Tax Deductions & Exemptions

For AY 2026-27 Indian taxpayers can choose between the new tax regime under section 115BAC, which offers wider slabs, full rebate under section 87A for income up to ₹7 lakh and a ₹75,000 standard deduction but disallows most chapter VI-A deductions, and the old regime where deductions like 80C up to ₹1.5 lakh, 80D for health insurance, 80CCD(1B) for NPS, HRA, LTA and home loan interest under section 24(b) remain available. Compute tax under both before filing.

Mayank Wadhera

Published: 14 Aug 2023

Updated: 16 May 2026

4 min read

With the new tax regime set as default from AY 2024-25 and reinforced through the Union Budget 2026, the planning of deductions and exemptions has changed for Indian taxpayers. Most chapter VI-A deductions are unavailable under the new regime, but the regime offers wider slabs, a higher rebate under section 87A, and a salary standard deduction of ₹75,000. Choosing wisely each year is now the core tax-planning decision.

The Two Regime Choice

Resident individuals can choose between the new regime under section 115BAC (default) and the old regime where most deductions remain available. The new regime offers basic exemption of ₹3 lakh, graded slabs up to 30%, full rebate under section 87A for income up to ₹7 lakh, and a salary standard deduction of ₹75,000.

The old regime retains the ₹2.5 lakh basic exemption (₹3 lakh for seniors, ₹5 lakh for super-seniors), HRA, LTA, section 80C, 80D, 80CCD(1B) and home loan interest deductions. Salaried taxpayers can switch each year; business income taxpayers can switch only once back to old.

Key Deductions Under the Old Regime

Section 80C: investments and payments up to ₹1.5 lakh — PPF, ELSS, life insurance premium, principal of home loan, tuition fees, EPF, NSC, five-year FD.
Section 80CCD(1B): additional ₹50,000 for NPS contribution.
Section 80D: health insurance premium up to ₹25,000 (₹50,000 for senior parents) and preventive health check-ups within sub-limits.
Section 80E: interest on education loan for higher studies, no upper limit, for eight years.
Section 80G: donations to specified funds and institutions, 50% or 100% of qualifying amount.
Section 24(b): home loan interest up to ₹2 lakh for self-occupied property.

Exemptions Available to Salaried Taxpayers

HRA exemption under section 10(13A) based on lower of actual HRA, rent paid minus 10% of salary, and 40% or 50% of salary.
LTA exemption for two journeys within a block of four years (old regime only).
Children education allowance and hostel allowance within prescribed limits.
Gratuity, leave encashment, and VRS up to notified limits.
Standard deduction of ₹75,000 — available under both regimes for salary and pension income.

Deductions Available Under Both Regimes

Standard deduction of ₹75,000 for salaried and pensioner.
Employer's contribution to NPS under section 80CCD(2) — up to 14% for central government and 10% otherwise.
Family pension standard deduction of ₹25,000.
Agniveer Corpus Fund contribution under section 80CCH.

How to Choose the Right Regime

List all expected exemptions and deductions you would claim under the old regime.
Compute tax under both regimes using AY 2026-27 slabs and rebate.
Factor in marginal relief under the new regime around the rebate cut-off.
Consider future flexibility — switching once for business income, annually for salary.
Pick the regime that yields lower net tax for your situation.

A Worked Comparison for FY 2025-26

Consider a salaried taxpayer earning ₹15 lakh, paying ₹15,000 a month rent in a metro, contributing ₹1.5 lakh to PPF, ₹50,000 to NPS, ₹25,000 to health insurance, and paying ₹2 lakh home loan interest. Under the old regime, the taxable income reduces sharply through HRA, 80C, 80CCD(1B), 80D and section 24(b), often bringing it below ₹7 lakh and triggering 87A — net tax can be near zero or modest.

Under the new regime, the same individual gets the ₹75,000 standard deduction and the wider slabs but loses the bulk of those deductions. The break-even depends on the deduction footprint; salaried taxpayers with substantial rent, EMIs and savings usually prefer the old regime, while younger taxpayers with limited deductions usually save more under the new regime.

Donations and Section 80G Hygiene

Section 80G claims need a valid registration of the donee (Form 10BE), digital receipt with PAN, and payment through non-cash mode above ₹2,000. The donee files Form 10BD with the department, and the donor's deduction is matched against that statement. Cash donations and unverified trusts are routinely disallowed in scrutiny.

Year-End Tax Planning Calendar

Begin tax planning in October, not March. By Diwali, project annual income, choose the regime, and front-load deductions you will actually use. PPF and ELSS investments compound longer the earlier they are made in the year. Health insurance renewal in November rather than March gives twelve months of continuous cover. Home loan prepayments before March can increase interest deduction within section 24(b) limits.

Conclusion

Deductions and exemptions remain powerful, but their relevance depends on which regime you choose. For salaried taxpayers with a heavy investment, insurance and home loan footprint, the old regime often wins; for younger earners and those without large eligible outflows, the new regime is simpler and often cheaper. Run the numbers each year before finalising in your ITR.

Frequently Asked Questions

Is section 80C available under the new tax regime?

No, section 80C and most chapter VI-A deductions are not available under the new tax regime. Only a limited set such as employer NPS contribution under 80CCD(2), family pension deduction, Agniveer Fund and standard deduction are available alongside the regime's wider slabs.

Can I claim HRA in the new tax regime?

No, HRA exemption under section 10(13A) is not available in the new regime. Salaried taxpayers paying significant rent and otherwise eligible for HRA often find the old regime more beneficial after a full tax comparison.

What is the section 87A rebate limit in AY 2026-27?

Under the new regime, full tax rebate under section 87A is available where total income does not exceed ₹7 lakh. Under the old regime, the rebate is available where total income does not exceed ₹5 lakh. Marginal relief applies just above the cut-off.

Can I switch regimes every year?

Salaried individuals and pensioners with no business or professional income can switch between the regimes each year while filing the return. Taxpayers with business or professional income can opt out of the new regime only once and revert later only once.

Is the standard deduction of ₹75,000 available in both regimes?

Yes, the ₹75,000 standard deduction for salary and pension income is available under both the new and old tax regimes from AY 2025-26 onwards, making salary income relatively cleaner from a deduction perspective in either choice.