- India implements increased salary-allowance exemptions starting from April first, twenty twenty-six, under Rule two eighty.
- Education and hostel limits rise significantly to three thousand and nine thousand rupees per month respectively.
- Military and specialized allowances receive major updates, including a new forty-two thousand five hundred rupee Siachen rate.
India has raised several salary-allowance exemption ceilings for income earned from April 1, 2026, under Rule 280, including children’s education, hostel, field-area, disability transport and Siachen allowances.
The revised provisions appear in the Income-tax Rules, 2026, notified by the Central Board of Direct Taxes through Notification No. 22/2026 dated March 20, 2026. They apply from April 1, 2026, for Tax Year 2026–27.
The older limits still govern earlier salary. Income earned through March 31, 2026, remains under Section 10(14) and Rule 2BB of the Income-tax Act, 1961 framework.
Free toolSubstantial Presence Test CalculatorThat split affects payroll, returns and tax planning. AY 2026–27 covers income earned between April 1, 2025, and March 31, 2026, so employees cannot claim the new ceilings retrospectively.
A second issue remains unresolved. The published wording of subsection 3 appears inconsistent with the regime provisions in Section 202, creating uncertainty over which expanded allowances can be claimed after an employee chooses a tax regime.
| Allowance | AY 2026–27 under old Rule 2BB | Salary from April 1, 2026 under the new framework |
|---|---|---|
| Children’s education | ₹100 per month per child, maximum two children | ₹3,000 per month per child, maximum two children |
| Hostel expenditure | ₹300 per month per child, maximum two children | ₹9,000 per month per child, maximum two children |
| Transport-system employee | 70% of allowance, maximum ₹10,000 per month | 70% of allowance, maximum ₹25,000 per month |
| Compensatory field-area | ₹2,600 per month | ₹13,500 per month |
| Modified field-area | ₹1,000 per month | ₹8,000 per month |
| Counter-insurgency | ₹3,900 per month | ₹22,000 per month |
| Highly active field-area | ₹4,200 per month | ₹22,000 per month |
| Disability transport | ₹3,200 per month | ₹15,000 with DA in metro cities; ₹8,000 with DA in other cities |
| Underground | ₹800 per month | 15% of basic pay |
| Siachen-related | ₹7,000 per month under the old specified-area entry | ₹42,500 per month as a separate allowance |
The new ceilings apply to current salary, not the next return
The children’s education exemption rises from ₹100 to ₹3,000 per month per child, subject to a maximum of two children. At the new ceiling, two children could produce a maximum annual exemption of ₹72,000, provided the allowance is actually granted and other conditions are met.
The old annual maximum for two children was ₹2,400. The increase does not make every education expense deductible.
Suppose an employer pays ₹4,000 per month for each of two children from April 2026. The employee receives ₹8,000, but the exemption ceiling is ₹6,000, leaving ₹2,000 per month taxable, subject to the applicable regime and other conditions.
The hostel allowance ceiling increases from ₹300 to ₹9,000 per month per child, also for a maximum of two children. The maximum annual exemption can reach ₹216,000, but only where the employer specifically grants a hostel allowance.
Payment of hostel fees alone does not create the exemption. It is not a general deduction available to every parent.
Location-based allowances now depend more heavily on the posting
The new framework replaces the separate ₹200 tribal-area entry with three Tough Location categories: ₹7,000 per month under Tough Location Allowance-I, ₹4,500 under Tough Location Allowance-II and ₹1,500 under Tough Location Allowance-III.
Tough Location Allowance-III includes scheduled tribal and bad-climate areas where the allowance is admissible under orders issued by the respective state governments. The change therefore cannot be described simply as an increase from ₹200 to ₹1,500.
The employee’s exact location must qualify. Some Tough Location allowances also cannot be combined with specified field-area, modified field-area or counter-insurgency exemptions.
Field-area limits rise from ₹2,600 to ₹13,500 per month for compensatory field-area allowance and from ₹1,000 to ₹8,000 for the modified field-area allowance. The listed locations include areas in Arunachal Pradesh, Manipur, Nagaland, Sikkim, Himachal Pradesh, Uttarakhand, Jammu and Kashmir and Ladakh.
