Salary Deductions — HRA, Standard Deduction, LTA, and Form 12BB

Learning Objectives

• Apply the three-condition HRA exemption formula under Section 10(13A) to Kiran Sharma's payroll
• Identify metro vs non-metro cities and how they affect HRA computation
• Understand the LTA block-year concept and what qualifies for exemption
• Know which allowances are taxable vs exempt after FY 2018-19
• Build a complete old vs new regime comparison for Kiran's salary income

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Standard Deduction — Section 16(ia)

The standard deduction is the simplest and most universal salary deduction — no proof, no receipts, no conditions.

From FY 2025-26, both regimes allow ₹75,000. This replaced the old ₹50,000 limit across the board.

Application: Kiran Sharma draws gross salary of ₹6,00,000. The standard deduction directly reduces his taxable salary by ₹75,000.

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HRA Exemption — Section 10(13A)

House Rent Allowance paid to an employee can be partially or fully exempt from tax if the employee actually pays rent for residential accommodation.

The Three-Condition Formula

HRA exemption = minimum of these three amounts:

1. Actual HRA received from the employer
2. 50% of basic salary — for employees in metro cities (Delhi, Mumbai, Chennai, Kolkata) 40% of basic salary — for all other cities
3. Rent paid minus 10% of basic salary

Metro vs Non-Metro

HRA Exemption — Kiran Sharma (Sunrise Retail, Hyderabad)

Kiran's payroll details:

Three-condition computation (annual):

HRA exemption = Minimum of three = ₹1,32,000

The three figures are ₹1,44,000, ₹1,44,000, and ₹1,32,000. The minimum is ₹1,32,000.

Taxable HRA = ₹1,44,000 − ₹1,32,000 = ₹12,000

Conditions for a Valid HRA Claim

• The employee must actually pay rent — no rent paid, no exemption even if HRA is received
• Cannot claim if living in own house
• If annual rent exceeds ₹1,00,000 (₹8,333/month), the landlord's PAN must be furnished to the employer
• Under the new regime, HRA exemption under Section 10(13A) is not available

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Leave Travel Allowance (LTA) — Section 10(5)

LTA covers the cost of domestic travel for the employee and family during leave. Exemption is available for two journeys in a block of four calendar years.

Block Years

Two journeys are permitted in each block. Any unclaimed journey from the current block can be carried forward to the first year of the next block — one carry-forward only.

What Qualifies

• Travel must be within India only — no international exemption
• Must be taken during leave — business trips do not qualify
• Only actual fare (air/rail/bus) is exempt — hotels, food, local transport are not
• Economy class airfare or AC first class rail fare — whichever is applicable
• Family = spouse, children (up to two born after 1 October 1998), dependent parents and siblings

LTA and the Regime

LTA exemption is not available under the new regime. This is one of the significant losses when switching to the new regime.

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Allowances — Taxable vs Exempt (FY 2025-26)

Most allowances lost their exemption after FY 2017-18 and were replaced by the standard deduction:

The conveyance and medical exemptions were abolished in Budget 2018 and replaced by the standard deduction — which at ₹75,000 is more valuable than both combined.

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EPF and Employer Contributions

The employee's EPF contribution (12% of basic salary) qualifies as a deduction under Section 80C in the old regime (covered in Lesson 5).

The employer's EPF contribution is exempt from tax up to 12% of basic salary. Employer contributions exceeding 12% (or ₹7,50,000 per year from all employer contributions to PF, NPS, and superannuation combined) become taxable as a perquisite in the employee's hands.

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Form 12BB — Investment Declaration by Employee

Form 12BB is submitted by the employee to the employer to avoid excess TDS deduction. It covers:

• HRA claim — rent receipts + landlord PAN
• LTA claim — travel tickets
• Home loan interest declaration — provisional certificate from bank
• Chapter VI-A deductions — 80C investments, 80D mediclaim premium

The employer computes TDS for the year based on the 12BB declaration. If actual investments differ, the employee adjusts at the time of filing the ITR. Form 16 (the TDS certificate) reconciles with the ITR.

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Kiran Sharma's Salary Head Computation (FY 2025-26)

Under Old Regime

Additional old-regime benefit: If Kiran also claims LTA of ₹24,000 for a trip taken in FY 2025-26 (within the 2022-2025 block), taxable salary further reduces to ₹3,69,000.

Under New Regime (Default)

HRA exemption is not available under the new regime — the full ₹1,44,000 HRA received is included in the ₹6,00,000 gross salary.

Regime Comparison — Salary Head

The old regime produces ₹1,56,000 less taxable salary from the Salaries head alone. Whether this translates to lower tax depends on the combined income and deductions — covered in Lesson 5.

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Practice Exercises

Exercise 1: A Sunrise Retail accountant lives in Mumbai (metro). Basic ₹45,000/month, HRA received ₹18,000/month, rent paid ₹22,000/month. Compute annual HRA exemption.

Solution: Annual figures:

• Basic salary: ₹5,40,000
• HRA received: ₹2,16,000
• Rent paid: ₹2,64,000

Three conditions:

1. Actual HRA received: ₹2,16,000
2. 50% of basic (Mumbai = metro): 50% × ₹5,40,000 = ₹2,70,000
3. Rent paid − 10% of basic: ₹2,64,000 − ₹54,000 = ₹2,10,000

Minimum = ₹2,10,000

Taxable HRA = ₹2,16,000 − ₹2,10,000 = ₹6,000.

