Your salary slip shows HRA and LTA sitting right there in black and white. Whether either one actually saves you a rupee in tax depends on one crucial choice — whether you’re using the old tax regime or the new tax regime.
HRA and LTA exemption under Income Tax Act 2025 is subject to the applicable tax regime, statutory conditions and prescribed limits for Tax Year 2026-27. Section 16 sets out what is included within income from salary for the purposes of the Act. Employment receipts are brought into the salary computation according to the Act, while specific exemptions are separately available where Section 11 and the relevant Schedules permit them. Therefore, an allowance labelled “House Rent Allowance” or “Leave Travel Allowance” is not automatically exempt; the applicable statutory conditions must first be satisfied. HRA exemption under Income Tax Act 2025 and LTA exemption under Income Tax Act 2025 are the two most commonly claimed of these carve-outs, and they’re worth understanding properly for Tax Year 2026-27 — because the single biggest mistake taxpayers make with both has nothing to do with the formula, and everything to do with whether they’re filing under the old tax regime or the new tax regime in the first place.
Applicability note: Both exemptions apply for Tax Year 2026-27 onward only under the old tax regime. Under the new tax regime, now the default, HRA and LTA are fully taxable regardless of rent paid or travel undertaken. From Tax Year 2026-27, the list of cities qualifying for HRA’s higher 50% limit also expands to include Bengaluru, Pune, Hyderabad, and Ahmedabad, alongside Delhi, Mumbai, Kolkata, and Chennai.
HRA and LTA Exemption Under Income Tax Act 2025: Quick Comparison
| Particular | HRA | LTA |
|---|---|---|
| Main purpose | Rent-related exemption | Eligible travel-related exemption |
| Old tax regime | Available, subject to conditions | Available, subject to conditions |
| New tax regime | Not available | Not available |
| Main eligibility | Actual rent paid for rented residential accommodation | Eligible travel within India |
| Calculation | Least of three prescribed amounts | Actual eligible fare subject to prescribed limits |
| Frequency limit | No four-year block limit | Two journeys in a four-calendar-year block |
| Key documents | Rent/payment and prescribed landlord details | Travel tickets/proof and prescribed documentation |
Why Salary Allowances Are Included in Salary Income Under Section 16
Section 16 of the Income-tax Act, 2025 defines “salary” for the purposes of the salary provisions and includes specified components such as wages, pension, gratuity, commission and allowances. Specific exemptions may then be available under Section 11 and the relevant Schedules, subject to their prescribed conditions and limits. Certain allowances, HRA and LTA among them, are excluded from total income only to the extent, and only under the conditions, each Schedule specifies. Miss the conditions, and the allowance stays taxable as ordinary salary.
Under the Income-tax Act, 2025, the familiar HRA and LTA exemptions continue in substance but are now structured through Section 11 and Schedule III. The HRA exemption corresponds to the earlier Section 10(13A) framework under the 1961 Act, and is covered under Schedule III, Table Sl. No. 11, of the 2025 Act. The LTA exemption corresponds to the earlier Section 10(5) framework, and is covered under Schedule III, Table Sl. No. 8. The 1961 Act section numbers referenced here describe the earlier law only; they are not sections of the 2025 Act itself.
HRA Exemption Under the Income Tax Act 2025: The Three-Way “Least Of” Test
House Rent Allowance exemption has used the same three-way comparison for decades, and the 2025 Act carries it forward unchanged in substance. The amount exempt from tax is whichever of these three figures is smallest:
HRA exemption requires actual rental expenditure. The employee must occupy rented residential accommodation and actually pay rent. If the employee lives in accommodation owned by them or does not actually pay rent, HRA exemption is not available.
Actual HRA Received
The full HRA amount your employer actually pays you during the Tax Year
50% / 40% of Salary
50% of basic pay + DA for specified cities, 40% for other cities
Rent Paid Minus 10% of Salary
Only rent above 10% of your salary actually counts toward the exemption
“Salary” for this specific formula means basic pay plus dearness allowance (where DA forms part of retirement benefits), plus any fixed-percentage commission on turnover — not your gross CTC, and not the HRA itself. Whatever HRA amount exceeds this least-of-three figure is simply added back to your taxable salary like any other income.
