Old Section 10 Exemptions vs New Exemption Clauses Under Income Tax Act 2025: Practical Case Study
Reviewed by CA Nikhil Gupta · Last reviewed 23 June 2026
If you've claimed HRA, LTA, gratuity or education allowance in your tax returns, you need to understand a structural shift: Section 10 of the Income Tax Act, 1961 — the home of all exempt incomes — has been moved to Schedule II of the Income Tax Act, 2025. The exemption benefits are largely preserved, but the citation changes from "Section 10(13A)" to "Schedule II, Entry (13A)" — and more importantly, the Income Tax Rules, 2026 brought a massive practical upgrade: education allowance jumped from ₹100 to ₹3,000 per month per child. This guide maps every key exemption old-to-new, and a practical case study shows the real-world impact.
Why Section 10 Moved to Schedule II
In the old Income Tax Act, 1961, Section 10 was a very long provision with 48+ sub-clauses covering everything from HRA exemption to tribal income to SEZ exemptions. This made the Act difficult to navigate — different provisions for different categories of exempt income were all crammed under one section number. The Income Tax Act, 2025 reorganised this by moving exempt incomes out of the main body into a dedicated Schedule II, while leaving the main Act chapters cleaner and more navigable.
The key principle: the exemption benefits are substantially the same; only the citation format changes. For AY 2026-27 ITR (July 2026 filing), use old "Section 10(XX)" references. For Tax Year 2026-27 ITR (July 2027 filing), cite "Schedule II, Entry (XX)".
Key Section 10 → Schedule II Mapping
| Exemption | Old Act 1961 Ref | New Act 2025 Ref | Regime Availability | Changed? |
|---|---|---|---|---|
| Agricultural income | Section 10(1) | Schedule II, Entry (1) | Both regimes | No change |
| Gratuity (private sector) | Section 10(10)(ii) | Schedule II, Entry (10)(ii) | Both regimes | Limit: ₹20 lakh (unchanged) |
| Commuted pension | Section 10(10A) | Schedule II, Entry (10A) | Both regimes | No change |
| Leave encashment (on retirement) | Section 10(10AA) | Schedule II, Entry (10AA) | Both regimes | Limit ₹25 lakh (unchanged) |
| Retrenchment compensation | Section 10(10B) | Schedule II, Entry (10B) | Both regimes | No change |
| Voluntary retirement (VRS) | Section 10(10C) | Schedule II, Entry (10C) | Both regimes | No change |
| HRA — House Rent Allowance | Section 10(13A) | Schedule II, Entry (13A) | Old regime only | No change in calculation |
| LTA — Leave Travel Allowance | Section 10(5) | Schedule II, Entry (5) | Old regime only | New LTA block: 2026–2029 |
| Children's education allowance | Section 10(14) r/w Rule 2BB | Schedule II + Rules 2026 | Old regime only | MAJOR CHANGE: ₹100 → ₹3,000/month/child |
| Children's hostel allowance | Section 10(14) r/w Rule 2BB | Schedule II + Rules 2026 | Old regime only | MAJOR CHANGE: ₹300 → ₹9,000/month/child |
| Conveyance/transport allowance | Section 10(14)(ii) | Schedule II, Entry (14)(ii) | Allowed in new regime for specially abled | No change |
| Interest on PPF | Section 10(11) | Schedule II, Entry (11) | Both regimes | Above ₹2.5L annual contribution taxable (unchanged) |
| EPF interest (on contributions up to ₹2.5L) | Section 10(12) | Schedule II, Entry (12) | Both regimes | No change |
| NPS lump sum (60% on retirement) | Section 10(12A) | Schedule II, Entry (12A) | Both regimes | No change |
| Life insurance maturity proceeds | Section 10(10D) | Schedule II, Entry (10D) | Both regimes | No change (unless premium >₹2.5L/₹5L) |
The Biggest Practical Change — Education Allowance 30x Jump
This deserves dedicated attention. Under the old Income Tax Rules, 1962, the children's education allowance exemption had been frozen at ₹100 per month per child (₹1,200/year) since 1963. This had become completely meaningless given the cost of education. The Income Tax Rules, 2026 corrected this dramatically:
🎓 Education Allowance — Income Tax Rules 2026 Enhancement
Education Allowance: Old limit ₹100/month/child → New limit ₹3,000/month/child (30x increase)
Hostel Allowance: Old limit ₹300/month/child → New limit ₹9,000/month/child (30x increase)
Maximum children: 2 children (unchanged)
Annual exemption now available: (₹3,000 + ₹9,000) × 2 children × 12 = ₹2,88,000/year
Old annual exemption was: (₹100 + ₹300) × 2 × 12 = ₹9,600/year
Additional benefit if employer pays these allowances: ₹2,78,400 more per year is now exempt
LTA Block Change — 2026 to 2029
Leave Travel Allowance is exempt for two journeys in a block of four calendar years. The current LTA block period is 2026 to 2029 (the block that started January 2026). This replaces the 2022–2025 block. Key rules under Schedule II:
