Flexible benefit plan (FBP) in India: old vs new regime

A flexible benefit plan (FBP) is a portion of an employee's CTC that the employee can allocate across tax-efficient heads, such as leave travel, telephone and internet, meal vouchers, books and periodicals, and employer NPS contribution, and then claim against bills or proofs. Under the old tax regime, a well-used FBP can cut tax noticeably. Under the new regime, which is now the default, most FBP exemptions are not available, and the employer's NPS contribution is the main head that still reliably reduces taxable income.

This guide explains how FBP works and when it is still worth offering. For where FBP sits inside the CTC, see salary structure and CTC breakup, and for the regimes themselves, TDS on salary: old vs new regime.

A note on the new Income-tax Act

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act, and the Income-tax Rules, 2026 replaced the 1962 Rules. Most of the provisions FBP relies on (LTA exemption, perquisite valuation, employer NPS deduction) carry over, but sections are renumbered and some rule-based limits, such as perquisite thresholds, were reportedly revised from 1 April 2026. This article uses the familiar old section names and flags limits you should confirm on the Income Tax Department website before configuring payroll.

What is a flexible benefit plan in salary?

In a typical structure, part of the special allowance is carved out as an FBP pool. Each employee chooses how much of that pool goes to each permitted head, up to a cap per head. Whatever is not allocated, or not supported by bills by the year-end cut-off, is paid as taxable allowance.

So FBP does not change CTC. It changes how part of the CTC is labelled, and therefore how it is taxed.

Typical FBP components

FBP head	How it is usually paid	Basis for tax benefit (old regime)	Typical design
Leave travel allowance (LTA)	Reimbursed against tickets for domestic travel	Exemption for travel cost of the employee and family, two journeys in a block of four calendar years	Annual entitlement, claim on travel
Telephone and internet	Reimbursed against bills	Perquisite valuation rules treat employer-provided or reimbursed telephone as nil value	Monthly cap
Meal vouchers or food cards	Prepaid card or vouchers	Valued as nil up to a per-meal limit (₹50 per meal under the old rules; confirm the current figure)	Monthly amount
Fuel and car maintenance	Reimbursed against bills and a usage log	Perquisite valuation for a car used for both official and personal purposes	Monthly cap by grade
Books and periodicals	Reimbursed against bills	Treated as an official-purpose reimbursement where genuinely for work	Annual cap
Gift vouchers	Issued by the employer	Exempt up to a prescribed annual value (₹5,000 under the old rules; reportedly revised)	Annual amount
Employer NPS contribution	Paid by the employer into the employee's NPS account	Deduction for employer contribution (old section 80CCD(2))	Percentage of basic plus DA

Children's education and hostel allowances also appear in some older structures, but the exempt amounts are small enough that many employers have dropped them.

How FBP works through the year

1. Allocation. At joining or at the start of the tax year, the employee allocates the FBP pool across heads, within the caps.
2. Monthly payment. Some heads are paid monthly (meal cards, NPS). Others accrue and are paid when claimed, or paid monthly as taxable allowance and treated as exempt once bills arrive.
3. Declaration. The employee's allocation is a declaration, just like an investment declaration. Payroll projects tax on it.
4. Proofs and bills. Bills are submitted through the year or in the proof window, typically January to February. See our guide to investment declaration and proof submission.
5. True-up. Any head without supporting bills by the cut-off becomes taxable. The extra tax falls on the remaining months, so late submissions hit January to March take-home.

The big change: FBP under the new tax regime

Under the new regime, the law withdraws most exemptions and deductions in exchange for lower slab rates. For FBP, that means:

• LTA exemption is not available. An LTA claim under the new regime is simply taxable salary.
• Allowance-based exemptions are largely not available, apart from a few narrow ones, such as allowances for travel on tour or transfer and conveyance for official duty.
• Employer NPS contribution remains deductible, and the limit is higher than under the old regime: up to 14% of salary (basic plus DA) under the new regime, compared with 10% under the old regime. Confirm the renumbered section under the 2025 Act.
• Perquisite valuation rules for items such as employer-provided telephones and meal vouchers are applied in valuing salary, and many employers and advisers continue to treat these at nil value under the new regime because they come from valuation rules rather than exemptions. Views differ, so take advice before relying on it.

Old vs new regime: FBP head by head

FBP head	Old regime	New regime
LTA	Exempt within the rules, against travel proof	Not available; taxable
Telephone and internet	Nil-value perquisite, against bills	Commonly treated as nil value; confirm
Meal vouchers	Nil value up to the per-meal limit	Commonly treated as nil value; confirm
Fuel and car maintenance	Taxed at the prescribed perquisite value instead of the full amount	Valuation rules apply; benefit depends on facts; confirm
Books and periodicals	Not taxable where genuinely for official use	Same principle for genuine official use; confirm
Gift vouchers	Exempt up to the prescribed limit	Commonly treated the same; confirm
Children's education allowance	Small exemption	Not available
Employer NPS contribution	Deductible up to 10% of salary	Deductible up to 14% of salary
HRA (not usually in FBP)	Exempt within the least-of-three rule	Not available

Employer contributions to PF, NPS and superannuation funds together are taxable above ₹7,50,000 a year, under both regimes. Few mid-level employees reach this, but senior structures can.

