Flexi Pay Allowances in India: What You Can Actually Claim and What You Can’t (2026)

In FY 2026-27, a salaried employee in India can legitimately shield ₹40,000 to ₹1,50,000 of annual income from tax — without earning a single rupee more. The tool is not a deduction scheme or a grey-area workaround. It is a basket of flexi pay allowances and reimbursements sitting right inside your Cost-to-Company (CTC), legislated under the Income Tax Act 2025. Most employees never fully claim them. (Source: Tax Garden FBP analysis, June 2026; VittSphere FBP salary restructuring guide, May 2026.)

Your CTC and your taxable salary are not the same number. Between them lies a Flexible Benefit Plan (FBP) — a portion of your salary that your employer lets you allocate across legally exempt heads. The total CTC does not change. Your in-hand salary goes up because a larger slice of it stops attracting tax.

The rules on these allowances just changed in a significant way. The Income Tax Rules 2026, notified by the Central Board of Direct Taxes (CBDT) via Notification No. G.S.R. 198(E) on 20 March 2026 and effective from 1 April 2026, have revised allowance ceilings that had not been touched in decades. Children’s education relief has gone up 30 times. Meal allowances have quadrupled. Four more cities now qualify for the higher HRA exemption. If you have not revisited your salary structure since April 2026, this article is worth reading before your next FBP declaration.

What “Flexi Pay” Actually Means — And What It Is Not

Your employer structures your salary into two broad buckets. The first is the fixed, taxable portion: basic salary, Dearness Allowance (DA), and any Special Allowance. These are taxed in full under “Income from Salaries.” (Flexi Pay Allowances)

The second bucket is the Flexible Benefit Plan (FBP) — also called flexi pay. This is a portion of your CTC (typically 10–25% at mid-to-senior roles) that your employer allows you to allocate across specific tax-exempt heads. You choose the mix each April. The total CTC does not change. Only the tax treatment of those components changes.

A concrete example: Ravi has a CTC of ₹12 lakh. His employer places ₹1.5 lakh in the FBP basket. Ravi declares ₹36,000 in meal allowances, ₹72,000 in children’s education allowance, and ₹42,000 in telephone and car reimbursements. If he submits valid bills, all ₹1.5 lakh is tax-exempt. If he does nothing, the entire ₹1.5 lakh becomes Special Allowance — fully taxable.

Critical distinction: allowance vs reimbursement. An allowance is a fixed monthly amount paid by the employer regardless of actual spending. A reimbursement is paid against actual bills submitted. This distinction matters hugely for tax: reimbursements based on verified bills are more robustly exempt, while a fixed allowance paid without bill submission is often treated as taxable salary. This applies to telephone, internet, fuel, car, and several other components.

Flexi Pay Allowances: The Complete 2026 List

The following tables reflect the revised limits under the Income Tax Rules 2026, effective 1 April 2026. CBDT Notification No. G.S.R. 198(E) is the primary regulatory source for all figures below.

Available Under Old Tax Regime Only

Source: CBDT Notification No. G.S.R. 198(E), March 2026; ClearTax, June 2026; KPMG Flash Alert 2026-081, March 2026. (Flexi Pay Allowances)

Available Under Both Old and New Tax Regimes

Note: Home-to-office commuting does not qualify as official conveyance — only travel for official duties (client visits, site travel, inter-office travel) is exempt.

The Biggest Allowance Changes in 2026 — What Actually Moved

Children’s education allowance: The most dramatic revision. From ₹100 to ₹3,000 per child per month — a 30× increase. The old limit was set in the 1960s and had never been revised. For a parent of two children, this alone adds ₹72,000 annually to tax-free income (₹3,000 × 2 × 12 months), up from just ₹2,400. (Flexi Pay Allowances)

Hostel allowance: From ₹300 to ₹9,000 per child per month — also for a maximum of two children. If your child stays in a hostel because of your job location, this is an additional ₹2,16,000 per year in tax-exempt income for two children. Combined with the education allowance, a parent of two children in school and hostel can exempt ₹2,88,000 annually.