Priya works in Bengaluru, earning a basic salary of ₹50,000 a month with no DA. Her employer pays her ₹20,000 a month as HRA, and she pays ₹18,000 a month in rent. Because Bengaluru now qualifies for the 50% limit from Tax Year 2026-27, her three figures are: actual HRA received, ₹2,40,000 for the year; 50% of salary, ₹3,00,000; and rent paid minus 10% of salary, ₹2,16,000 minus ₹60,000, which is ₹1,56,000. The smallest of the three is ₹1,56,000, so that’s her HRA exemption, and the remaining ₹84,000 of her HRA gets added back into her taxable salary.
LTA Exemption Under the Income Tax Act 2025: Two Journeys, Four Years, India Only
Leave Travel Allowance works on entirely different logic from HRA, no percentage-of-salary formula here, just actual travel cost, capped by mode of transport and restricted to domestic journeys only.
- What’s covered — travel concession or assistance from your employer, or a former employer, for you and your family. LTA exemption is restricted to eligible travel within India. Travel outside India does not qualify for the exemption. Where a journey includes both domestic and international travel, the exemption must be determined only with reference to the eligible travel covered by the applicable rules. Costs like hotels, food, and sightseeing are not covered; the exemption relates to eligible transport fare.
- The exemption cap — limited to actual expenditure incurred, subject to prescribed limits. For air travel, the exemption is subject to the prescribed fare limit for the eligible class of travel and the shortest-route conditions. For journeys by rail, or by another mode where the prescribed rail comparison applies, the exemption is subject to the applicable AC first-class rail fare by the shortest route. Where the Rules prescribe a different limit because rail connectivity is unavailable, the specific transport limit prescribed by the Rules applies instead.
- How often you can claim it — twice within a block of four calendar years. The current block runs 2022–2025; the next begins in 2026.
- Carry-forward — if you don’t use your LTA exemption at all during a block, you can carry forward one unused claim into the first calendar year of the next block.
The One Rule That Overrides Both Exemptions
Here’s the part worth reading before you touch either formula: both HRA and LTA exemptions are available only if you file under the old tax regime. The new tax regime, now the default unless you actively opt out of it, doesn’t recognise either exemption at all. Under the new regime, your entire HRA and any LTA received are simply taxed as ordinary salary income, no matter how much rent you actually pay or how many trips you actually took.
| Regime | HRA | LTA |
|---|---|---|
| Old Tax Regime | Exempt, per the least-of-three formula | Exempt, per actual travel cost, capped |
| New Tax Regime | Fully taxable, no exemption | Fully taxable, no exemption |
This makes the regime choice itself the real decision, not the HRA or LTA calculation. If your rent and travel claims, combined with other old-regime deductions, outweigh what the new regime’s lower slab rates and higher standard deduction would otherwise save you, the old regime wins. If not, both these exemptions are irrelevant to you regardless of how correctly you compute them.
- Computing HRA carefully while filing under the new regime — the entire calculation is irrelevant there; check your regime first, not last
- Assuming “salary” in the HRA formula means gross CTC — it means basic pay plus DA only, a much smaller base than most people assume
- Claiming LTA for an international trip — the exemption is restricted to eligible travel within India; where a journey includes an international leg, only the eligible domestic portion is considered under the applicable rules
- Forgetting required landlord details — where annual rent exceeds ₹1,00,000, the prescribed HRA documentation requires the landlord’s PAN, along with any other declaration or relationship information required under the applicable rules
Frequently Asked Questions: HRA and LTA Exemption Under Income Tax Act 2025
How is HRA exemption calculated under the Income Tax Act 2025?
HRA exemption is the smallest of three amounts: the actual HRA received from your employer, 50% of salary (basic pay plus DA) if you live in one of the specified cities or 40% for other cities, or the rent you actually pay minus 10% of that same salary figure. Whichever of these three is lowest becomes your tax-exempt amount; anything above it is added back to your taxable salary.
