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
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Section 115BAC(1A): Specifies concessional tax rates and withdrawal of exemptions.
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Rule 2BB of Income Tax Rules: Lists allowances exempt under Section 10(14).
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Rule 3: Specifies valuation rules for perquisites.
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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
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Allowances = Fixed sum = Taxable under 115BAC.
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Reimbursements = Against bills for official use = May be exempt, if not personal in nature.
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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?
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If provided by employer directly (as facility), not taxable per Rule 3(7)(ix).
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If reimbursed, require:
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Usage declaration.
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Proof of payment.
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Policy stating official use.
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✅ Better to issue corporate connections billed to company directly.
3. Meal Coupons / Food Vouchers: Electronic & Capped
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₹50 per meal allowed, per Rule 3(7)(iii).
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Must be:
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In electronic/coupon form.
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Not in cash.
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Used within working hours only.
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⚠️ Company cafeteria subsidies are also covered if invoiced per meal.
4. Uniform Allowance: Functional Uniforms Only
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Exemption allowed only for specific job-linked attire (e.g., police, security, hospital).
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“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
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Tax-free only if reimbursed for professional/official use.
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Must not be a fixed allowance.
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No exemption for general reading or personal development books.
6. Car, Driver & Fuel: Fully Taxable Unless Owned by Employer
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Any allowance given to employee directly is taxable.
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If car is owned/leased by company, perquisite valuation rules apply (Rule 3(2)).
🚨 Caution for Employers
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Misclassification risks: Naming a component "Reimbursement" does not make it exempt unless documented.
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Audit exposure: Non-documented reimbursements may be taxed during payroll scrutiny.
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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.”