Hidden Exemptions Still Available to Salaried Employees Under New Tax Regime for PY 2025-26 (AY 2026-27)
Introduction
The New Tax Regime under Section 115BAC has become the default tax regime for individual taxpayers. A common misconception among salaried employees is that almost all exemptions and allowances have been withdrawn under the new regime. While it is true that exemptions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and deductions under Chapter VI-A are largely unavailable, certain exemptions continue to survive even under the concessional tax regime.
One of the most overlooked and legally sustainable exemptions available to salaried taxpayers is the exemption under Section 10(14)(i) of the Income-tax Act, 1961, read with Rule 2BB(1) of the Income-tax Rules, 1962.
These provisions exempt specific allowances granted for meeting expenses wholly, necessarily, and exclusively incurred in the performance of official duties. Since such allowances merely reimburse official expenditure and do not constitute personal income, they continue to remain exempt even under the New Tax Regime.
Statutory Framework
Section 10(14)(i)
Section 10(14)(i) provides exemption in respect of:
Any special allowance or benefit, not being in the nature of a perquisite under Section 17(2), specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit, to the extent such expenses are actually incurred for that purpose.
Thus, the exemption is available only when:
1. The allowance is granted for official duties.
2. The expenditure is wholly, necessarily, and exclusively incurred for such duties.
3. The expenditure is actually incurred.
4. Exemption is restricted to the amount actually spent.
Prescribed Allowances under Rule 2BB(1)
For the purposes of Section 10(14)(i), Rule 2BB(1) prescribes the following allowances:
(A) Travel Allowance on Tour or Transfer – Rule 2BB(1)(a)
Any allowance granted to meet the cost of travel on official tour or transfer.
Example 1 – Official Foreign Tour
Mr. A, Sales Director of XYZ Ltd., is deputed to Germany for business meetings.
- Travel Allowance Received: ₹3,50,000
- Actual Official Travel Expenditure: ₹3,40,000
Tax Treatment
| Particulars | Amount (Rs.) |
| Allowance Received | 3,50,000 |
| Exempt u/s 10(14)(i) | 3,40,000 |
| Taxable as Salary | 10,000 |
Where the entire allowance is spent and properly accounted for, no portion becomes taxable.
(B) Daily Allowance During Tour or Transfer – Rule 2BB(1)(b)
Any allowance granted to meet ordinary daily charges incurred during absence from the normal place of duty.
This generally includes:
- Boarding
- Lodging
- Meals
- Incidental expenses
- Per diem allowances
Example 2 – Per Diem on Foreign Tour
An employee receives a per diem equivalent to ₹75,000 during an overseas business visit.
- Allowance Received: ₹75,000
- Actual Expenditure: ₹70,000
Tax Treatment
| Particulars | Amount (Rs) |
| Allowance Received | 75,000 |
| Exempt | 70,000 |
| Taxable | 5,000 |
Even if bills are not required, exemption is limited to actual expenditure incurred.
(C) Conveyance Allowance for Official Duties – Rule 2BB(1)(c)
Any allowance granted to meet conveyance expenditure incurred in performance of official duties, provided free conveyance is not supplied by the employer.
Example 3 – Field Sales Executive
Mr. D receives a conveyance allowance of ₹8,000 per month and uses his personal motorcycle for client visits.
- Allowance Received: ₹8,000
- Actual Official Conveyance Expenditure: ₹7,000
Tax Treatment
| Particulars | Amount (Rs) |
| Allowance Received | 8,000 |
| Exempt | 7,000 |
| Taxable | 1,000 |
Example 4 – No Official Usage
An employee receives ₹5,000 per month as conveyance allowance but performs only desk-based work.
Tax Treatment
Entire ₹5,000 becomes taxable because no official expenditure has been incurred.
Why These Exemptions Continue Under the New Tax Regime
Section 115BAC withdraws several exemptions and deductions; however, allowances covered by Section 10(14)(i) continue to remain available because they represent reimbursement of official expenditure rather than personal tax benefits.
The legislative intent is clear: amounts spent exclusively for employer’s business purposes should not be taxed as employee income.
Consequently, employees opting for the New Tax Regime can still legitimately claim exemption for:
- Official travel expenses
- Transfer-related travel expenses
- Daily allowances on official tours
- Conveyance expenses incurred for official duties
subject to actual expenditure.
Are Bills Mandatory for Claiming Exemption?
A frequently raised question is whether submission of bills is mandatory for claiming exemption under Section 10(14)(i).
Legal Position
Neither Section 10(14)(i) nor Rule 2BB expressly requires submission of bills in every case.
The law merely requires that:
- Expenditure must actually be incurred; and
- The expenditure should be for official duties.
However, the taxpayer must be capable of substantiating the expenditure if questioned by the tax authorities.
Therefore, while formal invoices may not always be mandatory, reasonable documentary evidence remains essential.
Documentary Evidence That May Support Exemption
1. Official Travel Allowance
- Travel approval letter
- Tour programme
- Air tickets
- Boarding passes
- Visa copies
- Hotel invoices
- Taxi bills
- Foreign exchange receipts
- Expense statements
- Tour completion reports
2. Daily Allowance / Per Diem
- Tour sanction order
- Client visit confirmations
- Hotel stay proof
- Internal per diem policy
- Employee expense declaration
- Duty assignment records
3. Conveyance Allowance
- Appointment letter indicating field duties
- Monthly conveyance declaration
- Vehicle log book
- Fuel bills
- Vehicle ownership documents
- Employer certification that free conveyance was not provided
4. Transfer Allowance
- Transfer order
- Relocation documents
- Transporter invoices
- Travel tickets
- New rental agreement
Compliance Guidance for Employers
For payroll and TDS purposes, employers should:
1. Clearly define the nature of allowance in HR policies.
2. Obtain employee declarations regarding official expenditure.
3. Maintain internal approval and tour documentation.
4. Retain supporting records wherever available.
5. Ensure the allowance is not merely a disguised salary component.
An allowance paid as a fixed monthly salary component without any linkage to actual official expenditure may be treated as fully taxable.
Professional Observations
1. Section 10(14)(i) remains one of the few significant exemptions available under the New Tax Regime.
2. The exemption is expenditure-based rather than allowance-based.
3. Actual expenditure is mandatory.
4. Formal bills are not expressly mandated by law, but adequate substantiation is essential.
5. Reasonable employer documentation substantially strengthens the claim.
6. Excess allowance retained by the employee is taxable as salary.
Conclusion
The widespread belief that the New Tax Regime has eliminated all salary-related exemptions is not entirely correct. Exemptions available under Section 10(14)(i) read with Rule 2BB continue to survive because they compensate employees for expenses incurred wholly and exclusively in the performance of official duties.
Travel allowances, daily allowances, transfer allowances, and official conveyance allowances can still be claimed as exempt to the extent of actual expenditure incurred. While the statute does not mandate submission of bills in every situation, maintaining adequate supporting documentation remains crucial for sustaining the exemption during assessment proceedings.
Employers and employees who properly structure and document such allowances can legitimately reduce taxable salary even under the New Tax Regime for PY 2025-26 (AY 2026-27).
Author Bio