What is the HRA exemption limit under the Income Tax Act 2025?
There is no fixed rupee limit. The exempt amount is capped by whichever of the three prescribed figures, actual HRA received, 50%/40% of salary depending on city, or rent paid minus 10% of salary, works out lowest in your specific case, subject to the conditions in Schedule III.
Can I claim HRA exemption under the new tax regime?
No. HRA exemption is available only under the old tax regime. Under the new tax regime, the entire HRA amount received from your employer is fully taxable, regardless of how much rent you actually pay.
Is HRA exemption available in the new tax regime for 2026-27?
No. This position is unchanged for Tax Year 2026-27. HRA exemption remains available only under the old tax regime; taxpayers in the new tax regime cannot claim any HRA exemption for 2026-27 or any other Tax Year under current rules.
What counts as “salary” for the HRA exemption formula?
Basic pay plus dearness allowance, where DA forms part of retirement benefits, plus any fixed-percentage commission on turnover. It does not include HRA itself, other allowances, or your gross CTC.
How many times can I claim LTA exemption?
Twice within a block of four calendar years. If you don’t use the exemption at all during a block, one unused claim can be carried forward into the first calendar year of the next block.
Does LTA cover international travel?
LTA exemption is restricted to eligible travel within India; travel outside India does not qualify. Where a journey includes both domestic and international travel, the exemption is determined only with reference to the eligible domestic travel covered by the applicable rules.
Can I claim HRA if I pay rent to a relative?
Rent paid to a relative, such as a parent, may qualify for HRA exemption provided the arrangement is genuine, the rent is actually paid, and it is properly documented, including a rent agreement and the landlord’s PAN where required. Rent paid to a spouse is generally not accepted for this purpose, given the nature of that relationship.
Which cities qualify for the 50% HRA limit from Tax Year 2026-27?
From Tax Year 2026-27, Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Pune, Hyderabad, and Ahmedabad qualify for the 50%-of-salary limit. All other cities use the 40% limit.
What is the new Section for HRA exemption under the Income-tax Act, 2025?
There is no standalone section specifically for HRA. The exemption is provided under Schedule III (Table, Sl. No. 11), read with Section 11, which sets out which Schedule-based exemptions are excluded from total income subject to their conditions.
What is the new Section for LTA exemption under the Income-tax Act, 2025?
There is no standalone section specifically for LTA either. The exemption is provided under Schedule III (Table, Sl. No. 8), read with Section 11, in the same manner as the HRA exemption.
Income From Salaries — Series Index
Heads of Income & Chargeability of Salary (§13, §15)
The five-head framework, and exactly when salary becomes taxable.
HRA & LTA: The Two Big Salary Exemptions
The formulas, the conditions, and the one rule that overrides both.
Other Salary Allowances: What’s Taxable, What’s Not
Children’s education, hostel, transport, and special allowances.
Both HRA and LTA reward genuine documentation, rent receipts, landlord PAN, travel tickets, but neither one matters at all unless you’re filing under the old regime in the first place. Before you spend an evening reconstructing a year of rent payments or travel bills, confirm which regime actually works out better for you. That single decision determines whether either calculation in this article is worth doing at all.
Sources & References
- Income-tax Act, 2025 [Act No. 30 of 2025] — full text, as amended by Finance Act, 2026Income Tax India, incometaxindia.gov.in
- Income Tax India — Section 16, SalariesIncome Tax India, incometaxindia.gov.in
- Income-tax Rules, 2026 — as notified (HRA and LTA computation, city classification, travel limits)Income Tax India, incometaxindia.gov.in
HRA and LTA computation rules discussed here are summarised for reader convenience and reflect the Schedules referenced under Section 11. Always cross-check against the official Act text and current Income Tax Rules linked above, and consult a Chartered Accountant before relying on this for a filing decision.
Disclaimer: This article is for general informational purposes only and does not constitute tax or legal advice. The Income-tax Act, 2025 and related rules are subject to notifications and amendments by the CBDT. Please consult a qualified Chartered Accountant for advice specific to your situation.
