HRA, LTA & Standard Deductions

HRA, LTA & Standard Deductions: Your Complete FY 2026-27 Salary Tax Guide

For salaried employees filing for Assessment Year 2027-28, three salary-side reliefs do most of the heavy lifting: HRA under Section 10(13A), LTA under Section 10(5), and the ₹75,000 standard deduction under Section 16(ia). HRA and LTA are available only under the old tax regime; the standard deduction applies under both regimes. This guide walks you through exact computation formulas, the 2026–2029 LTA block rules, documentation your employer and the Income Tax Department will expect, and a side-by-side regime comparison using realistic salary numbers.

House Rent Allowance Under Section 10(13A): The Full Picture

The Three-Way Minimum Test

HRA exemption is the least of three amounts computed year-by-year — or month-by-month if your salary changes during the year:

1. Actual HRA received from your employer during the year
2. 50% of (Basic Salary + Dearness Allowance) if your place of employment is Mumbai, Delhi, Kolkata, or Chennai; 40% for every other city
3. Actual rent paid minus 10% of (Basic Salary + DA)

The portion of HRA that exceeds the exempt amount is added back to your taxable salary income. The formula looks clean, but three errors are made so routinely in payroll that they are worth calling out explicitly: using gross salary instead of basic + DA as the base, applying the metro 50% rate to a non-metro city, and forgetting to subtract 10% of basic + DA from actual rent before entering limb 3.

Which Cities Actually Qualify as Metros?

Only four cities attract the 50% rate: Mumbai, Delhi, Kolkata, and Chennai. The 50% rate does not extend to the Delhi-NCR satellite cities. If you work in Gurgaon, Noida, or Faridabad — even for a company headquartered in Delhi — the applicable rate is 40%. Bengaluru, Hyderabad, Pune, Ahmedabad, and Jaipur are all 40% cities regardless of how large your employer is or what your offer letter says.

The PAN-of-Landlord Requirement

• If your total rent paid across the financial year exceeds ₹1,00,000 (roughly ₹8,334/month), you must provide your landlord's PAN to your employer via Form 12BB. This is mandatory under Rule 26C.
• If your landlord is an NRI, TDS obligations under Section 195 arise on your rental payments — clarify this with your payroll team before the first month's rent is transferred.
• If your landlord genuinely has no PAN and refuses to obtain one, your employer cannot allow the HRA exemption in TDS. You can still claim the exemption in your ITR with a sworn declaration, but this materially increases scrutiny risk.
• From FY 2025-26 onward, most large employers mandate monthly rent receipts uploaded to the HRMS portal. Submitting a consolidated annual receipt in January alongside other proofs is increasingly rejected by payroll processors — upload receipts monthly.

Step-by-Step: Computing Your HRA Exemption

Follow this sequence every April when your employer requests Form 12BB declarations:

1. Pull your monthly basic salary and DA from your payslip — not CTC, not gross salary.
2. Note the HRA component as a separate line item in your payslip.
3. Confirm your monthly rent matches the figure in your lease or rental agreement.
4. Determine whether your city of employment is a metro (50%) or non-metro (40%).
5. Compute all three limbs of the formula month by month — recalculate for any month in which your salary structure changes (promotion, increment, mid-year revision).
6. Pick the minimum each month; sum the monthly minima for the annual exempt amount.
7. Declare the annual exempt HRA in Form 12BB and attach supporting documentation.

Worked Example: HRA for a Delhi-Based Employee

Priya is a senior analyst working in Delhi. Her monthly salary:

Basic + DA = ₹68,000

Three limbs of the test (monthly):

1. Actual HRA received = ₹28,000
2. 50% of ₹68,000 (Delhi = metro) = ₹34,000
3. Rent paid − 10% of Basic+DA = ₹22,000 − ₹6,800 = ₹15,200

Least of three = ₹15,200 per month

Since Priya's annual rent = ₹22,000 × 12 = ₹2,64,000 — well above the ₹1 lakh threshold — she must provide her landlord's PAN in Form 12BB. If her landlord declines and she cannot provide the PAN, Priya's employer cannot allow the exemption in TDS, even though she is legally entitled to it at the ITR stage.