Meal allowances: From ₹50 to ₹200 per meal. If your employer structures a meal allowance for two meals per working day across 22 working days in a month, the maximum exempt amount is ₹8,800/month (2 × ₹200 × 22), or ₹1,05,600 per year. Even with one meal per day at ₹200, that is ₹4,400/month (₹52,800/year). Check your employer’s FBP policy for what they allow — many caps were set at the old ₹50/meal limit and may not have been updated yet.

Car benefit: If you use a personal car partly for official work and the company reimburses running and maintenance costs, the exempt amount is now ₹5,000/month (for engines up to 1.6 litres or electric vehicles) instead of ₹1,800. For larger engine cars, it’s ₹7,000/month. The driver’s salary component, if applicable, moved from ₹900 to ₹3,000 per month.

Gift vouchers: The annual tax-free limit for gifts and vouchers from an employer tripled from ₹5,000 to ₹15,000. This applies under the old tax regime.

HRA: The 8-City Change That Affects Lakhs of Salaried Employees

For over two decades, only four cities — Mumbai, Delhi, Kolkata, and Chennai — qualified for the higher 50% House Rent Allowance (HRA) exemption under Section 10(13A) of the Income Tax Act. Every other city was capped at 40%. This meant a software engineer in Bengaluru paying ₹35,000 rent was computed at the same ceiling as someone in a small town — despite Bengaluru’s rents regularly rivalling Chennai or Kolkata. (Flexi Pay Allowances)

From 1 April 2026, under Rule 279 of the Income Tax Rules 2026, four additional cities have been added to the 50% exemption category: Bengaluru, Hyderabad, Pune, and Ahmedabad. The 50% rate now applies to all eight cities. Every other city in India remains at 40%. (Source: CBDT Notification G.S.R. 198(E), March 2026; TaxGuru, March 2026.)

How the HRA Calculation Works (Three Conditions)

HRA exemption is the lowest of three values:

• Condition 1: Actual HRA received from employer
• Condition 2: Rent actually paid minus 10% of basic + DA
• Condition 3: 50% of basic + DA (8 cities) / 40% of basic + DA (all others)

Illustrative example: Priya works in Pune, earns ₹60,000 basic + DA per month, receives ₹30,000 HRA from her employer, and pays ₹25,000 rent per month.

Condition 1: ₹30,000 (actual HRA received)

Condition 2: ₹25,000 − (10% × ₹60,000) = ₹25,000 − ₹6,000 = ₹19,000

Condition 3 (old 40% rule): 40% × ₹60,000 = ₹24,000

Condition 3 (new 50% rule from April 2026): 50% × ₹60,000 = ₹30,000

Under the old rule, her HRA exemption was the minimum of ₹30,000, ₹19,000, and ₹24,000 = ₹19,000/month. Under the new 50% rule, it remains ₹19,000/month — because Condition 2 (₹19,000) is still the lowest. But if she paid ₹30,000 rent instead: Condition 2 becomes ₹24,000, Condition 3 (new) becomes ₹30,000. Old exemption: ₹24,000. New exemption: ₹24,000 (unchanged here). However, if her rent were ₹35,000: Condition 2 = ₹29,000; Condition 3 (new) = ₹30,000; minimum = ₹29,000 vs old = ₹24,000 (Condition 3 was the binding constraint before, now it isn’t). This is the scenario where the 50% upgrade materially helps — when Condition 3 was the limiting factor. (Flexi Pay Allowances)

The practical takeaway: if you are in one of the four newly added cities, on the old regime, and Condition 3 was previously capping your exemption — you will now get a higher HRA exemption automatically, provided your employer has updated TDS calculations. If you are unsure, check with payroll.

Important: HRA exemption is only available under the old tax regime. New regime employees cannot claim HRA exemption, regardless of which city they are in. Also, from 1 April 2026, investment declarations are submitted via Form 124 (which replaces the old Form 12BB). You must submit Form 124 with your rent details and landlord’s PAN (if annual rent exceeds ₹1,00,000) to your employer. (Flexi Pay Allowances)

Also read: HRA Exemption Now Covers Pune, Bengaluru, Hyderabad — What This Means for Your Tax

LTA: The New 2026–2029 Block Has Started — Don’t Waste It (Flexi Pay Allowances)

Leave Travel Allowance (LTA) under Section 10(5) of the Income Tax Act reimburses the fare cost of domestic travel during leave. Only transport fares are covered — not hotels, food, or local sightseeing. It is available only under the old tax regime.

