Tax on Salary: HRA, Standard Deduction, Perquisites and Form 16

For most employees, salary is the biggest part of their income, and the first year of the Income-tax Act, 2025 has brought a few useful changes. The most notable is that four more cities now get the 50% HRA limit. Here is how salary is taxed in tax year 2026-27.

What counts as salary?

basic pay, dearness allowance, bonus, commission
allowances: HRA, special allowance, LTA, etc.
perquisites: benefits in kind such as a company car, rent-free accommodation or ESOPs
employer contributions to PF, NPS or superannuation above the tax-free limits
leave encashment, gratuity and pension (with exemptions)

Standard deduction

	New regime	Old regime
Standard deduction	₹75,000	₹50,000

It is allowed automatically, with no proof needed. Pensioners get it too.

HRA exemption (old regime only)

The exempt amount is the lowest of:

the HRA actually received
rent paid minus 10% of salary (basic + DA)
50% of salary in the specified cities, 40% elsewhere

What’s new from tax year 2026-27: under the Income-tax Rules, 2026, the 50% limit has reportedly been extended from 4 to 8 cities: Mumbai, Delhi, Kolkata, Chennai plus Bengaluru, Hyderabad, Pune and Ahmedabad. For the FY 2025-26 return, only the original four cities qualify.

Tips:

If annual rent is more than ₹1 lakh, give your employer the landlord’s PAN.
Rent paid to parents is allowed if it is genuine, with a rent agreement, bank transfers, and the parent declaring the rent as income. Rent paid to a spouse is usually challenged.
HRA is not available under the new regime.

Other allowances and exemptions

Item	Treatment
Leave Travel Allowance (LTA)	Exempt for actual domestic travel fare, for 2 journeys in a block of 4 years. Old regime only
Gratuity	Exempt up to ₹20 lakh for non-government employees. Applies under both regimes
Leave encashment at retirement	Exempt up to ₹25 lakh for non-government employees (CBDT Notification 31/2023). Applies under both regimes
Employer’s NPS contribution	Deductible up to 14% of salary (new regime) or 10% (old regime)
Employer’s PF + NPS + superannuation	Total above ₹7.5 lakh a year is taxable as a perquisite
Children’s education allowance	Exempt within notified limits. Old regime only

Perquisites (benefits in kind)

Rent-free or concessional accommodation: taxed at a percentage of salary, based on city population, or at the actual rent paid by the employer.
Company car used privately: a fixed monthly value, depending on engine capacity and whether a driver is provided.
ESOPs / RSUs: taxed as salary when you exercise or receive them, on fair market value minus the price you pay. When you later sell, capital gains apply. Foreign RSUs must be reported in Schedule FA.
Interest-free or concessional loans: taxable on the interest saved (small loans up to ₹20,000 and medical loans are exempt).
Meal vouchers, gifts: small amounts are exempt within the prescribed limits.

Form 16 is now Form 130

Under the Income-tax Rules, 2026, the salary TDS certificate is Form 130 (formerly Form 16). Employers must issue it by 15 June after the year ends. Check it against your Annual Information Statement (Form 168, formerly AIS/26AS) before filing your ITR. Mismatches often lead to notices.

Switching jobs during the year

Give your new employer details of salary and TDS from your previous employer. Otherwise both will apply the lower slabs and the standard deduction, and you will owe tax when you file.
Each employer issues a separate certificate. Report both in your ITR.

Frequently asked questions

Can I claim HRA if I live in my own house?
No. HRA exemption needs actual rent paid for a house you don’t own (or don’t live in).

Is HRA available in the new regime?
No. If HRA is a large part of your pay, compare the two regimes. See our new vs old regime article.

How is notice-period pay or a joining bonus taxed?
Both are fully taxable as salary. If you repay a joining bonus, you may be able to adjust the tax. Get advice.

Bengaluru was a non-metro for HRA earlier. Does the change apply to my FY 2025-26 return?
No. The 8-city rule applies from tax year 2026-27 under the 2026 Rules.

Salaried and want to keep your tax low? Garvita Jain & Co. reviews your salary structure, regime choice and Form 130, and files your ITR. Contact us here, or at contact@garvitajainandco.com or +91 98678 16597.

This article is general information based on the law as of October 2026 and is not professional advice.

Sources

Official

Professional / CA publications