable provisions.
The document also provides that amounts received under the Unified Pension Scheme on superannuation, voluntary retirement or retirement under FR 56(j) are exempt to the extent of 60% of the individual corpus, while the entire lump-sum amount received under the specified provision is listed as exempt.
Provident Fund Tax Treatment
The document summarises the tax treatment of different provident funds. Employer contributions to a recognised provident fund are exempt subject to the prescribed limits, while employee contributions may qualify for deduction under the applicable provision.
Interest credited to recognised provident funds is generally exempt subject to the prescribed rules, including the specific restriction concerning employee contributions exceeding Rs 2.50 lakh in a tax year. Where there is no employer contribution, the corresponding threshold for employee contributions is Rs 5 lakh for determining taxable interest.
What Salaried Employees Should Keep in Mind
The tax treatment of salary is increasingly dependent on the nature of the benefit, how it is provided and whether the prescribed documentation and conditions are met. Employees should therefore review their salary structure, employer-provided benefits, retirement receipts and eligible deductions before finalising their tax position for TY 2026-27.
The Income Tax Department itself cautions that the document is intended as an information resource and should not be treated as a legal document. Taxpayers are advised to verify the provisions against the relevant Acts, Rules and Notifications.
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