Head #1 of 5
Tax on Salary & HRA Exemption 2026-27 — Now 8 Cities at 50%
Everything between your CTC and your in-hand pay lives in this chapter. Salary is taxed on a due-or-receipt basis (whichever is earlier) — and the new Act re-numbers the familiar provisions while keeping the substance.
Standard Deduction — a Flat Freebee
Every salaried taxpayer gets this flat deduction — no proof required:
| Regime | Standard Deduction | Note |
|---|---|---|
| New Regime (default) | ₹75,000 | Codified within Sec 202 |
| Old Regime | ₹50,000 | Re-numbered in the salary chapter |
Example — Effect on Form 16
Amit's salary is ₹9,00,000. In the new regime his taxable salary becomes ₹8,25,000 — no investments, no receipts needed. Under the old regime it would be ₹8,50,000.
HRA Exemption Calculation — Least of 3, with 8 Cities at 50%
In the old regime, the HRA exemption equals the LOWEST of these three:
- Actual HRA received (as per your payslip)
- Rent paid − 10% of salary (Basic + DA)
- Metro city: 50% of salary • Non-metro: 40%
New change (IT Rules 2026, Rule 279): the 50% metro list now has 8 cities — Mumbai, Delhi, Kolkata, Chennai plus Bengaluru, Hyderabad, Pune and Ahmedabad. All other cities (Noida, Gurugram, Jaipur, Bhopal...) stay at 40%. Remember: the HRA exemption exists only in the OLD regime!
Example — Priya in Bengaluru — what the new rule does
Priya lives in Bengaluru. Basic ₹40,000/month (₹4.8L/year), HRA ₹20,000/month (₹2.4L), rent ₹15,000/month (₹1.8L).
Least of three:
① Actual HRA = ₹2,40,000
② Rent − 10% of basic = ₹1,80,000 − ₹48,000 = ₹1,32,000 lowest
③ 50% of basic (Bengaluru is metro now) = ₹2,40,000
HRA exemption = ₹1,32,000/year.
Here ③ wasn't the binding number. But if rent were ₹25,000/month: ② = ₹2,52,000; ③ under the new 50% rule = ₹2,40,000 vs the old 40% rule = ₹1,92,000 — meaning ₹48,000 of extra exemption. That's why the 50% cap matters for Bengaluru/Hyderabad/Pune/Ahmedabad renters.
Least of three:
① Actual HRA = ₹2,40,000
② Rent − 10% of basic = ₹1,80,000 − ₹48,000 = ₹1,32,000 lowest
③ 50% of basic (Bengaluru is metro now) = ₹2,40,000
HRA exemption = ₹1,32,000/year.
Here ③ wasn't the binding number. But if rent were ₹25,000/month: ② = ₹2,52,000; ③ under the new 50% rule = ₹2,40,000 vs the old 40% rule = ₹1,92,000 — meaning ₹48,000 of extra exemption. That's why the 50% cap matters for Bengaluru/Hyderabad/Pune/Ahmedabad renters.
Common Salary Components — How Are They Taxed?
| Component | Tax Treatment | Note |
|---|---|---|
| Basic Salary | Fully taxable | — |
| HRA | Partly exempt (old regime) | Least-of-3 formula above |
| LTA | Exempt (old regime only) | Actual travel fare — 2 journeys in a 4-year block |
| Employer PF contribution | Exempt (up to 12% of Basic) | Above ₹7.5L/year (PF+NPS+SA combined) is taxable |
| Employer NPS (80CCD(2)) | Deductible — in both regimes! | Private sector: up to 14% of Basic (2026-27) |
| Gratuity | Exempt up to limit | ₹20 lakh for covered private employees |
| Leave encashment at retirement | Exempt up to limit | ₹25 lakh for non-government employees |
| Perquisites (car, accommodation) | Taxable by valuation rules | Company-leased car adds a perk value |
Example — Rahul with an ₹18L CTC — how much is taxable?
Rahul's CTC is ₹18L: Basic ₹9L, HRA ₹3.6L, special allowance ₹4.2L, employer PF ₹1.08L, employer NPS ₹0.72L...
• New regime: only the ₹75k standard deduction and employer NPS (80CCD(2)) come off his gross taxable salary.
• Old regime: HRA exemption (if he pays rent) + ₹50k standard deduction + 80C/123 + 80D/124 come off too.
At this income level with real deductions, the answer flips case by case — compare both in the calculator.
• New regime: only the ₹75k standard deduction and employer NPS (80CCD(2)) come off his gross taxable salary.
• Old regime: HRA exemption (if he pays rent) + ₹50k standard deduction + 80C/123 + 80D/124 come off too.
At this income level with real deductions, the answer flips case by case — compare both in the calculator.
VRS/retrenchment compensation, arrears (Sec 89 relief), notice-pay — all these specific rules carry over into the new Act, renumbered but unchanged in substance. Salary TDS is now deducted under Section 392 (formerly 192).
HRA next: HRA calculator → · HRA special cases →
By TaxSetu Editorial Team · Last reviewed: 7 October 2026
Based on the Income-tax Act 2025, Income Tax Rules 2026 and CBDT notifications; sections per the Income-tax Act 1961 (as amended) with 2025-Act mappings where notified · Verify on the official portal: incometax.gov.in
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