Income tax guide:
Allowance and reimbursement exemption limits every salaried employee should know
Jul 13, 2026
Synopsis
Salaried employees should know income tax exemption limits for various allowances. Leave Travel Allowance is exempt for self and family travel within India. Children Education Allowance offers exemption up to three thousand rupees per child. Phone bill reimbursements are generally not taxable for employees. Meal card benefits are exempt up to two hundred rupees per meal.
The pay package of a salaried employee may include various allowances, reimbursements, and special pay components, some of which are partially or fully taxable under old and/or new tax regime. For example: Sodexo meal card is tax exempt under old and new tax regime only if it is given for up to Rs 200 per meal (maximum Rs 1.05 lakh benefit in a year).
Following is the list of the allowances and reimbursements which are often common components of the salary structure.
• Dearness Allowance
• Leave Travel Allowance
• City compensatory allowance
• Special allowance
• Overtime allowance
• Children education allowance
• Fixed medical allowance
• Phone bill reimbursements
• Transport allowance
• Meal card (Sodexo)
Leave Travel Allowance (LTA):
Income Tax Act, 1961
LTA is tax exempt under Section 10(5), read with Rule 2B, and can be claimed for self-travel and travel in connection with himself and his family (spouse, children, parents, brothers, and sisters of such taxpayers who are wholly or mainly dependent on him), subject to the following:
Mode of Journey
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Ceiling Amount Equivalent to
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Air
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Economy fare of the national carrier by the shortest route to the place of destination.
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Other than by Air
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Rail facility is available
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Air-conditioned first-class rail fare by the shortest route to the place of destination.
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Rail facility is not available, but
|
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recognized public transport system exists
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First class or deluxe class fare on such transport by the shortest route to the place of destination
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recognized public transport system does not exists
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The air-conditioned first-class rail fare, for the distance of the journey by the shortest route, as if the journey has been performed by rail.
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Source: CA Suresh Surana
Tax exemption is available only for travel within India for self and family, restricted to actual eligible travel costs and prescribed journey limits.
The LTA benefit can be availed for two journeys performed in a block of 4 calendar years commencing from calendar year 1986, i.e., 1986-1989, 1990-1993, and so on. The block currently running is 2026-2029, i.e., January 1, 2026, to December 31, 2029.
An employee not availing LTA in a block of calendar years can carry over one journey to the succeeding block and perform the same in the first year of such a succeeding block. This will not affect the two journeys available for such succeeding block.
The benefit can be availed only in respect to travel expenditure and not in relation to boarding/ lodging expenses.
Rule 2B of the Income-tax Rules, 1962, provides that LTC for air travel is restricted to economy class airfare. However, in accordance with Rule 278 of the Income Tax Rules 2026 removes this restriction and allows airfare reimbursement based on the class of travel to which the employee is entitled.
Further, in cases where no recognised public transport system exists, the ceiling of AC first-class rail fare is to be replaced with a fixed limit of Rs 30/km for the shortest route.
Here's a table showing the other components:
Serial number
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Particulars
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Tax Treatment under ITA, 1961 & ITR, 1962
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Tax Treatment under ITA, 2025 & ITR, 2026
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1
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Dearness Allowance (DA)
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Fully taxable as salary under Section 15 read with Section 17(1). DA is specifically treated as taxable allowance
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Taxable as salary under Section 15 read with Section 16.
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2
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City Compensatory Allowance (CCA)
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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.
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4
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Special Allowance
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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.
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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.
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5
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Overtime Allowance
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Fully taxable as salary under Section 15 read with Section 17(1). No exemption available.
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Fully taxable as salary under Section 15 read with Section 16. No exemption available.
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6
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Children Education Allowance
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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.
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●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.
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7
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Fixed Medical Allowance
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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.
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Taxable as salary, unless it is structured as an eligible medical facility / benefit specifically excluded under the perquisite provisions.
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8
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Phone Bill Reimbursement
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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.
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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.
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9
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Transport Allowance – Employees with Disability
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Exempt up to Rs 3,200 per month (Rs. 38,400 p.a.) for blind, deaf & dumb and orthopedically handicapped employees with disability of lower extremities.
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● Transport Allowance provided to an employee who is blind, deaf, and dumb, or orthopaedically handicapped with disability of the lower or upper extremities is eligible for tax exemption.
●As per Rule 280(2) Table Sl. No. 10, The exempt amount is up to Rs. 15,000 per month plus dearness allowance thereon in metro cities and up to Rs. 8,000 per month plus dearness allowance thereon in other cities.
● Any amount received in excess of the prescribed exemption limit is taxable as salary income.
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10
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Meal Card (Sodexo)
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As per Rule 3(7)(iii), Meal vouchers (Free food/non-alcoholic beverages) exempt up to Rs. 50 per meal under erstwhile perquisite valuation rules.
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As per Rule 15, Table IV, Sl. No. 3. Free food/non-alcoholic beverages through paid vouchers usable at eating joints exempt up to Rs 200 per meal. Excess taxable as a prerequisite.
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Source: CA Suresh Surana
[The Economic Times]
