In FY 2026–27, payroll decisions are being influenced by widespread claims of increased allowances. The legal position is clear:
Only the Income-tax Act 2025, Income-tax Rules 2026, and Gazette-notified amendments are valid.
Any proposal, draft, or viral communication without notification has no legal effect.
Section 11 Allowances – Actual Position (No Change)
No enhancement has been enacted. The law continues as under:
Children Education Allowance
Rs 100 per month per child, maximum 2 children
Annual: Rs 2,400 per child, Rs 4,800 total
Hostel Allowance
Rs 300 per month per child, maximum 2 children
Annual: Rs 3,600 per child, Rs 7,200 total
Meal Benefit
Rs 50 per meal subject to prescribed conditions
Indicative annual value: Rs 12,000 to Rs 14,000
Gift Vouchers
Exempt up to Rs 5,000 per annum
Conclusion: No increase in Section 11 allowances has been enacted under the Income-tax Act 2025.
What Has Actually Changed
Car Perquisites – Section 17(2) read with Rule 15
Up to 1.6 litre: Rs 8,000 per month (Rs 96,000 annually)
Above 1.6 litre: Rs 10,000 per month (Rs 1,20,000 annually)
This is a significant increase in taxable perquisite value.
HRA – Section 21 (Old Regime only)
Metro cities expanded to 8
Exemption remains based on least of prescribed conditions
TDS Reporting – Section 393
Form 130 introduced in place of Form 16
New Tax Regime – Section 202
No Section 11 exemptions
No HRA exemption
Standard deduction continues
Payroll Impact – Actual Numbers (CTC Rs 15 Lakh)
The real impact arises from availability or denial of exemptions, not from rate changes.Old Regime (with Section 11 and HRA)
Section 11 exemptions:
About Rs 25,000 annually (CEA, Hostel, Meals combined)
HRA exemption:
Typically Rs 2.5 lakh to Rs 3 lakh depending on rent and salary
Car perquisite:
Rs 96,000 taxable
Computation:
Gross salary: Rs 15,00,000
Less HRA: about Rs 3,00,000
Less Section 11: about Rs 25,000
Less standard deduction: Rs 50,000
Taxable income: about Rs 11.2 lakh to Rs 11.5 lakh
Tax: about Rs 90,000 to Rs 1,00,000
New Regime (Default)
No Section 11 exemptions
No HRA exemption
Standard deduction: Rs 75,000
Computation:
Gross salary: Rs 15,00,000
Less standard deduction: Rs 75,000
Taxable income: about Rs 14.25 lakh
Tax: about Rs 1.35 lakh to Rs 1.45 lakh
Clear Financial Impact
Difference in taxable income: about Rs 3 lakh
Additional tax under new regime: about Rs 40,000 to Rs 55,000
Conclusion: Where HRA and family-linked allowances apply, the old regime remains more tax efficient in many cases.
Employee Compliance – Regime Selection
The new tax regime is the default.
Employees intending to opt for the old regime must inform the employer for TDS purposes.
The final option is exercised while filing the income tax return.
Form 10-IEA applies in specified situations, particularly where business or professional income exists.
The choice made for TDS can be aligned or revised at the return stage as permitted.
Structural Change – Wage Definition
Under the Code on Wages, 2019:
Basic pay, DA and retaining allowance must be at least 50 percent of total remuneration.
Impact:
Higher provident fund contribution
Increased employer cost
Reduced flexibility in structuring salaries
HR and Payroll Action Points
Do not revise Section 11 allowances
Update car perquisite valuation in payroll systems
Ensure compliance with 50 percent wage requirement
Implement Form 130 for TDS reporting
Capture employee regime declarations clearly
Maintain complete HRA documentation
Final Legal Position
No increase in allowances under Section 11
Car perquisite valuation increased significantly
HRA exemption continues only under the old regime with expanded metro scope
New regime removes exemption-based benefits
Key Takeaway
There may be many proposals and interpretations, but there is only one law in force.
For FY 2026–27, tax outcomes are driven by regime selection and availability of exemptions, not by any increase in allowances. Payroll decisions must be based strictly on enacted provisions.
