Tax-Exempt Salary Components Under New Regime – Section 115BAC(1A): A Comprehensive Legal Note for FY 2025–26

In tax, as in surgery, precision saves pain.”
— A professional compliance note for employers and payroll heads

Background

Effective AY 2024–25 onwards, Section 115BAC(1A) is the default tax regime for all individuals (except those with business income opting out). This regime provides reduced slab rates but withdraws most exemptions and deductions available under the old regime.

Employers must carefully structure salary components to avoid erroneous TDS calculations, ensure compliance, and minimise disputes.

Governing Law

• Section 115BAC(1A): Specifies concessional tax rates and withdrawal of exemptions.

• Rule 2BB of Income Tax Rules: Lists allowances exempt under Section 10(14).

• Rule 3: Specifies valuation rules for perquisites.

• CBDT Circulars and case law: Provide clarification on exemptions and reimbursements.

Allowed Exemptions Under New Regime (Section 115BAC)

Component	Allowed	Legal Reference	Conditions / Remarks
Employer NPS Contribution	✅ Allowed	Sec. 80CCD(2)	Max 10% of Salary (Basic + DA). Exempt u/s 80CCD(2) even in new regime.
Standard Deduction	✅ Allowed	Sec. 16(ia)	₹50,000 allowed for salaried employees under Sec. 115BAC(1A) from AY 2024–25.
Professional Tax	✅ Allowed	Sec. 16(iii)	Deductible even in new regime.
Transport Allowance for Disabled	✅ Allowed	Rule 2BB(2)	Max ₹3,200/month. Only for orthopedically handicapped, blind, or disabled.
Conveyance Allowance (Official Duty)	✅ Allowed	Rule 2BB(1)(a)	Reimbursed for official travel. Must be actual expense & documented.
Daily Allowance (During Travel)	✅ Allowed	Rule 2BB(1)(c)	Must be for official travel, with documentation.
Uniform Allowance	✅ Conditionally Allowed	Rule 2BB(1)(f)	Only for distinctive uniform; casual wear not allowed. Must be compulsory & job-linked.
Books, Periodicals (Official Use)	✅ Conditionally Allowed	Based on Rule 2BB/ Reimbursement principle	Allowed if for official use & reimbursed against proof. Cannot be fixed allowance.
Telephone & Internet (Official)	✅ Conditionally Allowed	Rule 3(7)(ix) & Circulars	Must be provided as facility or reimbursed with usage declaration. Not a flat allowance.
Meal Coupons / Food Vouchers	✅ Conditionally Allowed	Rule 3(7)(iii)	Max ₹50/meal. Must be electronic, non-transferable. Cash not allowed. Use restricted to working hours.
Children Education Allowance	❌ Not Allowed	Withdrawn u/s 10(14)	Not permitted under new regime. Was earlier ₹100/child/month.
Hostel Allowance	❌ Not Allowed	Withdrawn u/s 10(14)	Earlier ₹300/child/month. Withdrawn under new regime.
Fuel & Maintenance Allowance	❌ Not Allowed	Rule 3(2)	Fully taxable unless car is owned/leased by employer.
Driver Allowance	❌ Not Allowed	Rule 3(2)	Taxable unless provided as perquisite with company car.
Other Allowances (Medical, LTA, HRA, etc.)	❌ Not Allowed	Section 10(13A), 10(14) Withdrawn	All such exemptions withdrawn. No relief under new regime.

Interpretations & Key Legal Clarifications

1. Reimbursements vs Allowances – The Deciding Factor

• Allowances = Fixed sum = Taxable under 115BAC.

• Reimbursements = Against bills for official use = May be exempt, if not personal in nature.

• CBDT Circular No. 15/2001: Emphasises business-linked reimbursements are not income.

✅ Actionable: Maintain internal expense policies and employee declarations for reimbursements.

2. Telephone & Internet: Facility or Perquisite?

• If provided by employer directly (as facility), not taxable per Rule 3(7)(ix).

• If reimbursed, require:

  • Usage declaration.

  • Proof of payment.

  • Policy stating official use.

✅ Better to issue corporate connections billed to company directly.

3. Meal Coupons / Food Vouchers: Electronic & Capped

• ₹50 per meal allowed, per Rule 3(7)(iii).

• Must be:

  • In electronic/coupon form.

  • Not in cash.

  • Used within working hours only.

⚠️ Company cafeteria subsidies are also covered if invoiced per meal.

4. Uniform Allowance: Functional Uniforms Only

• Exemption allowed only for specific job-linked attire (e.g., police, security, hospital).

• “Smart Casuals” or business formals not allowed unless part of a uniform code with company branding.

✅ Internal policy must define job roles needing uniform.

5. Books & Periodicals: Functional Reimbursement

• Tax-free only if reimbursed for professional/official use.

• Must not be a fixed allowance.

• No exemption for general reading or personal development books.

6. Car, Driver & Fuel: Fully Taxable Unless Owned by Employer

• Any allowance given to employee directly is taxable.

• If car is owned/leased by company, perquisite valuation rules apply (Rule 3(2)).

🚨 Caution for Employers

• Misclassification risks: Naming a component "Reimbursement" does not make it exempt unless documented.

• Audit exposure: Non-documented reimbursements may be taxed during payroll scrutiny.

• Policy harmonization: HR policies must align with tax rules. Salary slips, declarations, and Form 12BB should reflect correct classification.

Employer's Action Checklist

✅ To-Do	Description
📝 Update Salary Structures	Remove disallowed allowances from standard CTC for 115BAC employees.
📃 Draft Reimbursement Policy	Cover telecom, conveyance, books, and official expenses.
🧾 Collect Proofs & Declarations	Especially for reimbursements, NPS, uniform use.
📁 Maintain Supporting Documents	Bills, logs, medical certificates (where needed).
🧠 Train HR/Payroll Teams	On distinction between perquisites, allowances & reimbursements.

Final Word

The new regime under Section 115BAC(1A) requires greater discipline in payroll structuring. While exemptions are restricted, official duty-linked reimbursements and specific components backed by law are still available.

The key is accurate classification, documentation, and conservative interpretation to avoid risk during assessments and audits.

“Compliant salary structuring is not just a payroll task; it’s a tax risk management strategy.”