Key Changes in Allowances & Perquisites for Salaried Individuals under the New Income Tax Act 2025
Revised Norms under New Income Tax Act 2026 Concerning Salary Head
The New Income Tax Act, 2025 (applicable from tax year 2026-27 onwards) introduces a significant overhaul in the taxation of salary income. While the broad framework of salary taxation remains similar, the Act revises exemption limits, rationalizes perquisite valuations, and updates allowance thresholds to reflect present-day economic realities.
These changes are particularly relevant for salaried taxpayers who opt for the old tax regime, where exemptions and deductions continue to play a critical role in reducing taxable income. The revised limits for HRA, children's education allowance, medical benefits, food benefits, and other perquisites indicate a clear attempt to modernize outdated thresholds that had remained unchanged for decades.
This article aims to highlight the key changes in salary taxation provisions, focusing on revised exemptions, perquisite valuation rules, and compliance requirements under the new law.
What this article covers (Scope of Article)
This article covers the following major changes under the new Income Tax framework relating to salary income:
• Revised HRA rules including expansion of metro city definition
• Updated exemption limits for allowances (education, hostel, transport etc.)
• Changes in valuation of perquisites like motor car, food, gifts and loans
• Revised medical benefit provisions in India and abroad
• Updated Leave Travel Concession compliance requirements
• Threshold changes for non-monetary perquisites
• Comparison of old limits vs revised limits
The objective is to help salaried employees, HR professionals, and tax practitioners understand how these changes impact taxable salary computation.
Revised Norms for Allowances
1. House Rent Allowances
Under New Income Tax Act, the scope of Metropolitan cities for the purpose of HRA Exemption has been expanded. Revised provision now include cities such as Ahmedabad, Hyderabad, Pune and Bengaluru with in the Ambit of “Metro Cities”
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Provision under Income Tax Act 1961 |
Provision under Income Tax Act 2025 |
|
Section 10 (13A) |
Schedule III Sr No. 11 as specified by section 11 |
|
Least of the following is exempt 1. 50% of salary – if house taken on rent is situated in Kolkata, Chennai, Delhi & Mumbai
40% of salary – for other cities 2. Rent paid – 10% of salary 3. HRA actually received |
Least of the following is exempt 1. 50% of salary – if house taken on rent is situated in Kolkata, Chennai, Delhi, Mumbai, Hyderabad, Pune, Ahmedabad & Bengaluru 40% of salary – for other cities 2. Rent paid – 10% of salary 3. HRA actually received |
2. Rule 2BB (Old Income Tax Rules) Allowances
The new Act introduce an upward revision in the exemption limits of various allowances, thereby enhancing the tax relief available to Salaried taxpayers. This revision aligns the provision with current economic conditions and cost of living.
|
Name of Allowance |
Nature of Allowance |
Exemption under Rule 2BB (Old Act) |
Exemption under Rule 280 (New Act) |
|
Transport Employees |
It is an allowance granted to an employee working in any transport system to meet his personal expenditure provided such employee is not in receipt of daily allowance |
The amount of Exemption is a. 70% of such allowance or b. Rs.10000 per month Whichever is less |
The amount of Exemption is a. 70% of such allowance or b.Rs. 25000 per month Whichever is less |
|
Children Education Allowance |
This allowance is given for children’s education |
Rs. 100 per month per child up to maximum of two children |
Rs. 3000 per month per child up to a maximum of two children |
|
Children’s Hostel Expenditure Allowance |
This allowance is given for children’s hostel expenditure |
Rs. 300 per month per child up to maximum of two children |
Rs. 9000 per month per child up to maximum of two children |
|
Transport Allowance To an Blind, Deaf, Dumb or orthopedically handicapped employee |
Transport Allowance is granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence to place of duty |
Rs. 3200 per month |
For Metro Cities Rs. 15000 + DA Per month For Other Cities Rs 8000 + DA per month |
|
Underground Allowance |
It is granted to an employee who is working in uncongenial, unnatural climate in underground mines |
Rs. 800 per month |
15% of Basic Pay |
Revised Norms for Various Perquisite
1. Valuation of Motor Car perquisite
Under the revised perquisite valuation framework, the taxable value for a motor car owned or hired by the employer and used for both official and personal purposes is determined based on who bears the running and maintenance expenses. The updated monthly taxable values are as follows:
Where Running and Maintenance Expenses are:
A. Borne by the Employer:
-> For vehicles with an engine capacity up to 1.6 litres: The monthly taxable value is Rs. 5000. (Earlier Rs. 1800)
-> For vehicles with an engine capacity exceeding 1.6 litres: The monthly taxable value is Rs. 7000. (Earlier Rs. 2400)
-> Chauffeur Provision: If a chauffeur is also provided, an additional Rs. 3,000 per month (Earlier Rs. 900) is added to the above amounts.
