In this guide
A common belief is that salaried employees choosing the new tax regime cannot claim any allowance exemption except the ₹75,000 standard deduction. That is not completely correct.
Certain allowances connected directly with performing official duties can still receive tax-exempt treatment, subject to strict conditions. The key is to distinguish a genuine official-duty conveyance allowance from an ordinary allowance for travelling between home and office.
For AY 2026-27, the Income-tax Act, 1961 continues to apply. From 1 April 2026, the Income Tax Act, 2025 applies to Tax Year 2026-27 onwards.
Is Conveyance Allowance Exempt in the New Tax Regime?
Yes, a genuine allowance granted to meet conveyance expenditure incurred in performing official duties can remain exempt to the extent actually spent for that purpose.
The Income Tax Department specifically describes conveyance allowance for performance of office duties as exempt to the extent of official expenditure.
The new Income Tax Act framework also preserves this concept. Rule 280 includes an allowance granted for expenditure on conveyance while performing employment duties where the employer does not provide free conveyance.
Therefore, an employee such as a salesperson who regularly travels to customers may qualify where the allowance and actual expenditure are properly supported.
Conveyance Allowance vs Transport Allowance
These two terms should not be used interchangeably.
| Allowance | Purpose | Tax treatment |
|---|---|---|
| Conveyance allowance | Travel while performing official duties | Exempt to extent actually spent, subject to conditions |
| Normal transport allowance | Home-to-office and office-to-home commute | Generally taxable |
| Transport allowance for specified disabled employees | Home-to-work commute | Exemption up to ₹3,200 per month |
The general home-to-office transport allowance is taxable. A specific exemption of ₹3,200 per month continues for qualifying blind, deaf and dumb, or orthopaedically disabled employees covered by the prescribed rule.
So merely renaming part of salary as “conveyance allowance” does not make it tax-free.
What Evidence Should an Employee Maintain?
There is no blanket rule that an employer can simply add ₹10,000 or ₹20,000 per month to CTC and automatically treat it as exempt.
The exemption depends on actual expenditure for official duties.
Useful evidence can include:
- Employer’s allowance policy;
- Travel or field-visit records;
- Mileage records;
- Fuel bills;
- Toll or parking expenses;
- Cab receipts;
- Client-visit details; and
- Employee declarations supported by reasonable records.
If ₹15,000 is received but only ₹9,000 is genuinely spent for qualifying official travel, the exemption should not automatically be assumed for the entire ₹15,000.
For salary tax planning:
Can Salary Up to ₹12.75 Lakh Have Zero Tax?
For AY 2026-27, the new regime provides a ₹75,000 standard deduction to salaried taxpayers.
A qualifying resident individual with gross salary of ₹12.75 lakh can therefore reach taxable income of ₹12 lakh. The new regime’s Section 87A rebate can eliminate up to ₹60,000 of qualifying normal-rate tax where the conditions are satisfied.
If additional genuinely exempt official-duty allowance exists, gross employment receipts can potentially be higher without necessarily increasing taxable salary by the same amount.
But the exemption must be real and documented—not merely a salary-restructuring entry.
Business, Professional and Freelance Income Are Not the Same
Another frequent mistake is assuming that anyone described as a “freelancer” automatically qualifies for Section 44ADA.
Section 44ADA applies only to eligible residents carrying on a profession referred to in Section 44AA(1). These include specified professions such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration and other notified professions.
Where cash receipts do not exceed 5% of gross receipts, the Section 44ADA eligibility threshold can extend from ₹50 lakh to ₹75 lakh. Presumptive professional income is generally 50% of qualifying receipts.
A content creator, marketer or other freelancer does not automatically become a specified professional merely because a client calls the payment “professional fees.”
Similarly, Section 44AD excludes commission/brokerage income and agency businesses.
Does TDS Under Section 194J Make Income “Professional Income”?
Not necessarily.
The section under which a payer deducts TDS is relevant information, but it does not conclusively determine the correct head or character of income in the recipient’s ITR.
The actual nature of activity must be examined.
For example, a client may deduct TDS treating a payment as professional fees, but that alone does not automatically make the recipient eligible for Section 44ADA.
This distinction is particularly important when deciding between regular business taxation and presumptive professional taxation.
Can You Choose Business Income Instead of Capital Gains Just to Save Tax?
No unrestricted choice exists merely because business income may produce lower tax.
CBDT acknowledges that shares can be held as investment, stock-in-trade, or in separate portfolios, but classification must reflect the taxpayer’s actual conduct and accounting treatment.
Where listed securities are consistently treated as stock-in-trade, income is business income. For listed shares held for more than 12 months and consistently treated as investment, CBDT provides protection for capital-gain treatment, subject to its circular.
You should not reclassify investment gains as business income solely to obtain Section 87A rebate or deduct business expenses.
Be Careful When Moving Individual Property to an HUF
An ancestral-looking asset is not automatically HUF property.
Ownership, inheritance documents and the source through which the property was acquired must first be examined.
If individually owned property is transferred to an HUF without adequate consideration, Section 64(2) clubbing provisions can apply, potentially taxing income from that property back in the individual’s hands.
Likewise, selling an individually owned property and subsequently depositing the proceeds into an HUF account does not retrospectively convert the original capital gain into HUF income.
For HUF and property tax structuring:
Frequently Asked Questions
Is home-to-office conveyance tax-free in the new regime?
Generally no. Ordinary commuting is different from conveyance expenditure incurred while performing official duties.
Is there a fixed maximum exemption for official conveyance allowance?
The exemption is principally linked to the amount actually spent for qualifying official duties rather than a general monthly ceiling, subject to satisfying the applicable conditions.
Can my employer simply restructure salary to make conveyance tax-free?
Salary structure alone is insufficient. There should be genuine official-duty expenditure and supporting evidence.
Does every freelancer qualify for Section 44ADA?
No. Section 44ADA is restricted to eligible taxpayers carrying on specified professions referred to in Section 44AA.
Can I show share profits as business income because the tax is lower?
Classification should follow the actual nature and treatment of the shares. It should not be changed solely to obtain a tax advantage.
Can I transfer my personal property to HUF to shift future tax?
Simply transferring personal property to an HUF can trigger Section 64(2) clubbing. Ownership history and the manner of transfer should be reviewed before using an HUF for tax planning.