The counter-insurgency ceiling increases from ₹3,900 to ₹22,000 per month for eligible armed-forces members operating away from their permanent locations. The highly active field-area ceiling also becomes ₹22,000, up from ₹4,200.
These payments are not general benefits for anyone working in a difficult area. The prescribed employment and geographical conditions apply.
Disability, underground and island allowances use different formulas
The disability transport exemption changes from a flat ₹3,200 per month. The new limits are ₹15,000 with dearness allowance in metro cities and ₹8,000 with dearness allowance in other cities.
The expanded orthopaedic category covers disability of the lower or upper extremities. The provision also covers eligible blind employees and uses the statutory expression “deaf and dumb.” The allowance must meet commuting expenditure between the employee’s residence and place of duty.
Underground allowance moves from an ₹800 monthly ceiling to 15% of basic pay for employees working in the uncongenial and unnatural climate of underground mines. Payroll systems must calculate it from basic pay rather than apply a fixed amount.
Island-duty allowance also shifts to percentages. The rates are 10% of basic pay for areas around Port Blair, Kavaratti and Agatti, 16% for designated difficult areas and 20% for designated more difficult areas, including specified islands in the Andaman and Nicobar and Lakshadweep groups.
The place of posting controls the rate. It is not a uniform island allowance.
For armed-forces members, high-altitude allowances are ₹4,500 per month for altitudes between 9,000 and 15,000 feet and specified lower-altitude places with an uncongenial climate, ₹7,000 above 15,000 feet and ₹30,000 for covered locations in Jammu and Kashmir, Ladakh, Sikkim and Uttarakhand.
The rules also create a separate Siachen allowance of ₹42,500 per month for armed-forces members serving in the Siachen area of Ladakh. The older specified-area entry provided ₹7,000.
Official-duty reimbursements remain tied to spending
The revised provisions retain official-duty allowances for travel during an official tour or transfer, packing and transporting personal effects, daily expenses during official travel, official conveyance, helper duties, academic or research work, training and uniforms.
The exemption for these payments is limited to expenditure actually incurred for the prescribed purpose. An employee who receives ₹25,000 for uniforms but spends ₹18,000 ordinarily cannot exclude more than ₹18,000.
Home-to-office travel is different. Official conveyance relates to duties performed during employment when the employer does not provide free conveyance, while ordinary commuting is not transformed into an exempt payment by changing its salary-statement description.
A label such as special allowance, flexible allowance, hardship allowance or reimbursement does not independently create an exemption. The payment must match the statutory description, the employee must satisfy the applicable conditions and actual spending must be established where required.
Employers must separate the two tax years in payroll
Employers processing salary from April 1, 2026, should replace old Rule 2BB limits for current salary while retaining those limits for Form 16 and returns connected with FY 2025–26.
Payroll reviews should also verify eligible children, hostel residence, exact field or island postings, disability records and the calculation of percentage-based exemptions against basic pay. Official-duty reimbursements should remain separate from fixed compensatory allowances.
Returning NRIs and expatriate employees may receive relocation, shipment, temporary accommodation, education, hostel, uniform, research or location-based hardship payments. A foreign assignment letter or overseas payroll classification does not determine the Indian tax result.
The payment must be tested against its purpose, whether it is an allowance or reimbursement, the applicable location or employment condition, actual expenditure requirements and the selected tax regime.
The regime wording needs clarification
Under the earlier framework, employees in the default new regime were generally limited to official-tour or transfer travel, related daily allowance, official-duty conveyance and specified disability transport. Wider items such as children’s education, hostel, helper, academic and uniform allowances were generally associated with the old regime for AY 2026–27.
The new law makes the default regime applicable unless the taxpayer exercises the option under Section 202(4). However, the published subsection 3 wording appears to limit an employee who exercises that option to allowances under clauses (a) to (d) and disability transport allowance under Serial Number 10.
Section 202(2), by contrast, is structured to restrict exemptions when income is computed under the default regime. The cross-reference therefore appears internally inconsistent.
Employers and taxpayers should check for a later clarification, amendment or corrigendum before carrying the earlier regime treatment into the new framework. The issue remained unresolved as of August 3, 2026.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