B. Borne by the Employee:
-> For vehicles with an engine capacity up to 1.6 litres: The monthly taxable value is reduced to Rs. 2,000. (Earlier Rs. 600)
-> For vehicles with an engine capacity exceeding 1.6 litres: The monthly taxable value is reduced to Rs. 3,000. (Earlier Rs. 900)
-> Chauffeur Provision: If a chauffeur is provided in this scenario, the additional taxable value remains Rs. 3,000 per month. (Earlier Rs. 900)
Professional Note: These fixed monthly rates are considered a comprehensive valuation of the benefit received by the employee. For the purpose of these calculations, a 'month' refers to a completed calendar month, and any fraction of a month is excluded.
2. Leave Travel Concession
The updated provisions modernize the travel caps and administrative requirements for claiming exemptions:
Standardization of Air Travel: The previous restriction to "National Carrier" fares has been removed. Exemption is now granted based on the actual fare of the entitled class for the employee via the shortest route.
Alternative Transport Rate: For journeys to destinations not connected by a recognized public transport system, the exemption is calculated at a standardized rate of Rs. 30 per kilometer. The exemption was previously linked to rail fares.
Compliance Protocol: To avail of the exemption, employees must now formally submit travel evidence via the newly prescribed Form No. 124. Failure to submit Form 124 will result in the forfeiture of the exemption even if travel was performed
3. Medical Facilities
A. Medical Facilities in India
-> As per income tax act following No perquisite value is charged for treatment in a hospital maintained by employer, The Government or Hospital approved by the Principal Chief Commissioner for Specific diseases
-> Also, any health insurance premium paid by the employer for the employee or their family is fully exempt
B. Medical Facilities Outside India
-> In the Old Act, the exemption for the cost of travel (for the patient and one attendant) was practically obsolete for the middle class because it was restricted to employees with a GTI of Rs. 2 Lakhs or less.
-> Under the 2025 Act, the threshold of GTI is raised to Rs. 8,00,000. This ensures that the travel cost is no longer added back to the taxable salary for a vast majority of salaried taxpayers.
-> Under both Old and New Income Tax Rules, the expenditure on medical treatment and stay abroad is exempt only up to the limit permitted by the Reserve Bank of India.
Threshold limit for exemption from tax on Non-monetary perquisite
Effective from the new tax year, employees with an annual salary income up to Rs. 4,00,000 are exempt from tax on non-monetary perquisites (e.g., medical facilities), with the eligibility threshold increased significantly from the previous limit of Rs. 50,000
4. Valuation of Interest free or concessional loan provided to employee or household member
The taxable value is calculated as the interest that would have been charged at the annual rate set by the State Bank of India (SBI) as of the first day of the relevant tax year. This interest is computed on the maximum outstanding monthly balance, minus any interest actually paid by the employee.
Exemptions and Conditions
No taxable value (perquisite) is charged under the following specific conditions:
Medical Treatment: Loans provided for the medical treatment of diseases specified in Rule 18 are exempt. The exemption for medical loans does not apply to any portion of the loan that has been reimbursed to the employee under a medical insurance scheme.
Small Loan Amounts: If the aggregate amount of such loans does not exceed Rs. 2,00,000 (Earlier Rs. 20,000) no perquisite value is assigned.
5. Food and Beverages
-> Free food and non-alcoholic beverages provided during working hours at the office or business premises, or through paid vouchers usable only at eating joints, are exempt up to a value of Rs. 200 per meal. (earlier Rs. 50 per meal)
-> Free food and non-alcoholic beverages provided during working hours in a remote area or an off-shore installation are fully exempt.
-> Tea or snacks provided during working hours are fully exempt.
6. Gift, Vouchers and Token
The taxable value of perquisite in nature of gift, voucher or token from employer is its actual cost or face Value. However, if total value of all such items received during the year is below Rs. 15,000 (Earlier Rs. 5000) then the benefit is valued at NIL and is not subject to tax.
7. Other perquisites
|
Nature of Perquisite |
Taxable Values |
Condition for Taxability |
|
Free or concessional educational facilities for any member of the employee's household. |
The amount of expenditure incurred by the employer in this regard, as reduced by any amount paid or recovered from the employee on that account. |
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|
|
Free or concessional educational facilities for any member of employee household, where the educational institution is itself maintained and owned by the employer. |
Cost of such education in a similar institution in or near the locality, as reduced by any amount paid or recovered from the employee on that account.
|
Where the cost of such education or value of such benefit per memberss exceeds Rs.3,000 per month. (Earlier Rs.1000 per month)
|
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Free educational facilities for any member of employees' household in any other educational institution by reason of his employment. |
The revised salary provisions under the Income Tax Act, 2025 represent a long-overdue correction of outdated exemption limits and perquisite values. By increasing thresholds for HRA, education allowances, medical travel, food benefits, and small perquisites, the law attempts to align tax relief with present cost structures.
However, the real benefit of these changes will be realized only by employees who:
-> Opt for the old tax regime
-> Receive structured allowances
-> Maintain proper documentation
-> Periodically evaluate their tax position
From a practical tax planning perspective, the key takeaway is clear:
There is no universally better tax regime. The correct approach is to compute tax liability under both regimes and choose the more beneficial option based on salary structure and eligible exemptions.
Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.