The government divides LTA entitlement into four-year calendar blocks (not financial years — this is where most people trip up). The previous block ran from 1 January 2022 to 31 December 2025. The current block runs from 1 January 2026 to 31 December 2029. Within each block, you can claim LTA exemption for exactly two journeys — in any year, in any combination.

Mode of Travel and Exemption Limits

• Air travel: Economy class fare on the shortest route with a national carrier (Air India)
• Rail: AC First Class fare on the shortest route
• Other transport: First-class fare on recognised public transport, where rail/air connectivity is unavailable

Hotels, taxis, food, and entertainment do not qualify. The fare for the family travelling together is covered. Family includes self, spouse, dependent children (up to two children for those with children born after 1 October 1998), and dependent parents. (Flexi Pay Allowances)

The Carry-Forward Most People Are Missing

If you did not use one of your two LTA claims in the 2022–2025 block, you can carry it forward — but it must be used by 31 December 2026. After that, it permanently lapses. You cannot roll it into 2027 or beyond.

This means calendar year 2026 is unusual: an employee with a carry-forward can claim up to three LTA-exempt journeys in 2026 alone — one carry-forward plus both fresh claims from the new 2026–2029 block.

A rough ₹ example: Amit earns a basic salary of ₹80,000/month. He travels from Pune to Kerala by Air India economy (fare: ₹12,000 return per person). He travels with his wife and two children. Total fare: ₹48,000. His LTA exemption on this journey: ₹48,000 (all four fares covered, within the economy ceiling). At 30% tax rate, that’s ₹14,400 in tax saved on a single trip. If he has a carry-forward from the 2022–2025 block and travels again before December 2026, he saves another ₹14,000+ on that trip too. (Note: this is an illustrative calculation, not a guaranteed amount — actual savings depend on the fare and tax slab.)

Also read: Leave Travel Allowance (LTA): What It Is, How to Claim It in 2026

Telephone and Internet Reimbursements: The One Exemption That Works in Both Regimes

Under Rule 3(7)(ix) of the Income Tax Rules, reimbursements for telephone and internet expenses incurred for official duties are fully exempt from tax with no fixed monetary cap in the law. The ceiling is whatever your employer’s policy allows, paid against actual bills submitted. Crucially, this exemption applies under both the old and new tax regimes. (Source: ClearTax, May 2026; Pluxee India, May 2026.)

This makes it the single most valuable flexi component for new-regime employees. If you have opted for the new regime, almost every other FBP benefit listed in this article is not available to you — but telephone and internet reimbursements remain.

The condition: The reimbursement must be on actuals, against bills submitted. A fixed ₹1,500/month “mobile allowance” paid without requiring bills is treated as a regular allowance and is fully taxable. The same ₹1,500, reimbursed against your actual postpaid or broadband bill for the month, is tax-free.

In practice: keep your monthly mobile and broadband bills (even PDF bills from Jio/Airtel/ACT are fine). Submit them to your employer’s HR portal within the stated deadlines. The amount reimbursed, up to your employer’s cap, is excluded from taxable salary.

Conveyance and daily allowance (TA/DA) for official tours also fall into this both-regimes category. If your job involves client visits, field work, or travelling to other offices, reimbursements for those trips are exempt from tax on actual expenditure — in both regimes.

What Gets Taxed When You Do Not Claim Properly

Unclaimed FBP converts to Special Allowance — fully taxable. Most employers have a declaration cycle in April and bill submission deadlines in February or March. If you declare a component but do not submit bills by the cut-off, the unclaimed amount typically gets added back to your taxable salary in the last quarter. This is why many salaried employees see unexpectedly high TDS in February and March.

The impact in rupees: Suppose you declared ₹60,000 per year in meal allowances but submitted bills for only ₹30,000 by February. The remaining ₹30,000 is added to your taxable salary in March. At a 30% slab, that is ₹9,000 in extra tax — deducted from a single month’s salary. This is a real and avoidable shock.

Fixed allowances without bills are taxable. If a head is labelled “internet allowance” and paid as a fixed ₹1,200 per month without requiring bill submission, it is a taxable allowance, not an exempt reimbursement. True reimbursement requires actual bill verification.