Worked example: the same pool, two regimes

Ananya's CTC is ₹24,00,000, with basic of ₹9,60,000 a year. Her gross salary (CTC less employer PF and gratuity) is ₹22,50,000, and her structure includes an FBP pool of ₹2,40,000 a year carved out of special allowance. She is in the top slab under either regime.

If she opts for the old regime

FBP head	Allocated and supported by bills
LTA (one domestic journey)	₹60,000
Telephone and internet	₹24,000
Meal vouchers (₹2,200 a month, assumed within the current limit)	₹26,400
Books and periodicals	₹12,000
Employer NPS (10% of basic)	₹96,000
Total tax-efficient	₹2,18,400
Balance of pool paid as taxable allowance	₹21,600

At the 30% slab plus 4% cess (31.2%), the FBP saves about ₹2,18,400 × 31.2% = ₹68,141 in tax. Whether the old regime is better for her overall depends on her other deductions too. Run both with the TDS calculator.

If she stays in the new regime

LTA, books and the other exemptions do not help. The useful step is to route part of the pool to employer NPS, up to 14% of basic: ₹9,60,000 × 14% = ₹1,34,400. CTC is unchanged; take-home falls because the money goes into her NPS account.

Line	Without NPS	With employer NPS
Gross salary	₹22,50,000	₹22,50,000
Less standard deduction	₹75,000	₹75,000
Less employer NPS deduction	₹0	₹1,34,400
Taxable income	₹21,75,000	₹20,40,600
Tax before cess	₹2,43,750	₹2,10,150
Tax with 4% cess	₹2,53,500	₹2,18,556
Annual tax saved		₹34,944

The ₹1,34,400 reduction falls entirely in the 25% slab, so the saving is ₹1,34,400 × 25% × 1.04 = ₹34,944. The trade-off is liquidity: NPS money is largely locked in until retirement, so this suits employees who want the long-term saving, not everyone.

When does FBP still make sense?

• A meaningful share of your employees choose the old regime, usually those with high rent, a home loan and full 80C investments. For them, FBP still saves tax.
• You want employer NPS as a benefit. Offering NPS as an optional FBP head is the cleanest new-regime tax benefit you can give, at no extra CTC cost.
• Your workforce is senior or high-earning, where nil-value perquisites and NPS add up to real money.

It may not be worth the effort where almost everyone is on the new regime with taxable income below ₹12,00,000, because the rebate already makes their tax nil. Collecting bills from them only adds administration.

Designing an FBP policy

Decision	Common options	Watch out for
Who gets FBP	All employees above a grade, or above a CTC threshold	Junior employees under the rebate gain nothing
Pool size	A fixed amount by grade, or a percentage of CTC	The Code on Wages 50% wages test: FBP heads are usually excluded from wages, so a large pool can push excluded components above 50%
Heads offered	A short list that employees actually use	Every extra head adds bill verification work
Change window	Once a year, plus at joining	Mid-year changes complicate the projection
Unclaimed balance	Paid as taxable allowance monthly or at year-end	Paying at year-end creates a large March payout and TDS spike
Proof cut-off	Late January or February	Leave two payroll cycles before March
Regime link	Old-regime heads hidden or flagged for new-regime employees	Employees allocating to LTA under the new regime and expecting a saving

The wage-definition point matters: under the Labour Codes, if excluded components exceed 50% of total remuneration, the excess is added back to wages for PF and gratuity. See our explainer on the 50% wages rule.

Common mistakes

• Treating FBP as a tax saving for everyone, when new-regime employees get little from most heads.
• Leaving LTA in a new-regime employee's allocation without telling them it is taxable.
• Setting the employer NPS percentage above the limit for the employee's regime.
• Accepting bills that do not match the head, the tax year or the employee, because there is no written verification rule.
• Collecting bills in March, which crushes the last month's take-home.
• Building a large FBP pool that breaches the 50% wages test.
• Forgetting the ₹7,50,000 aggregate cap on employer retirement contributions for senior staff.

FAQs

Is FBP useful under the new tax regime? Mostly no, except for employer NPS contribution, which is deductible up to 14% of salary under the new regime. Some perquisite-valuation items such as meal vouchers are commonly treated as tax-free under both regimes, but confirm with your adviser.

Is LTA exempt under the new regime? No. LTA exemption is an old-regime benefit.

What happens to FBP balance if bills are not submitted? The unsupported amount becomes taxable, and payroll recovers the extra tax from the remaining months of the year.

Can an employee change FBP allocation mid-year? Only if the employer's policy allows it. Most allow changes at joining and once at the start of the tax year.

Is employer NPS contribution part of CTC? Usually yes. In an FBP, it is carved out of the existing pool, so CTC stays the same and take-home falls by the contribution.

Does FBP affect PF? FBP heads are generally excluded from wages for PF, but under the Labour Codes, excluded components above 50% of total remuneration are added back to wages.

How NeevHR helps

NeevHR benefits includes an FBP workflow: employees declare, submit proof and HR verifies, and the verified amount reduces taxable income from the next payroll run. FBP components and their tax treatment are configured by HR, and an FBP utilisation report shows take-up. Payroll then computes TDS under each employee's chosen regime, with structures configured once as components per employee group. To see FBP and payroll together, book a demo.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 17 Oct 2026.