What Are Tax Exemptions?
Tax exemptions are specific portions of your salary that the Income Tax Act allows you to exclude from taxable income altogether. They sit under Section 10 of the Income Tax Act, 1961, and the logic is straightforward: certain allowances (HRA, LTA, gratuity, food coupons) never enter the tax calculation in the first place, provided you meet the conditions and stay within prescribed limits.
Deductions under Chapter VI-A (80C, 80D) reduce your gross total income after it has been computed. Exemptions remove income before that stage. Both lower your final tax, but exemptions act earlier in the pipeline, which is why payroll teams need to get them right when computing TDS under Section 192.
Which Salary Exemptions Can Employees Claim?
HRA everyone knows. LTA, sure. But ask the average HR manager at a 40-person manufacturing unit in Pimpri whether they claim children education allowance for their staff, and you will get a blank stare. Rs.100 per month per child under Section 10(14) read with Rule 2BB, capped at two children. The individual numbers are small, genuinely small, but stack all six exemptions under the old regime and a mid-level employee knocks Rs.1,17,900 off her taxable salary in one financial year.
| Section | Exemption | Annual Limit (FY 2025-26) |
|---|---|---|
| 10(13A) | House Rent Allowance (HRA) | Least of: actual HRA; 50%/40% of basic+DA (metro/non-metro); rent paid minus 10% of basic+DA |
| 10(5) | Leave Travel Allowance (LTA) | Actual domestic travel fare, 2 trips per 4-year block |
| 10(10) | Gratuity (non-govt) | Rs.25,00,000 |
| 10(10AA) | Leave encashment on retirement | Rs.25,00,000 |
| Rule 3(7)(iii) | Food coupons / meal vouchers | Rs.50 per meal |
| 10(14) r/w Rule 2BB | Children education allowance | Rs.100/month per child (max 2) |
Gratuity and leave encashment survive the new regime. Everything else on this table? Gone the moment an employee opts in.
Tax Exemption Example
Neha Soren, floor supervisor at a garment export unit in Doranda, Ranchi, picked the old regime for FY 2025-26. Her rent eats a third of her take-home and dropping HRA would have meant roughly Rs.900 more in TDS every single month, so the choice was obvious.
| Component | Monthly (Rs.) | Annual (Rs.) |
|---|---|---|
| Basic | 28,500 | 3,42,000 |
| DA | 4,750 | 57,000 |
| HRA | 11,400 | 1,36,800 |
| Special Allowance | 8,300 | 99,600 |
| Food Coupons | 2,200 | 26,400 |
| Children Education (2 kids) | 200 | 2,400 |
| LTA (annualised) | 1,250 | 15,000 |
| Gross Salary | 56,600 | 6,79,200 |
Rent: Rs.9,500 a month. The HRA formula throws three numbers at you (actual HRA at Rs.1,36,800; 40% of basic+DA for non-metro at Rs.1,59,600; rent paid minus 10% of basic+DA at Rs.74,100) and the taxman picks whichever is smallest. Rs.74,100 it is.
| Exemption | Amount (Rs.) |
|---|---|
| HRA (Section 10(13A)) | 74,100 |
| Food coupons | 26,400 |
| LTA (actual travel claimed) | 15,000 |
| Children education | 2,400 |
| Total Section 10 exemptions | 1,17,900 |
Knock that off along with the Rs.50,000 standard deduction. Taxable salary: Rs.5,11,300. That is about Rs.1,000 extra in Neha’s hand every payday, money that would otherwise sit with the government until her July refund.
Old Regime vs New Regime: Which Exemptions Survive?
Annual salary below Rs.12 lakh? None of this matters. The new regime’s Section 87A rebate wipes your liability to zero whether you claim exemptions or not.
Above that line the trade-off gets real. Old regime shelters income through HRA, LTA, food coupons, 80C, 80D. New regime strips all of it but gives wider slabs and Rs.75,000 standard deduction instead of Rs.50,000. Across 30,000+ Payroll clients over the last two assessment years the pattern is consistent: below Rs.10 lakh, new regime wins without anyone even running the comparison. Break-even sits between Rs.13 lakh and Rs.15 lakh, but it moves depending on real rent paid, PPF contributions, and whether the employee actually submits proof or just lets the February deadline pass. Talk to your CA; a generic calculator misses half the variables.
How Petpooja Payroll Handles Tax Exemptions
Petpooja Payroll lets the admin wire exempt components (HRA, LTA, food coupons, children education) into the salary structure once. Monthly payroll calculations then apply Section 10 caps based on declared rent, city tag, and whichever regime the employee picked in April. No separate HRA calculator sheet, no scramble when the CA asks for the breakup in March.
Frequently Asked Questions
Where they sit in the computation. Exemptions under Section 10 pull income out before gross total income is even calculated; deductions under Chapter VI-A (your 80C, 80D, 80E) come after. Rupee impact looks similar, but payroll software treats them as separate config items, which is why getting one right does not fix the other.
No, and this trips up more people than you would expect. Section 10(13A) does not exist under the new regime. If rent runs above Rs.8,000 to Rs.10,000 a month and CTC crosses Rs.12 lakh, run both sets of numbers with your CA. The gap can be Rs.15,000 to Rs.25,000 in annual tax at the 20% bracket.
Depends entirely on who employs you. Government employees get full exemption, no ceiling, no questions asked. Private sector faces Rs.25,00,000 under Section 10(10), raised from Rs.20,00,000 in March 2019. Cross the cap and the excess gets taxed as salary income.
Old regime only. Rs.50 per meal under Rule 3(7)(iii), which at two meals across 22 working days and twelve months works out to about Rs.26,400 a year. New regime kills this entirely, and we saw a fair number of employees at client sites in Surat and Rajkot confused by the bump in their May 2024 TDS when payroll recalculated after they switched regimes that April.