Leave Travel Allowance Under Section 10(5): The 2026–2029 Block Rules

How the Block System Works

LTA exemption under Section 10(5) read with Rule 2B operates on four-calendar-year blocks, not financial years. The current block runs from 1 January 2026 to 31 December 2029. Within this block, you may claim LTA exemption for two journeys — each being a return trip to any destination within India, undertaken with your family.

The exemption is capped at actual travel cost, limited to specific modes:

• Air travel: Economy class airfare by the shortest available route
• Rail travel: AC First Class fare by the shortest route
• Road travel (where no rail/air connection exists): First-class deluxe or air-conditioned bus fare by the shortest route

Explicitly excluded from the exemption: hotel stay, food and beverages, local sightseeing, travel insurance premiums, and any international leg of the journey. If you book a holiday that includes a Colombo stopover, only the demonstrably domestic portion of your travel costs can be considered — and only if separately ticketed.

Who Qualifies as "Family" Under Rule 2B?

Family for LTA purposes includes your spouse, your children, and fully dependent parents and siblings. For children, a restriction applies to births on or after 1 October 1998: only the first two surviving children qualify. A single birth resulting in multiple children (twins, triplets) counts as one for this purpose — so twin children count as one child toward the limit.

Carry-Forward From the 2022–2025 Block

If you did not utilise both LTA exemptions in the previous 2022–2025 block, Rule 2B(3) permits you to carry forward one unclaimed journey into the first calendar year of the new block (i.e., calendar year 2026). The carried-forward journey must actually be completed in 2026 to be claimable. A taxpayer who carries forward and also takes a new block journey in 2026 could therefore claim up to three LTA exemptions in a single financial year — but only if the travel was real, ticketed, and completed.

Standard Deduction Under Section 16(ia): The Simplest Relief in the Code

The standard deduction of ₹75,000 was enhanced from ₹50,000 with effect from FY 2024-25 and continues for FY 2026-27 — under both the old and the new tax regime. Pensioners drawing pension from a former employer are also entitled to this deduction against pension income.

What makes the standard deduction unlike every other deduction in the Act:

• No documents to submit
• No investments to make
• No Form 12BB declaration required
• Automatically applied by your employer in monthly TDS computation
• Reduces salary income before any other deduction or exemption is computed

For a taxpayer in the 30% slab, ₹75,000 translates to direct tax savings of ₹27,300 per year (₹75,000 × 30% × 1.04 cess factor). Under the new regime, this is often the only deduction available — making it the single most important relief for salaried employees who have chosen simplicity over deduction stacking.

Old vs New Tax Regime: A Framework for the Annual Decision

The new tax regime has been the default regime since FY 2023-24. For FY 2026-27, the position is unchanged — if you do nothing, you are taxed under the new regime.

To opt for the old regime:

• Salaried employees must inform their employer at the start of the financial year. They can, however, switch back to the old regime when filing their ITR — the ITR-1 or ITR-2 allows regime selection at time of filing.
• Taxpayers with business or professional income must file Form 10-IEA electronically before the due date of the original ITR. This election is generally irrevocable for that year; missing the deadline locks you into the new regime.

What survives under the new regime:

Worked Example: Side-by-Side Regime Comparison for FY 2026-27

Arjun is a finance manager based in Bengaluru. His FY 2026-27 profile:

Old Regime Calculation

Tax under old regime slabs:

• Up to ₹2,50,000: Nil
• ₹2,50,001–₹5,00,000 (₹2,50,000 × 5%): ₹12,500
• ₹5,00,001–₹7,80,000 (₹2,80,000 × 20%): ₹56,000
• Tax before cess: ₹68,500 | Add 4% H&E cess: ₹2,740
• Old regime tax: ₹71,240

New Regime Calculation

Tax under new regime slabs (as per slab structure applicable for the relevant financial year — verify current rates under Finance Act 2026 at incometax.gov.in; figures below use the slab structure in effect for FY 2025-26 as a reference baseline):

• Up to ₹4,00,000: Nil
• ₹4,00,001–₹8,00,000 (₹4,00,000 × 5%): ₹20,000
• ₹8,00,001–₹12,00,000 (₹4,00,000 × 10%): ₹40,000
• ₹12,00,001–₹14,25,000 (₹2,25,000 × 15%): ₹33,750
• Tax before cess: ₹93,750 | Add 4% H&E cess: ₹3,750
• New regime tax: ₹97,500

Verdict: Arjun saves ₹26,260 under the old regime in FY 2026-27. His home loan interest + HRA + 80C + 80D deductions collectively outweigh the benefit of the lower new-regime slab rates.

