Allowances

Section numbers here are from the Income tax Act, 2025, effective Tax Year 2026-27. Perquisite valuation is covered separately in Perquisites. This article is for general information and does not constitute tax advice.

Taxable by default

An allowance is a cash payment on top of basic salary. It forms part of salary under Sections 15–19 (old Section 17) and is taxable by default unless the Act or Rules carve out a specific exemption. Dearness allowance, city compensatory allowance, and overtime allowance are all fully taxable, with no exemption attached to any of them.

The small, long-standing exemptions

• Children’s Education Allowance — ₹100 per month per child, capped at two children
• Hostel Expenditure Allowance — ₹300 per month per child, same two-child cap
• Special duty allowances — uniform, academic or research, and official conveyance allowances are exempt to the extent actually spent on the stated purpose, not the full amount received

These figures have stood unchanged for a long time and are modest enough that most salaried employees barely notice them on a payslip. HRA and LTA carry materially larger exemptions and are covered in their own dedicated article.

The point that actually matters now: most of this is old-regime only

Since the new tax regime became the default, this is the detail that genuinely changes the practical value of everything above. CEA, HEA, uniform, conveyance, and the other special duty allowance exemptions are available only under the old regime. A salaried employee who has not affirmatively elected the old regime, which by default now means most people, gets none of these exemptions, however carefully the employer structures the salary around them. The allowance itself is still paid and still taxable; what disappears is the exemption that used to offset it.

This is worth flagging explicitly because HR departments sometimes continue structuring offer letters around these exemptions as though every employee will benefit from them, when in practice most new joiners on the default regime will not. Confirm which regime actually applies before treating a salary structure’s allowance mix as a real tax saving.

Where perquisites differ

Perquisites, the non-cash side of this, work differently: their valuation is largely the same under either regime, since a perquisite is taxed on the value of the benefit provided rather than through a regime-dependent exemption. What changes between regimes is the allowance exemptions above, not how a company car or rent-free accommodation gets valued. The full mechanics, including what changed for Tax Year 2026-27, are in Perquisites.