Section 10(14): Income Tax Exemption on Special Allowances for Salaried Employees AY 2026-27

Section 10(14): Special Allowances Tax Exemption 2026

Section 10(14) provides tax exemptions on specific allowances paid to salaried employees for legitimate reasons (work transfer, leave encashment, pension commutation). Many salaried individuals do not know about this exemption or fail to provide required proof, overpaying tax on legitimate allowances.

This guide covers which allowances qualify, eligibility conditions, documentation required, and how to claim in ITR.

Looking for expert help with Section 10(14) special allowances income tax exemption salaried India 2026? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.

Allowances Covered by Section 10(14)

1. Transfer / Relocation Allowance (sub-clause a)

Eligibility: Employee transferred to new posting (city/country)

Exemption limit: Actual amount paid (no cap)

Requirement: Transfer must be in course of official duties

Proof: Transfer order from employer showing:

• New posting location
• Date of transfer
• Official reason for transfer

Example:

• Employee transferred from Delhi to Mumbai
• Relocation allowance: Rs 3 lakh (covers moving costs, accommodation shift)
• Exemption: Full Rs 3 lakh (no limit)
• No tax on this allowance

2. Leave Encashment (sub-clause aa)

Eligibility: Encashment of earned leave at retirement/separation

Exemption limit:

• Rs 3 lakh per year (old regime)
• Unlimited in year of retirement or separation
• Can be claimed in multiple years if encashment spans years

Requirement: Leave actually earned and encashed

Proof: Employer certificate showing:

• Total leave encashed
• Daily rate / amount paid
• Employee ID and name
• Leave type (earned leave)

Example:

• 30 days earned leave @ Rs 10,000/day = Rs 3 lakh
• Exemption: Full Rs 3 lakh
• Amount over Rs 3 lakh: Taxable if encashed beyond limit in non-retirement year

3. Commuted Value of Pension (sub-clause b)

Eligibility: Government employee receiving commuted value of pension

Exemption limit: Rs 5 lakh (fixed, no limit for govt pensioner aged 60+)

Requirement: Pension commutation at retirement

Proof: Government pension commutation order

Example:

• Government employee retires at age 60
• Commuted value of pension received: Rs 8 lakh
• Exemption: First Rs 5 lakh
• Remaining Rs 3 lakh: Taxable

4. Gratuity and Certain Allowances (sub-clause c)

Gratuity: Already separately taxed under Section 10(10)(iii)

Specific allowances that exempt:

• Foreign Service Allowance (government employees abroad)
• Duty allowance (police, military, paramilitary)
• Overseas posting allowance
• Hardship allowance (difficult terrain posting)

Limit: Actual amount or government-specified rate, whichever is lower

Proof: Government order specifying allowance and rate

Section 10(14A): Leave Travel Allowance (LTA)

Separate exemption: Also under Section 10, clause 14A

Eligibility: Salaried employee entitled to LTA in employment contract

Exemption limit:

• Actual travel cost (airfare, train, hotel)
• Limited to 4 journeys per year (typically 2 to family, 2 individual)
• Unused LTA can be encashed in limited cases
• LTA encashment: Limited to actual fare cost

Proof: Travel tickets, hotel bills, railway/airline receipts

Note: LTA is available under BOTH old and new tax regimes (unlike HRA)

How to Claim Section 10(14) in ITR

Location in ITR-1/ITR-2:

Schedule S1 (Salary):

• Line item: "Allowances / other receipts"
• Section 10(14) claimed allowances: Itemize separately

Steps:

1. Go to ITR Schedule S1
2. Under "Allowances" section, list:
   • Transfer allowance: Rs amount
   • Leave encashment: Rs amount
   • LTA: Rs amount
   • Other sub-14 allowances
3. Gross salary reduced by these exemptions = Taxable salary
4. Attach proof documents with ITR

Example ITR entry:

• Gross salary (before allowances): Rs 50 lakh
• Transfer allowance: Rs 2 lakh (claimed under 10(14)(a))
• Leave encashment: Rs 3 lakh (claimed under 10(14)(aa))
• LTA: Rs 80,000 (claimed under 10(14A))
• Taxable salary: Rs 50 - 2 - 3 - 0.8 = Rs 44.2 lakh
• Tax on Rs 44.2 lakh (30%): Rs 13.26 lakh

Without proper claim:

• Taxable salary: Rs 50 lakh
• Tax (30%): Rs 15 lakh
• Loss if not claimed: Rs 1.74 lakh in unnecessary tax

Documentation Required (Critical)

For transfer/relocation:

• Transfer order (on employer letterhead)
• New posting location details
• Date of transfer

For leave encashment:

• Leave encashment certificate (from HR/payroll)
• Itemized leave record (types and count)

For LTA:

• Airline/train booking confirmation
• Ticket purchased receipt
• Hotel reservation (if applicable)
• Travel dates matching claimed LTA

For commuted pension:

• Government pension commutation order

For hardship/duty allowance:

• Government order specifying allowance
• Posting order (if applicable)

Common Mistakes and How to Avoid

Mistake 1: Not claiming eligible allowances

Many salaried employees receive transfer/LTA allowances but don't claim in ITR, assuming all salary is taxable.

Prevention: Review your salary slip for allowance breakdowns; claim all qualifying items in Schedule S1.

Mistake 2: Claiming without documentation

AO disallows exemptions if proof is missing. Must have employer certificate or bills.

Prevention: Collect documents at time of receipt; store for 7 years.

Mistake 3: Exceeding exemption limit

Leave encashment exceeding Rs 3 lakh in a year (non-retirement) is partially taxable. Claiming full amount gets noticed.

Prevention: Check if total encashed in year exceeds Rs 3 lakh; report excess as taxable.

Mistake 4: Claiming transfer allowance without transfer order

AO can disallow if no proof that transfer was official.

Prevention: Always obtain written transfer order from employer.

Key Takeaways

1. Transfer allowance: Unlimited, requires transfer order proof
2. Leave encashment: Up to Rs 3 lakh/year (unlimited in retirement year)
3. LTA: Actual travel cost, requires receipts
4. Commuted pension: Up to Rs 5 lakh for government employees
5. Document everything: AO will ask for proof; missing docs = exemption denied

Frequently Asked Questions

I received Rs 5 lakh transfer allowance for posting to Bangalore. Is this fully exempt?

Yes. Transfer allowance under Section 10(14)(a) has no limit. Full Rs 5 lakh is exempt from tax if you provide transfer order from employer.

I encashed 30 days leave (Rs 3 lakh) plus took 5 days extra leave encashment (Rs 50,000) in FY 2025-26. How much is exempt?

First Rs 3 lakh is exempt; additional Rs 50,000 is taxable (unless you retired that year). Total taxable: Rs 50,000.

Does LTA work under new tax regime?

Yes. LTA (Section 10(14A)) is available under BOTH old and new tax regimes. It is NOT a Chapter VI-A deduction.

Employer refused to give transfer certificate. Can I still claim transfer allowance?

Difficult. AO may disallow without employer proof. Try to get a retrospective certificate or written explanation from employer. File amended ITR if claim rejected.

I received Rs 8 lakh commuted pension (government employee). How much is exempt?

Rs 5 lakh is exempt (fixed limit for commutation), Rs 3 lakh is taxable.

Section 10(14) & 10(14A), Income Tax Act 1961; CBDT Circular on allowance exemptions; Schedule S1 ITR format; Employer certification formats.