Fuel reimbursement: official duty only, not commuting. Rule 3(2) car benefit exemption applies to a car used partly for official and partly for personal purposes. Home-to-office commuting does not qualify for this exemption. Only travel for client visits, site work, inter-office travel, or field duties counts as official. If your fuel reimbursement claim spans daily commuting, the excess over officially allowable amounts is a taxable perquisite.

New regime: most FBP benefits are lost entirely. If you have opted for the new tax regime under Section 115BAC (which is the default unless you opt out in writing via Form 10-IEA), the following are fully taxable regardless of bills submitted: HRA, LTA, meal allowances, children’s education allowance, hostel allowance, car benefits, and books/periodicals reimbursements. Only telephone/internet reimbursements and official conveyance/TA/DA remain exempt. This is the most common source of confusion in mixed-regime workplaces.

For a detailed look at how all these components appear on your monthly payslip, read How to Read Your Salary Slip — Every Component Explained in Plain English.

Old Regime vs New Regime: Does the FBP Math Work in Your Favour?

The right regime depends on your total deduction stack. Under the new regime, you get a ₹75,000 standard deduction and wider tax slabs — but lose almost all FBP exemptions. Under the old regime, you keep HRA, LTA, meal allowances, children’s education, and 80C benefits, but the slabs are narrower. The old vs new regime decision is worth computing properly for your specific salary level.

Here is an illustrative comparison for a ₹15 lakh CTC employee in Pune with two school-going children who pays ₹25,000/month rent:

Note: HRA exemption of ₹1,08,000 assumes ₹9,000/month (Condition 2 binding: ₹25,000 rent − ₹6,000 = ₹19,000; not lower than Condition 3 at 50% = ₹30,000; so HRA = ₹19,000 × (say) estimated fraction—the actual number depends on the full 3-condition calculation with the specific salary breakup). This is illustrative. Source: ClearTax FBP analysis, June 2026; Tax Garden FBP guide, June 2026.

The old regime with full, documented FBP utilisation clearly wins when you have significant rent, children in school, and active 80C investments. It stops making sense if you rent cheaply, have no dependents, and do not actively invest in 80C instruments — in that case, the new regime’s cleaner slab structure may win despite the lost exemptions.

Six FBP Mistakes That Are Quietly Costing You Money

1. Missing the FBP declaration window. Most employers open FBP allocation in April and close it by May or June. Miss it, and you cannot restructure until next year. Your entire FBP basket defaults to Special Allowance — taxable.

2. Over-declaring without having the bills. Declaring ₹60,000/year in fuel reimbursement but not having receipts for official travel — and then scrambling in February — ends with unclaimed amounts converting to taxable Special Allowance in the last salary cycle. Declare only what you can genuinely document.

3. Confusing LTA block years with financial years. LTA runs on calendar years (January–December), not financial years (April–March). Many employees plan travel in Q4 (January–March) and get confused about which block the claim falls in. The 2026–2029 block runs by calendar year — a January 2027 trip claims the new block, not the old one.

4. Claiming HRA on the new tax regime. If you have opted for the new regime but your employer still structures HRA in your salary, the HRA portion is fully taxable. No exemption applies. This leads to incorrect TDS deductions when employees assume HRA is automatically exempt.

5. Treating unlimited fuel reimbursement as exempt. The car benefit exemption under Rule 3(2) applies specific monthly ceilings (₹5,000 or ₹7,000 depending on engine size). Any reimbursement above these limits is a taxable perquisite. Covering your daily home-to-office commuting costs through “fuel reimbursement” is also not exempt under this rule.

6. Not updating to Form 124. From 1 April 2026, the old Form 12BB (investment declaration form) has been replaced by Form 124 under the Income Tax Rules 2026. If your employer is still using the old form, your HRA and LTA declarations may not be processed correctly for TDS computation. Check with your payroll team that they have switched to Form 124 for FY 2026-27.

For a complete guide on how take-home salary is calculated from CTC in India, read our detailed breakdown.

