Types of allowances and Tax Benefits

Different Types of Allowances and Their Tax Benefits

Learn about common salary allowances and their tax benefits, including HRA, travel, medical, and special allowances, for effective tax planning.

Written by : Knowledge Centre Team

2026-02-11

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6 minutes read

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Data from the Income Tax Department clearly reveals that salaried people make up the bulk of taxpayers in India. For FY 2019-20, individual taxpayers in the ₹2.5-5 lakh per annum income bracket constituted the lion's share of income taxpayers in India.

In AY 2020-21, 5.78 crore salaried individuals filed their income tax returns (ITR), and by  AY 2024-25, the number jumped to 7.28 crore. In the same period,  ITR by business increased from 15.3 million to 22.5 million. Ironically, in the corresponding period, average business income grew by 7.2% per year, while average salaried income increased by a meagre 4.2%.

Salaried people have a limited scope for increasing their income, but have to bear a larger burden of the country’s taxes. In such a scenario, it is essential that you know how to minimise your tax outflow by using all the legal means and methods of saving tax at your disposal.

Your employer provides different types of allowances as a component of your salary to lighten your tax burden. You must know about each of these allowances, how to declare them, and use them to your advantage to enjoy maximum tax benefits.

Key Takeaways

  • Salary allowances form a crucial part of income tax planning, as several allowances offer partial or full tax exemptions

  • Understanding different types of allowances in a salary slip helps salaried employees reduce taxable income legally

  • Allowances like HRA and LTA provide the highest tax-saving potential when claimed with proper documentation

  • Not all allowances are tax-free; some, such as dearness allowance, are fully taxable under income tax rules

  • Combining salary allowances with deductions under Sections 80C, 80D, and 80CCD can significantly optimise tax outgo

House Rent Allowance (HRA)

HRA is the best among all types of allowances from an employee’s perspective. The extent of HRA tax deduction available to you is dependent on your basic salary, dearness allowance and other factors. If the value of your rent payments in a financial year is more than ₹1 lakh, you have to submit your landlord’s PAN Card.

The following factors will determine the extent of HRA tax deductions you can get on your tax return:

  • Total HRA provided by your employer on your salary structure

  • 50% of basic salary + Dearness Allowance (DA) in metro cities

  • 40% of basic salary + DA in non-metro cities

  • Actual rent paid minus 10% of basic salary + DA

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Leave and Travel Allowance (LTA)

Leave Travel Allowance (LTA), also known as Leave Travel Concession, is a component of an employee’s salary package designed to cover travel expenses incurred while on leave. It forms part of the employee’s Cost to Company (CTC) and is usually offered as an annual benefit. One of the key advantages of LTA is its tax-exempt status under Section 10(5) of the Income Tax Act, 1961, subject to specific conditions.

LTA tax exemption can be claimed only for travel undertaken within India and is applicable for trips taken with the employee’s spouse, children, and dependent parents or siblings. The exemption is limited to the actual travel cost incurred and must be supported by valid bills and proof. It is important to note that LTA can be claimed for a maximum of two journeys in a block of four calendar years. When used correctly, LTA helps reduce taxable income and results in meaningful tax savings for salaried individuals

Dearness Allowance

Dearness Allowance (DA) is a salary component paid by some employers to help employees offset the impact of inflation and rising living costs. It is commonly offered to government employees and pensioners and is calculated as a percentage of basic salary.

From a tax perspective, DA is fully taxable in the hands of the employee. Since it is treated as part of salary income, no specific tax exemptions or deductions are available on this allowance. Additionally, DA is considered while calculating retirement benefits such as the provident fund and gratuity, depending on the terms of employment. While it increases overall take-home pay, it does not provide direct tax-saving benefits like certain other allowances.

Standard Deduction

Standard deduction is a flat deduction allowed by the government to reduce your taxable salary income, without requiring any bills or proof. It is automatically applied while calculating tax.

As per the latest rules, salaried individuals and pensioners can claim a standard deduction of ₹50,000 under the old tax regime. Under the new tax regime (from FY 2024–25 onwards), this limit has been increased to ₹75,000 for salaried taxpayers.

For example, if your annual salary income is ₹3 lakh and you opt for the new tax regime, a ₹75,000 standard deduction reduces your taxable income to ₹2.25 lakh, helping lower or even eliminate your tax liability, depending on the slab. This makes the standard deduction a simple yet effective tax-saving benefit for salaried individuals.

Relocation Allowance

As companies today operate in multiple locations, employees might be asked to report to work in a different city, and it may even come along with a promotion. Relocation incurs huge costs as you have to move furniture, vehicles and make other costly arrangements in a new city. As per Section 10(14) of the Income-tax Act, 1961, read with rule 2BB of the Income-tax Rules, 1962, any allowance granted to meet the cost of travel on transfer (including packing and transportation of personal effects) or the ordinary daily charges incurred during the period of journey in connection with transfer can be claimed as exempt from tax. So you can claim the relocation allowance as exempt from tax to the extent of actual specified expenses incurred on your transfer.

If the amount paid by the employer is more than the actual specified expenses incurred, the difference shall be taxable as salary income in your hands. You should maintain the necessary documents substantiating the payment of expenses for the transfer.

Utilising Section 80C, 80CCC, 80CCD(1) Deductions

Apart from various types of allowances, you can reduce your tax burden by investing in tax-saving instruments such as ULIPs, pension plans, NPS, PPF and tax-saving fixed deposits. You can also avail tax deductions on home loan interest paid under Section 24 and on interest paid on education loan as per Section 80E of the Income Tax Act.

Investing in ULIPs is one of the best ways to avail yourself of maximum tax benefits, get life protection, and generate wealth in the long term. Since ULIPs are EEE investment instruments, investors get the triple benefit of enjoying tax benefits on premiums paid, returns on investment, and on maturity/death benefit. Start with and meet your financial goals while maximising tax savings and returns.

Wrapping Up

Understanding the different types of allowances in your salary is essential for effective tax planning. When used correctly, allowances like HRA, LTA, and relocation benefits can significantly reduce your taxable income while remaining fully compliant with income tax laws. Since salaried individuals have limited flexibility to increase income, making the most of available tax allowances and deductions becomes even more important. By reviewing your salary slip carefully and combining allowances with eligible deductions, you can optimise tax savings, improve take-home pay, and plan your finances more efficiently.

Glossary

  1. House Rent Allowance (HRA): A salary allowance offering tax exemption for rent paid, subject to income tax limits
  2. Leave Travel Allowance (LTA): An allowance covering travel expenses within India, exempt under specified conditions
  3. Dearness Allowance (DA): A cost-of-living allowance fully taxable under income tax
  4. Standard Deduction: A flat deduction from salary income allowed to all salaried taxpayers
  5. Other Allowance: Residual salary component with taxability based on income tax rule
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FAQs

Personal allowance in salary refers to fixed components paid by employers to meet specific employee expenses. These allowances form part of salary income and may be taxable or tax-exempt based on income tax provisions.

Other allowances in salary include payments that do not fall under specific categories like HRA or LTA. The tax treatment depends on the allowance’s purpose and whether it qualifies for exemption under income tax rules.

Common tax allowances include House Rent Allowance (HRA), Leave Travel Allowance (LTA), relocation allowance, and certain special allowances. These are part of the broader list of allowances in salary eligible for tax benefits.

Salary slips usually show allowances such as HRA, LTA, special allowance, dearness allowance, and other allowances separately to ensure transparency and correct tax calculation.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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