Income Tax Act 2025 Guide

Income Tax Act, 2025

A Comprehensive Guide to Modernized Tax Structures & Exemptions (Effective 1st April 2026)

The Income Tax Act, 2025, replaces the 1961 Act to modernize India’s tax structure by simplifying language and reorganizing provisions into 23 chapters. While core principles remain largely unchanged, the Act introduces a uniform "Tax Year" and enhanced limits to support taxpayers.

Section 10: Your Shield Against Higher Taxes

Under the Income Tax Act, "Exemptions" are portions of your income that are completely excluded from your total taxable income calculation. This direct benefit lowers your assessable earnings from the start.

1. Top Exemptions for Salaried Individuals

Common components of salary packages designed to provide relief for essential living costs:

House Rent Allowance (HRA) [Section 10(13A)]

If you live in a rented home, you can claim the least of the following three as exempt:

  • Actual HRA received.
  • 50% of salary (Basic + DA) for metro cities (Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad); 40% for other cities.
  • Actual rent paid minus 10% of salary (Basic + DA).
Example: Raj lives in Mumbai, earns Basic Salary of ₹50,000/month, receives ₹25,000 HRA, and pays ₹20,000 rent.
  • Actual HRA: ₹3,00,000/year
  • 50% of Salary: ₹3,00,000/year
  • Rent paid - 10% Salary: ₹2,40,000 - ₹60,000 = ₹1,80,000

Result: Raj gets a tax exemption of ₹1,80,000.

Leave Travel Allowance (LTA) [Section 10(5)]

Covers domestic travel fares for you and your family.

  • Condition: Available for two journeys in a block of four calendar years (Current: 2022–2025; Next: 2026–2029).
  • Coverage: Only travel costs (air, train, or bus fare) are exempt; hotel stays and food are fully taxable.

Special Allowances [Section 10(14)]

  • Children’s Education: ₹100/month per child (max 2 children).
  • Hostel Expenditure: ₹300/month per child (max 2 children).
  • Food Allowance: Exempt up to ₹26,400 per year (based on ₹50/meal for two meals across 22 working days/month).

2. Exemptions on Retirement & Savings

  • Gratuity [Section 10(10)]: Fully exempt for government employees. Private-sector limit is ₹20 lakh.
  • Leave Encashment [Section 10(10AA)]: Fully exempt for government; ₹25 lakh limit for others.
  • Life Insurance [Section 10(10D)]: Maturity proceeds exempt if annual premium < 10% of sum assured (for policies after 1st April 2012).
  • NPS Withdrawal [Section 10(12B)]: Partial withdrawals exempt up to 25% of your own contributions for specific purposes.

3. How to Claim Your Exemptions

Follow this checklist to ensure your exemptions are processed correctly:

  1. Select the Old Tax Regime: Most Section 10 exemptions are only available here. The New Regime is default but disallows many benefits.
  2. Submit Form 12BB: Provide this to your employer with proofs (rent receipts, tickets) for Form 16 reflection.
  3. Correct ITR Form: Use ITR-1 if exempt income is < ₹5,000; otherwise use ITR-2.
  4. Disclose in Schedule EI: Report these amounts in the 'Exempt Income' schedule even though they aren't taxed.

Frequently Asked Questions (FAQs)

Q1: Is agricultural income taxable? No, agricultural income derived from land in India is fully exempt under Section 10(1).
Q2: Can I claim HRA if I live in my own house? No. HRA exemption is only for rent actually paid to a landlord.
Q3: Are dividends from Indian companies still exempt? No, the exemption for dividends was removed. Dividends are now taxable in the hands of the recipient.
Q4: What if I forget to submit rent receipts to my employer? You can still claim the HRA exemption directly while filing your ITR, provided you have the supporting documents ready for verification.