As the ITR filing season gathers pace, salaried employees should evaluate whether the old tax regime is more beneficial based on their salary structure. 

While the new tax regime remains the default option, exemptions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA) and employer contribution to the National Pension System (NPS), together with deductions such as section 80C, section 80D and housing loan interest, can significantly reduce taxable income under the old regime only. 

For employees residing in rented accommodation, HRA remains one of the most valuable tax exemptions, with the eligible exemption linked to factors such as rent paid, salary level and city of residence. 

Similarly, LTA provides tax relief for eligible domestic travel expenses incurred by employees and their families and can generally be claimed for two journeys in a block of four calendar years. 

For many salaried employees, these exemptions and perks can translate into tax savings running into lakhs of rupees every year. In some cases, the combined benefit from HRA, LTA, and other eligible salary components can help reduce tax liability by as much as Rs 2 lakh, depending on income level, city of residence, and salary structure.

Before filing your ITR for AY 2026-27, it’s worth taking a closer look at the tax exemptions available through your salary package. Here’s how HRA, LTA, and other common employee benefits can help you maximise tax savings and lower your overall tax burden.

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How HRA, LTA and other salary perks can help employees save up to Rs 2 lakh in tax?

According to CA Chandni Anandan, Tax Expert at ClearTax, here’s how HRA, LTA and other common salary perks can lower your tax burden and help you keep more of your hard-earned income.

Assumptions:

Car lease annual instalment is assumed to be Rs 5 lakhs for a car which costs Rs 17 lakh.

Car perquisite of Rs 28,800 is assumed to be a part of the total CTC of Rs 30 lakh.

Maximum amount of children education allowance for two children, and the full LTA received is assumed as an eligible exemption.

Maximum meal coupon exemption availed – Rs 50 per meal, 2 meals per day, 22 days per month, for all the months

Perquisite for car lease is valued at Rs 2400 per month, without driver. (engine capacity more than 1.6cc).

Considering all tax allowances and perquisites, tax is calculated under the old regime, as it is more beneficial. On the contrary, the new regime is more beneficial for tax calculation without exemptions on allowances and perquisites.

Particulars Tax Payable with allowances and perquisites  (Old Regime is more beneficial). Amount in RsTax Payable without allowances and perquisites (New Regime is more beneficial). Amount in Rs
Annual CTC                     30,00,000                30,00,000
Employer’s Contribution to PF                               1,800                            1,800
Gross Salary for the purpose of taxation                     29,98,200                29,98,200
HRA                       7,50,000 
LTA                       1,50,000 
Children education allowance                               2,400 
Meal coupon                             26,400 
Car leasing instalment                       5,50,000                                        –  
Standard Deduction                             50,000                        75,000
Net Salary                     14,69,400                29,23,200
Employee’s Contribution to PF                               1,800                                        –  
Taxable Income                     14,67,600                29,23,200
Tax Payable under the old regime                       2,62,891                    4,75,238
Taxes saved using the allowances and perquisites                      2,12,347

Note: The above table assumes 100% HRA exemption of Rs 7.5 lakh, full LTA exemption of Rs 1.5 lakh and car lease benefit of Rs 5.5 lakh. 

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How can salaried employees maximize HRA exemption if they live in rented accommodation in metro versus non-metro cities?

According to Ashish Mehta, Partner at Khaitan & Co, to maximize House Rent Allowance (HRA) exemption, employees should understand that the exemption is the least of the following three:

Actual HRA received

Rent paid minus 10% of salary (basic + DA forming part).

50% of salary (for metro cities: Mumbai, Delhi, Chennai, Kolkata) / 40% (for non-metros) – From financial year 2026-27, even Bengaluru, Hyderabad, Pune and Ahmedabad have also been included in this category of higher exemption for HRA.

Planning pointers:

Metro residents benefit from a higher cap (50%), so structuring salary with a reasonable HRA component can increase the exemption.

Ensure rent paid is meaningfully higher than 10% of salary; the exemption gets restricted in view of the above calculations.

Generally, the HRA amount should be close to half of the basic salary

Maintain proper rental documentation (rent agreement, remittance details, receipts, PAN of landlord if rent exceeds Rs 1 lakh annually).

Couples may consider evaluating who should pay rentals and claim HRA based on salary structure to optimise tax efficiency.

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What are the most common mistakes employees make while claiming HRA that lead to tax notices or disallowances?

Tax authorities are increasingly relying on data matching and AIS, so inconsistencies in such fields are more likely to be flagged. Some of the common mistakes are:

Failure to provide proper documents to the employer results in a higher deduction of tax, and claim of HRA not appearing in Form 16 and then claims are made only in the return of income.

Paying rent to family members without substantiation (no agreement, no actual money trail).

Claiming both HRA and home loan benefits (without satisfying genuine conditions like a different city or actual rental arrangement, or a document reason for stay in the rented premises).

Failure to report landlord PAN where required.

Not aligning HRA claims with Form 16 and ITR disclosures

What are the key conditions employees must satisfy to claim the LTA exemption?

Leave Travel Allowance (LTA) is often underutilized due to strict conditions:

Travel must be within India (foreign travel is not eligible).

Exemption is limited to actual travel cost (air/rail/bus fare); hotel and food expenses are not covered.

Travel should be undertaken with eligible family members (as defined).

Can be claimed for a maximum of two journeys in a block of four calendar years.

Requires actual travel proof (tickets, boarding passes, invoices).

Must be claimed through the employer or while filing ITR with proper documentation.

If LTA is not claimed in a block of four years, one journey can be carried forward to the next block.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.    

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