Most of the HRA is exempt because the actual rent is high relative to basic salary.

Exercise 2: Kiran has already used one LTA claim in the 2022-2025 block. He takes a family trip to Goa in January 2026 costing ₹32,000 (airfare + local transport). How much LTA exemption can he claim?

Solution: January 2026 falls within the 2022-2025 block (runs to 31 December 2025 — wait, no: the block is calendar years 2022, 2023, 2024, 2025 — so 31 December 2025 is the last date).

January 2026 falls in the next block (2026-2029). Kiran can claim this trip as the first of two claims in the new block.

However, only actual fare qualifies — not local transport. If the airfare was ₹20,000 and local transport ₹12,000, only ₹20,000 is eligible for LTA exemption.

Maximum LTA exemption = ₹20,000 (actual airfare, economy class).

Exercise 3: Under the new regime, Kiran's income from Salaries is ₹5,25,000. His PGBP is ₹4,00,000 and dividend ₹50,000. Is the Section 87A rebate available?

Solution: Kiran's GTI = ₹5,25,000 + ₹4,00,000 + ₹50,000 = ₹9,75,000.

Under the new regime, GTI = Net taxable income (no Chapter VI-A deductions).

Section 87A rebate under the new regime applies when net taxable income ≤ ₹12,00,000. Here ₹9,75,000 ≤ ₹12,00,000.

Tax on ₹9,75,000 (new regime):

• ₹0–₹4L: Nil
• ₹4L–₹8L: ₹4L × 5% = ₹20,000
• ₹8L–₹9,75,000: ₹1,75,000 × 10% = ₹17,500
• Total income tax = ₹37,500

Section 87A rebate = ₹37,500 (full tax wiped out). Total tax payable = ₹0.

Note: This is the salary-only GTI scenario for illustration. The full computation including all three income streams is in Lesson 5.

The HRA claim that triggered a 50% penalty

Anitha, a project manager at a Hyderabad IT services firm, lived with her parents in Kondapur but claimed HRA exemption of ₹2,16,000 for AY 2024-25. Her employer-paid HRA was ₹18,000/month; she declared ₹17,000/month "rent paid" to her father in Form 12BB. Her father, a retired pensioner with no rental income history in his prior ITRs, signed informal receipts that her CA accepted.

Three things went wrong at processing time. First, the IT Department's AIS cross-reference flagged a mismatch: Anitha's bank statements showed NO regular monthly transfer of ₹17,000 to her father — only ad-hoc family transfers. Second, the father's ITR for the same year did not disclose any rental income (he was below the basic exemption limit and didn't file at all). Third, Anitha's annual rent of ₹2,04,000 exceeded ₹1,00,000, which triggered the Section 10(13A) rule requiring the landlord's PAN to be furnished — she had not.

Section 142(1) notice asked for proof. Anitha couldn't produce bank-traceable rent payments. Section 270A was invoked for under-reporting (50% of tax evaded) — and the AO considered classifying it as MISREPORTING (200% penalty) because the rent receipts looked manufactured. Eventually settled at 50% penalty: original tax saved was ₹40,800; penalty was ₹20,400; plus Section 234B/234C interest of ~₹8,000.

Lesson: HRA without bank-traceable rent payments + landlord PAN + landlord ITR disclosure is a Section 270A trap. If you genuinely live with parents and pay them rent, run it as a real rental: monthly bank transfer, formal rent agreement, parent files ITR showing the rental income.

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Key Terms

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Check Your Understanding

1. Kiran pays ₹14,000/month rent in Hyderabad. Basic ₹30,000/month, HRA received ₹12,000/month. What is the annual HRA exemption?

   a₹1,44,000b₹1,32,000c₹1,68,000d₹3,60,000

2. Which of the following cities qualifies as a 'metro' for the 50% HRA rule under the Income Tax Act?

   aBengalurubHyderabadcChennaidPune

3. Is conveyance allowance still exempt from tax in FY 2025-26?

   aYes — up to ₹19,200 per yearbYes — up to ₹1,600 per monthcNo — it was merged into the standard deduction from FY 2018-19dOnly for disabled employees

4. What is the purpose of Form 12BB?

   aAnnual income tax return filed by the employeebTDS certificate from employer to employeecEmployee's declaration of deductions and exemptions to employer for TDS computationdApplication for HRA exemption at ITR filing time

5. Kiran is locked between old and new regime. His salary head taxable income would be ₹3,69,000 (old) vs ₹5,25,000 (new). His total deductions outside salary (PPF, mediclaim) are ₹50,000. Which regime should he choose?

   aOld regime — clearly lower taxable salarybNew regime — fewer deductions to trackcNew regime — Section 87A rebate likely wipes out his tax fullydEither — the choice doesn't matter for his salary level

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Next up: Module 4 — Business Income (PGBP) — How to arrive at taxable business income from P&L accounts, depreciation under the block-of-assets method, and the presumptive taxation schemes under Sections 44AD and 44ADA.