- Two journeys within India are exempt per block
- Exemption covers only transport costs (air, rail, bus fare) — no lodging, sightseeing, or food
- Family includes spouse, up to 2 children, parents (if wholly dependent), and dependent siblings
- Air travel: Economy class fare by shortest route
- One unused carry-forward from the previous block (2022-2025) to the first calendar year of new block (2026)
- Old regime only — new regime does not allow LTA exemption
Exemptions Available in BOTH Old and New Tax Regime
Not all Schedule II exemptions are old-regime-only. These remain available regardless of regime choice:
- Gratuity: Exempt up to ₹20 lakh (Schedule II Entry 10) — available in both regimes
- Leave encashment on retirement: Exempt up to ₹25 lakh (Schedule II Entry 10AA) — both regimes
- VRS compensation: Exempt up to ₹5 lakh (Schedule II Entry 10C) — both regimes
- NPS lump sum on retirement (60%): Fully exempt (Schedule II Entry 12A) — both regimes
- PPF/EPF interest (within threshold): Both regimes
- Life insurance maturity: Mostly both regimes (conditions apply)
Case Study: Sunita — How New Rules 2026 Changed Her Tax Planning for Tax Year 2026-27
Sunita earns ₹10 lakh/year as a private school teacher. Her salary included: HRA ₹80,000/year, Education Allowance ₹800/year (old limit: ₹100/month × 2 children × 4 months used), Hostel Allowance ₹2,400/year (old limit). Total old-rule exempt: ₹3,200 from education + hostel combined.
Her school restructured CTC for Tax Year 2026-27 under new Rules 2026:
- Education allowance: ₹3,000/month × 2 children = ₹72,000/year (fully exempt vs old ₹2,400)
- Hostel allowance (elder child in boarding school): ₹9,000/month × 1 child = ₹1,08,000/year (fully exempt vs old ₹3,600)
- Additional tax-free salary: ₹1,80,000 − ₹6,000 (old limits) = ₹1,74,000 more tax-free
- Tax saving at 20% slab: ₹1,74,000 × 20% = ₹34,800 annually — without changing gross CTC
The school's HR team restructured the salary breakup by reducing the "special allowance" (taxable) and increasing education + hostel allowance components — achieving a significant tax saving for employees with school-age children without increasing payroll cost.
Regime-wise Exemption Availability — Quick Decision Table
| Exemption | Old Regime (Schedule II) | New Regime (Section 202) |
|---|---|---|
| HRA — House Rent Allowance | ✅ Available | ❌ Not Available |
| LTA — Leave Travel Allowance | ✅ Available | ❌ Not Available |
| Education + Hostel allowance | ✅ Available (new 30x limit) | ❌ Not Available |
| Special allowances (uniform, meal, etc.) | ✅ Subject to conditions | ❌ Most not available |
| Gratuity, VRS, Leave encashment | ✅ Available | ✅ Available |
| NPS lump sum (60% on retirement) | ✅ Available | ✅ Available |
| EPF/PPF interest (within threshold) | ✅ Available | ✅ Available |
| Life insurance maturity (conditions) | ✅ Available | ✅ Available (same conditions) |
| Agricultural income | ✅ Available | ✅ Available |
| Transport allowance (for specially-abled) | ✅ Available | ✅ Available (this specific one only) |
| Conveyance allowance (job duty travel) | ✅ Available | ✅ Available |
Section 10 → Schedule II — Key Points
- Section 10 of old Act has moved to Schedule II of new Act — same benefits, new citation
- For July 2026 ITR (FY 2025-26): still cite "Section 10(13A)" for HRA, etc.
- From July 2027 ITR (Tax Year 2026-27): cite "Schedule II, Entry (13A)" for HRA
- Big win — Education allowance: ₹100/month → ₹3,000/month per child; hostel ₹300 → ₹9,000/month
- Both exemptions available for max 2 children; old regime only
- LTA block: 2026–2029 — two journeys exempt; old regime only
- Gratuity (₹20L), leave encashment (₹25L), VRS (₹5L): available in BOTH regimes
- NPS 60% lump sum on retirement: tax-free in both regimes
- HR teams should restructure salary to maximise new education + hostel limits for employees with school-age children
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Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.
- Primary category
- Income Tax
- Official starting point
- www.incometax.gov.in
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Primary sources & related provisions
Statutory provisions referenced in this guide:
- Form 124 (Employee statement of claims for tax deduction) - Income-tax Forms, 2026
- Section 11 (Incomes not included in total income; earlier Section 10) - Income-tax Act
- Section 202 (New tax regime for individuals, Hindu undivided family and…) - Income-tax Act
- Section 392 (Salary and accumulated balance due to an employee; earlier Section 192) - Income-tax Act
- Section 2 (Definitions) - Income-tax Act