If Arjun owned his home outright, had no HRA, and made minimal 80C contributions, the calculus would reverse. The e-filing portal's built-in tax calculator at incometax.gov.in lets you run both computations in under five minutes — use it every April before deciding.

Form 12BB: What to Submit, When, and to Whom

Form 12BB is your declaration of deductions and exemptions to your employer under Rule 26C of the Income-tax Rules, 1962. It is submitted to payroll — not filed with the Income Tax Department — typically in two rounds: an initial projection in April and a final submission with actual proofs in January or February.

What Form 12BB must include:

Form 12BB is a self-declaration under penalty of perjury equivalent provisions. Providing false information to reduce TDS is an offence under Section 271C (penalty) and Section 276B (prosecution) of the Income-tax Act. Keep original documents — physical or digital — for at least six years from the end of the relevant assessment year, which is the outer limit commonly encountered in income tax proceedings.

Common Mistakes and Pitfalls to Avoid

1. Using gross salary as the HRA base The formula requires basic salary + DA only. HRA itself, special allowances, performance bonus, and LTA are excluded from the denominator. Inflating the base artificially raises limbs 2 and 3, resulting in a higher claimed exemption that a scrutiny assessment can disallow.

2. Applying metro rates to non-metro cities Bengaluru, Hyderabad, Pune, Noida, and Gurgaon are all 40% cities. This is among the most common payroll configuration errors in medium-sized companies.

3. Paying rent in cash without bank trail Rent receipts without corresponding bank transfers are red flags under the AIS (Annual Information Statement). Pay rent by bank transfer, UPI, or cheque — never purely in cash, especially above ₹10,000/month where cash payment implications arise.

4. Claiming LTA without boarding passes Travel tickets alone are insufficient. Boarding passes, or for train travel, a ticket alongside an IRCTC booking history, must be retained. Claims without boarding passes are routinely denied in employer verification.

5. Not running both regime calculations before April Defaulting to the new regime without calculating your actual deduction total costs many employees ₹20,000–₹50,000 annually. Run numbers; do not guess.

6. Missing Form 10-IEA for business-income taxpayers If you earn even ₹1 from freelancing, a partnership, or professional practice in addition to salary, you are a "taxpayer with business income" and must file Form 10-IEA to claim the old regime. The ITR regime toggle alone is insufficient.

7. Misunderstanding the LTA block year The previous block (2022–2025) ended on 31 December 2025. Any journey taken in January 2026 onward counts in the new 2026–2029 block — not the old one — unless it is a validly carried-forward journey under Rule 2B(3).

Key Takeaways

• HRA exemption under Section 10(13A) is the least of three limbs — always compute all three; metro vs non-metro (four cities only) changes the result by 10 percentage points of your entire basic + DA.
• LTA under Section 10(5) allows two journeys in the current 2026–2029 block; only transport cost by specified modes qualifies; hotels and meals are never exempt.
• The ₹75,000 standard deduction under Section 16(ia) requires zero documentation, applies under both regimes, and saves up to ₹27,300 annually for a 30% bracket taxpayer.
• Both HRA and LTA are old regime only — the moment you default to or opt for the new regime, both exemptions are forfeited.
• Regime choice is an annual decision — salaried employees can switch at ITR filing time; business-income taxpayers must file Form 10-IEA before the ITR due date to elect the old regime.
• Form 12BB is the bridge between your entitlements and your employer's TDS computation — submit it with all required proofs, including the landlord's PAN where annual rent exceeds ₹1 lakh.
• When HRA + home loan interest [Section 24(b)] + Section 80C + Section 80D deductions together exceed approximately ₹3.5–4 lakh, the old regime will typically outperform the new regime — but verify with the e-filing portal calculator every year, not a rule of thumb.