Section 10(14)(i) of income tax act makes an allowance tax free when the employer pays it to meet a cost incurred wholly for official duty, such as travel on tour, daily allowance while on tour, or conveyance for office work, but only to the extent the money is actually spent on that purpose. The unspent part is taxed as salary.
What counts as salary in the first place is set by section 17: pay and allowances in 17(1), perquisites in 17(2) and profits in lieu of salary in 17(3). Figures are for FY 2025-26, with a note on what the Income-tax Rules, 2026 changed for tax year 2026-27. For tax on the salary itself see TDS on salary.
Quick facts
10(14)(i)
Official-duty allowances, exempt up to the amount spent10(14)(ii)
Personal allowances with fixed limits, such as children's education and hostelNew regime
Only tour travel, tour daily allowance, official conveyance and transport for disabled employees stay exempt10(5) LTC
Fare for two journeys in a block of four calendar years, old regime only17(1)
Salary, wages, pension, bonus, leave encashment, allowances17(2)
Perquisites: housing, car, loans, ESOPs, employer retirement contributions above ₹7.5 lakhStatement
Form 12BA with Form 16 for FY 2025-26
Section 17 of income tax act: what salary includes
| Clause | Covers | Examples |
|---|---|---|
| 17(1) Salary | Every payment for employment | Basic pay, DA, bonus, commission, pension, leave encashment, taxable allowances, advance salary |
| 17(2) Perquisites | Benefits in kind or paid on the employee's behalf | Rent-free flat, company car for personal use, school fees paid by the employer, ESOP shares, interest-free loans |
| 17(3) Profits in lieu of salary | Lump sums linked to joining, leaving or changing terms | Compensation on termination, keyman insurance proceeds, payments before joining or after leaving |
Exemptions under section 10 are then subtracted to reach taxable salary, and the standard deduction comes after that: ₹75,000 in the new regime and ₹50,000 in the old.
Section 10(14)(i) of income tax act: allowances for official duty
| Allowance | Exempt amount | New regime |
|---|---|---|
| Travel or transfer allowance (tour or transfer costs) | Amount actually spent | Exempt |
| Daily allowance on tour or away from the normal place of duty | Amount actually spent | Exempt |
| Conveyance allowance for official duties | Amount actually spent | Exempt |
| Helper allowance for official work | Amount actually spent | Taxable |
| Academic or research allowance | Amount actually spent | Taxable |
| Uniform allowance | Amount actually spent on uniforms for work | Taxable |
The test is purpose and proof. A sales executive who gets ₹10,000 a month as conveyance and keeps fuel bills and visit logs for client meetings can treat the spent amount as exempt. A flat monthly allowance with no link to duty is ordinary salary.
Section 10(14) of income tax act, clause (ii): personal allowances
| Allowance | FY 2025-26 limit | Tax year 2026-27 |
|---|---|---|
| Children's education allowance | ₹100 a month per child, up to two children | Raised to ₹3,000 a month per child by the Income-tax Rules, 2026 |
| Hostel expenditure allowance | ₹300 a month per child, up to two children | Raised to ₹9,000 a month per child |
| Transport allowance for a blind, deaf or orthopaedically disabled employee | ₹3,200 a month | Check the new Rules; also exempt in the new regime |
Apart from the transport allowance for disabled employees, these personal allowances give no exemption in the new regime. The jump in the education and hostel limits from tax year 2026-27 is one reason some employees are rechecking which regime suits them.
Worked example: an employee's allowances
Facts, FY 2025-26. Anil, a regional sales manager, gets basic pay of ₹9,00,000, a tour travel allowance of ₹1,20,000 (bills show ₹1,05,000 spent), conveyance for client visits of ₹36,000 (fully spent) and children's education allowance of ₹12,000 for two children. Gross pay is ₹10,68,000.
New regime. Exempt: ₹1,05,000 travel + ₹36,000 conveyance = ₹1,41,000. Salary after exemptions ₹9,27,000; less ₹75,000 standard deduction gives ₹8,52,000.
Old regime. Add ₹2,400 education allowance exemption (₹100 x 12 months x 2). Exempt ₹1,43,400; salary ₹9,24,600; less ₹50,000 gives ₹8,74,600.
The unspent ₹15,000 of travel allowance is taxed in both regimes.
10(5) of income tax act: leave travel concession
- Covers travel within India for the employee, spouse, children and dependent parents and siblings.
- Two journeys are exempt in a block of four calendar years.
- Only the fare is exempt: economy air fare by the shortest route, or first class AC rail fare where travel is by rail. Hotels, food and local travel are not covered.
- Available only in the old regime.
Give tickets and boarding passes to the employer. If the claim is not made through the employer, it cannot be added later in the return.
Perquisites in income tax: section 17(2) of income tax act
Perquisites meaning in income tax: any benefit or amenity the employer gives free or at a concession. Perquisites are taxed in both regimes, valued under Rule 3 of the Income-tax Rules.
| Perquisite | How it is valued |
|---|---|
| Rent-free flat owned by a private employer | 10%, 7.5% or 5% of salary, by city population |
| Employer's PF, NPS and superannuation contributions | Amount above ₹7.5 lakh a year in total, plus related income |
| Interest-free or cheap loan | Interest saved at the notified bank rate; small loans up to ₹20,000 ignored |
| Gifts and vouchers | Exempt up to ₹5,000 a year |
| ESOP shares | Fair value on exercise date minus the price paid |
The employer lists perquisites in Form 12BA and shows them in Form 16. The Income-tax Rules, 2026 revised several values, including meals, cars and loans, for tax year 2026-27, so check your new Form 130 rather than last year's figures.
Allowance and perquisite mistakes
| Error | Correction |
|---|---|
| Treating the whole travel allowance as exempt | Only the amount spent on official travel, with proof |
| Claiming children's education allowance in the new regime | Not allowed; only four duty or disability allowances stay exempt |
| Claiming LTC for a foreign holiday | LTC covers travel within India only |
| Ignoring a perquisite shown in Form 12BA | Report it; the department sees it in Form 16 and AIS |
The deductions and exemptions list covers HRA, gratuity and other section 10 items.
We give a general view of salary rules here. Your employer's pay structure and the Rules decide your case; your employer's payroll team or a chartered accountant can confirm details.
Sources we checked
- Income-tax Act, 1961, sections 10(5), 10(14) and 17
- Income-tax Rules, 1962, rules 2B, 2BB and 3
- Income-tax Rules, 2026
Frequently asked questions
What is section 10(14)(i) of income tax act in the new tax regime?
In the new regime only three official-duty allowances stay exempt: travel on tour or transfer, daily allowance on tour, and conveyance for official duties. Helper, research and uniform allowances become taxable.
Section 17(1) of income tax act: what does it cover?
Clause (1) defines salary. It includes wages, pension, gratuity, fees, commission, bonus, leave encashment and advance salary.
Which benefits fall under section 17(2) of income tax act?
This clause lists perquisites, the benefits an employer gives free or at a concession, such as a rent-free house, a car for personal use, ESOP shares and interest-free loans.
What is 17(3) of income tax act?
Profits in lieu of salary, such as compensation on termination or change of terms, keyman insurance proceeds and amounts received before joining or after leaving.
How does section 10(5) of income tax act treat LTC?
It gives an exemption for the fare portion of leave travel concession for two journeys in a block of four calendar years, for travel within India, in the old regime only.