Complete Guide to Tax Exemptions, Allowances & Deductions Under Income Tax Act 1961 for AY 2026-27

The Income Tax Act, 1961, as amended by the Finance Act, 2026, provides an extensive framework of allowances, exemptions, and deductions across multiple heads of income. This guide consolidates the applicable provisions for Assessment Year 2026-27, covering salary income, house property, business or profession, capital gains, and other sources — serving as a ready reference for assessees and tax professionals alike.

Part A: Allowances & Exemptions Under the Head — Salaries

Salaried assessees receive various allowances from their employers. These allowances are either wholly or partially exempt from income tax, depending on the nature of the allowance, conditions prescribed, and the category of the assessee. Certain allowances, however, attract full taxability regardless of the purpose for which they are received.

Fully Exempt Allowances (Subject to Conditions)

  1. Government Employees Posted Abroad — Under Section 10(7), any allowance or perquisite paid by the Government of India to its employees serving outside India is entirely exempt from tax. This benefit is available to individual salaried employees who are Indian citizens.

  2. Allowances to Judges of High Courts and the Supreme Court — Judges of the High Court and the Supreme Court of India are entitled to exempt allowances, subject to certain prescribed conditions.

  3. Salary and Allowances to SAARC Teachers/Professors — An individual who is a teacher or professor from a SAARC member state and receives salary and allowances is fully exempt, subject to specified conditions.

Partially Exempt Allowances

  1. Entertainment Allowance [Section 16(ii)] — Available exclusively to Government employees. The exemption is the least of:

    • Rs. 5,000
    • 1/5th of basic salary (excluding other allowances, benefits, or perquisites)
    • Actual entertainment allowance received

    Note: In the case of non-government employees, entertainment allowance is fully taxable.

  2. House Rent Allowance (HRA) [Section 10(13A) read with Rule 2A] — One of the most commonly claimed exemptions for salaried assessees. The exempt amount is the least of:

    • Actual HRA received
    • 40% of salary (or 50% if the rented house is situated in Mumbai, Kolkata, Delhi, or Chennai)
    • Rent paid minus 10% of salary

    Salary for this purpose = Basic Pay + Dearness Allowance (if forming part of retirement benefits) + Commission based on turnover

    Important Notes:

    • HRA is fully taxable if the assessee resides in his own house or does not pay rent.
    • If rent paid exceeds Rs. 1,00,000 per annum, the PAN of the landlord must be reported to the employer as per Circular No. 08/2013 dated 10th October, 2013.

  3. Children's Education Allowance [Section 10(14)] — Exempt up to Rs. 100 per month per child, for a maximum of two children.

  4. Hostel Expenditure Allowance [Section 10(14)] — Exempt up to Rs. 300 per month per child, for a maximum of two children.

  5. Transport Allowance for Differently Abled Employees [Section 10(14)] — Exempt up to Rs. 3,200 per month, available to employees who are blind, deaf and dumb, or orthopedically handicapped with a lower limb disability.

  6. Allowance for Transport Business Employees [Section 10(14)] — For employees in a transport business performing duties during transit (and not receiving daily allowance), the exempt amount is the lower of:

    • 70% of the allowance received
    • Rs. 10,000 per month

  7. Conveyance Allowance for Official Duties [Section 10(14)] — Exempt to the extent of actual expenditure incurred for official purposes.

  8. Travel/Transfer Allowance [Section 10(14)] — Exempt to the extent of actual expenditure incurred for official travel or transfer.

  9. Daily Allowance [Section 10(14)] — Exempt to the extent of actual ordinary expenses incurred while the employee is absent from their regular place of duty.

  10. Helper/Assistant Allowance [Section 10(14)] — Exempt to the extent of expenditure actually incurred for official purposes.

  11. Research Allowance [Section 10(14)] — Granted to promote academic research and professional development; exempt to the extent of expenditure incurred for official purposes.

  12. Uniform Allowance [Section 10(14)] — Exempt to the extent of expenditure incurred for the purpose of performing official duties.

Special Compensatory and Area-Based Allowances

  1. Special Compensatory Allowance — Hilly Areas [Section 10(14)] — Exemption ranges from Rs. 300 to Rs. 7,000 per month, subject to specific locations and conditions.

  2. Border/Remote/Disturbed/Difficult Area Allowance [Section 10(14) read with Rule 2BB] — Exemption ranges from Rs. 200 to Rs. 1,300 per month, depending on location and applicable conditions.

  3. Tribal Area Allowance [Section 10(14)] — Exempt up to Rs. 200 per month, available to employees working in tribal areas of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar, and Odisha.

  4. Compensatory Field Area Allowance [Section 10(14)] — Exempt up to Rs. 2,600 per month. If this exemption is claimed, no separate exemption for border area allowance can be availed.

  5. Compensatory Modified Area Allowance [Section 10(14)] — Exempt up to Rs. 1,000 per month. Claiming this exemption precludes a simultaneous claim for border area allowance.

  6. Counter Insurgency Allowance [Section 10(14)] — Exempt up to Rs. 3,900 per month for members of the Armed Forces. Border area allowance exemption cannot be claimed concurrently.

  7. Underground Mine Allowance [Section 10(14)] — Exempt up to Rs. 800 per month for employees working in underground mines with uncongenial conditions.

  8. High Altitude Allowance [Section 10(14)] — Available to Armed Forces personnel:

    • Rs. 1,060 per month for altitudes of 9,000 to 15,000 feet
    • Rs. 1,600 per month for altitudes above 15,000 feet

  9. Highly Active Field Area Allowance [Section 10(14)] — Exempt up to Rs. 4,200 per month for Armed Forces members in highly active zones.