Massive Hikes in Tax-Free Allowances Under ITA 2025#
Escaping the 1990s Tax Limits#
One of the biggest jokes among Indian taxpayers was the archaic limits set for various salary allowances under Section 10(14) of the old Income Tax Act.
For instance, the Children’s Education Allowance was capped at a mere ₹100 per month per child. Similarly, the Hostel Expenditure Allowance was capped at ₹300 per month. These limits were set decades ago and completely ignored modern inflation and the skyrocketing costs of private education.
The Reality Check of ITA 2025#
The drafters of the Income Tax Act, 2025 have finally modernized these limits, bringing massive, inflation-adjusted hikes to standard tax-free allowances.
Starting April 1, 2026, salaried employees can benefit from the following revised exemption limits:
1. Children’s Education Allowance#
The exemption limit has been massively hiked from ₹100 per month to ₹3,000 per month per child (up to a maximum of two children). This means an employee can now claim a direct tax exemption of ₹72,000 annually (₹3,000 x 12 months x 2 children) just for their kids' schooling, provided the employer structures this allowance into the CTC.
2. Hostel Expenditure Allowance#
If your child resides in a hostel, the exemption limit has jumped from ₹300 per month to ₹5,000 per month per child (up to a maximum of two children). This allows for a maximum annual exemption of ₹1,20,000.
3. Free Meals and Beverages#
Under the old regime, meals provided by the employer through vouchers (like Sodexo or Zeta) were exempt up to ₹50 per meal. Recognizing the cost of living, the ITA 2025 has increased this exemption limit to ₹150 per meal, allowing employers to offer better tax-free perks to their workforce.
4. Transport Allowance for the Differently Abled#
The transport allowance exemption limit for blind, deaf and dumb, or orthopedically handicapped employees has been doubled from ₹3,200 per month to ₹6,400 per month, providing substantial relief for commuting costs.
Salary Restructuring is Urgent#
Because the government is heavily promoting the simplified "New Tax Regime" (which disallows most of these specific allowances), these hikes primarily benefit taxpayers who consciously choose to remain in the Old Tax Regime due to heavy home loan interests or specific investments.
If you are opting for the regime that allows exemptions, you must sit down with your HR and payroll team immediately to restructure your CTC. Ensure that 'Education Allowance' and 'Hostel Allowance' are explicitly mentioned as separate line items in your salary slip, rather than being clubbed into a taxable 'Special Allowance'.