What to Do This Week

A numbered plan, in order of priority:

1. Pull out your April 2026 salary slip and identify what is in your FBP basket. Compare the limits against the revised 2026 ceilings — especially children’s education (now ₹3,000/child/month), hostel (₹9,000/child/month), and meal allowances (₹200/meal). If your company has not yet updated its FBP policy to reflect 2026 limits, raise it with HR.
2. Confirm your tax regime. Open your employer’s HR portal or check your salary slip. If you see TDS being deducted without any HRA or LTA exemption, you are likely on the new regime. If you are unsure, ask payroll. This determines which of the above benefits even apply to you.
3. If you are in Bengaluru, Pune, Hyderabad, or Ahmedabad and on the old regime, verify that your HRA is being computed at 50% (not 40%) from April 2026. If your payroll has not updated this, your TDS is higher than it should be. Raise it with payroll and submit Form 124 with your landlord’s PAN details (required if annual rent exceeds ₹1,00,000).
4. Check LTA carry-forward. Did you claim both LTA journeys in the 2022–2025 block? If not, you may have one carry-forward — but it must be used before 31 December 2026. Plan a domestic trip this year, collect original tickets and boarding passes, and submit your LTA claim to HR before the December deadline.
5. Start a bills folder now. Internet and telephone bills for official use, fuel receipts for official travel, restaurant bills for meal reimbursements. Even if your next FBP submission window is months away, maintaining these in one folder means you are never scrambling at year-end. A Google Drive folder or a simple WhatsApp album of bill photos is fine — as long as you can produce them when the payroll cycle calls for it.
6. Run an old-vs-new regime comparison with your actual numbers. Use the Income Tax Department’s e-filing portal calculator, or consult a Chartered Accountant (CA). If you are spending ₹20,000+ per month in rent in one of the 8 HRA cities, have children in school, and invest in Section 80C instruments, the old regime with full FBP utilisation very likely saves you more. But run the numbers — do not assume.

Related reading on The Salary Investor:

• HRA Exemption Now Covers Pune, Bengaluru, Hyderabad — What This Means for Your Tax
• What is HRA and How Do I Claim It? A Simple Guide for Salaried Indians
• Leave Travel Allowance (LTA): What It Is, How to Claim It in 2026
• Old Tax Regime vs New Tax Regime: Which One Should You Pick in FY 2025-26?
• How to Calculate Your Take-Home Salary in India — The Right Way (2026)

Disclaimer: Data in this article reflects the Income Tax Rules 2026 (CBDT Notification No. G.S.R. 198(E), effective 1 April 2026) and publicly available information as of July 2026. Allowance exemptions depend on individual tax regime choices, employer FBP policy, and actual bill submissions — they cannot be assumed without verifying these conditions. This article is for general educational purposes only and does not constitute tax or financial advice. Returns and savings will vary based on individual circumstances, salary structure, and applicable tax slabs. Consult a SEBI-registered financial advisor or Chartered Accountant before making decisions about tax regime selection, salary restructuring, or individual tax claims.

Sources: Income Tax Rules 2026 — CBDT Notification No. G.S.R. 198(E) (CBDT / Ministry of Finance, March 2026)  *  Income Tax Act 2025 as amended by Finance Act 2026 (Ministry of Finance, 2026)  *  Income Tax Rules 2026: PDF, Key Changes, New ITR Forms and Exemption Limits (ClearTax, June 2026)  *  Leave Travel Allowance (LTA): Rules and Exemption (ClearTax, May 2026)  *  Telephone and Internet Allowance Tax Exemption Limit (ClearTax, May 2026)  *  HRA Exemption: 8 Cities Now Qualify for 50% Exemption — A Complete Practical Guide (TaxGuru, March 2026)  *  Flash Alert 2026-081: India Income Tax Rules 2026 — Key Changes (KPMG, March 2026)  *  New Flexi-Benefits for Employees After April 2026 (EnKash, May 2026)

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Kunal Kundu

Kunal Kundu is a salaried professional from Pune, Maharashtra, with over 16 years of work experience. He has been investing since 2012 — starting with stocks and later expanding into mutual funds, options trading, and systematic tax planning.
He figured out most of what he knows about personal finance not from courses or advisors, but from years of reading, making mistakes, and fixing them. The Salary Investor is his attempt to save other salaried Indians the same time and money.
He is not a CA or a SEBI-registered advisor. He writes as a fellow salaried person who has been in the trenches — navigating EPF, ITR, 80C, salary slips, and market volatility.

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