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.
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)".
| 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) |
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: 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
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:
Not all Schedule II exemptions are old-regime-only. These remain available regardless of regime choice:
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:
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.
| 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 |