Tax exemption limits for many allowances

Published 13 July 2026 · india

Serial number Particulars Tax Treatment under ITA, 1961 & ITR, 1962 Tax Treatment under ITA, 2025 & ITR, 2026 1 Dearness Allowance (DA) Fully taxable

Serial number Particulars Tax Treatment under ITA, 1961 & ITR, 1962 Tax Treatment under ITA, 2025 & ITR, 2026 1 Dearness Allowance (DA) Fully taxable as salary under Section 15 read with Section 17(1). DA is specifically treated as taxable allowance Taxable as salary under Section 15 read with Section 16. 2 City Compensatory Allowance (CCA) Generally fully taxable. It is not automatically exempt merely because it compensates for city cost of living. Only specific prescribed allowances under Section 10(14) read with Rule 2BB qualify for exemption within limits Generally taxable, unless it falls within a specifically prescribed allowance under Schedule III, Sl. No. 13 read with Rule 280. 4 Special Allowance A generic special allowance is fully taxable. However, if the allowance is specifically granted to meet expenses wholly, necessarily and exclusively incurred in performance of official duties, exemption may be available under Section 10(14)(i) read with Rule 2BB, to the extent actually spent.

Taxable unless covered by Schedule III, Sl. No. 12 or Sl. No. 13 read with Rule 280. Duty-related allowances are exempt only to the extent actually spent for prescribed official purposes. 5 Overtime Allowance Fully taxable as salary under Section 15 read with Section 17(1). No exemption available. Fully taxable as salary under Section 15 read with Section 16. No exemption available. 6 Children Education Allowance Exempt u/s 10(14) read with Rule 2BB up to Rs 100 per month per child for a maximum of 2 children (Rs. 2,400 p.a.). Excess Balance taxable. ●The Children Education Allowance received from an employer is eligible for tax exemption under Schedule III Sr. No. 13 read with Rule 280 of the Income tax Rules. ● Under the revised provisions applicable from TY 2026-27, the exemption has been increased to Rs.

3,000 per month per child, for a maximum of two children. 7 Fixed Medical Allowance Fully taxable. A fixed cash medical allowance is taxable even if described as medical allowance. This is different from specified medical facilities / reimbursements which may be separately governed by perquisite rules. Taxable as salary, unless it is structured as an eligible medical facility / benefit specifically excluded under the perquisite provisions. 8 Phone Bill Reimbursement Actual telephone / mobile phone expenses incurred by the employer on behalf of the employee are not treated as taxable perquisite under Rule 3(7)(ix). However, a fixed telephone allowance without supporting bills may be taxable. Not taxable. Expenses on telephones, including mobile phones, are specifically excluded from perquisite valuation under Rule 15(5)(a), Table IV, Sl. No. 9 of the Income-tax Rules, 2026. 9 Transport Allowance – Employees with Disability Exempt up to Rs 3,200 per month (Rs.