Salary Breakup Explained: How HRA, LTA And Other Perks Affect Your Income Tax Liability

Understanding how salary components like HRA, LTA and other allowances affect your income tax liability can help maximise savings.

Your salary is usually divided into multiple components, each with its own tax implications.(Photo: Unsplash)

When you receive your monthly salary, the amount credited to your account is often just a part of the full picture. Your salary is usually divided into multiple components, each with its own tax implications. Understanding these can help you plan better, reduce overall income tax liability and maximise your in-hand income.

Basic Salary

The basic salary is the core of your compensation. It forms the basis for other salary components like HRA, provident fund and gratuity. However, it’s fully taxable and there’s little room for tax-saving here.

House Rent Allowance (HRA)

House Rent Allowance (HRA) is provided by employers to help employees meet the cost of living in rented accommodation. While it forms part of the salary, HRA is not fully taxable. Under Section 10(13A) of the Income Tax Act, 1961, a portion of the HRA can be exempt from tax, subject to certain conditions. This exemption is deducted from the total income before calculating the taxable income, thereby offering significant tax savings. However, if an employee resides in their own house and does not pay rent, the entire HRA received becomes taxable. This tax benefit is available only to salaried individuals who receive HRA as part of their salary and actually live in rented homes.

How To Calculate HRA Exemption

To determine the HRA exemption, the least of the following three amounts can be claimed:

  • Actual HRA received from the employer.

  • Actual rent paid minus 10% of basic salary and dearness allowance (DA).

  • 50% of basic salary plus dearness allowance if you live in a metro city (Delhi, Mumbai, Chennai or Kolkata).

  • 40% of basic salary plus dearness allowance for non-metro cities.

Also Read: Investment Declaration FY 2025-26: New Vs Old Tax Regime; Which One Should You Choose?

Leave Travel Allowance (LTA)

The Leave Travel Allowance (LTA), is a component of an employee’s salary package meant to cover travel expenses incurred during vacations. It forms part of the total cost to the company (CTC) and is usually offered as an annual benefit. What makes LTA distinct is its potential for tax exemption under Section 10(5) of the Income Tax Act, 1961. If certain conditions are met, such as travel within India and submission of valid travel proofs, employees can claim this exemption and reduce their taxable income, thereby saving on taxes.

To claim LTA exemption, the travel must be within India and only actual travel expenses are covered — accommodation, food, and shopping are excluded. Travel must be by bus, economy class air, or train. The benefit applies to the employee and immediate family, including spouse, children and dependent parents or siblings.

It is limited to two children born after Oct. 1, 1998, with exceptions for earlier births or multiple births after the first child. Valid travel proof and a declaration form are required to claim the exemption.

Provident Fund (PF)

As per the Employees’ Provident Fund Organisation (EPFO) guidelines, an employee should make contributions of Rs 1,800 or 12% of basic salary and DA. The employer also contributes an equal amount to the EPF account.

The interest earned on the employee’s contribution to the EPF account above Rs 2.5 lakh per annum in a financial year is taxable in the hands of the employee. The interest earnings on EPF contributions were fully tax-exempt with no limit on the amount deposited, before FY 2021-22.

Also Read: Top Five Personal Loan Offers With Best Interest Rates In 2025

Watch LIVE TV, Get Stock Market Updates, Top Business, IPO and Latest News on NDTV Profit.
WRITTEN BY
P
Personal Finance Desk
Our team of personal finance writers covers what matters for your wallet. F... more
GET REGULAR UPDATES