Tax Deductions & Exemptions

Tax Deductions & Exemptions: The Complete Guide for AY 2027-28

Under the new default regime (Section 115BAC), most Chapter VI-A deductions are unavailable — but the regime offers wider slabs, a significantly higher Section 87A rebate, and a Rs. 75,000 standard deduction that applies to both salary and pension. For AY 2027-28, a salaried taxpayer with a full deduction footprint — meaningful HRA, home loan interest, Section 80C investments, NPS contributions, and health insurance — will usually pay less tax under the old regime. A younger earner with minimal eligible outflows will almost always benefit from the new regime's simpler structure. This guide gives you every number, every qualifying condition, and a worked comparison so you can make that decision with actual arithmetic, not instinct.

The Two-Regime Framework: Who Chooses What and When

Section 115BAC is the default regime for all resident individuals and HUFs from AY 2024-25 onwards. You do not opt in — you opt out. For AY 2027-28, this means:

• Salaried employees: Declare your regime choice to your employer at the start of FY 2026-27 (April 2026), typically through Form 12BB. If you want the old regime and miss this declaration, TDS runs under the new regime all year and you recover the excess only after filing your ITR.
• Business or professional income (PGBP): If any of your income falls under Profits and Gains of Business or Profession, you may switch from new to old regime only once in a lifetime. After that switch, re-entry to the new regime is permanently barred as long as you have PGBP income. This is an irreversible decision — treat it accordingly.
• Non-business income only: You file ITR-1 or ITR-2 and can pick the regime at filing time. The due date for non-audit cases for AY 2027-28 is 31 July 2027 (unless extended by notification); audit cases face 31 October 2027.

If you are salaried and prefer the old regime, make your declaration to HR before the first payroll of April 2026. Waiting until March 2027 means twelve months of TDS under the new regime and a refund application rather than lower monthly TDS outgo.

New Tax Regime (Section 115BAC): Slabs, Rebate, and the Real Zero-Tax Threshold

The new regime's appeal rests on three pillars: lower marginal rates at mid-income levels, a generous Section 87A rebate, and freedom from documentation.

Tax Slabs Under the New Regime for FY 2026-27

Add: 4% health and education cess on tax. Surcharge applies above Rs. 50 lakh but is capped at 25% under the new regime for all income levels — unlike the old regime where it can reach 37% for income above Rs. 5 crore.

Section 87A Rebate Under the New Regime

The rebate for taxpayers with total income not exceeding Rs. 12,00,000 is Rs. 60,000 — effectively wiping out the entire tax liability at that income level. Combine this with the Rs. 75,000 standard deduction available to salaried taxpayers, and a gross salary up to Rs. 12,75,000 yields zero tax under the new regime, with no investments or documentation required.

The Section 87A rebate under the old regime is Rs. 12,500, available only if total income does not exceed Rs. 5,00,000.

What Survives Inside the New Regime

The new regime is not a complete deduction desert:

1. Standard deduction — Rs. 75,000 for salary and pension income (Section 16(ia)).
2. Employer's NPS contribution under Section 80CCD(2) — deductible up to 14% of salary for Central Government employees, 10% for all other employees. This works under the new regime and requires no personal outflow from you — it is purely a salary restructuring benefit.
3. Agniveer Corpus Fund under Section 80CCH — full deduction for contributions by Agnipath scheme enrollees.
4. Family pension standard deduction — Rs. 25,000 for recipients of family pension.
5. Section 10(10) Gratuity exemption, Section 10(10AA) leave encashment on retirement — available under both regimes as notified.
6. Section 10(11) PPF interest — tax-free regardless of regime.

Every other Chapter VI-A deduction (80C, 80D, 80E, 80G, 80CCD(1B), 80TTA) and most Section 10 exemptions (HRA, LTA, children's education allowance) are not available under the new regime.

Old Regime: Your Complete Deduction Map

Section 80C — The Rs. 1.5 Lakh Investment Basket

The aggregate ceiling under Section 80C + 80CCC + 80CCD(1) is Rs. 1,50,000. Qualifying instruments include:

• PPF contributions — up to Rs. 1.5 lakh per year, 15-year lock-in, interest fully tax-exempt
• ELSS mutual funds — 3-year lock-in, market-linked returns
• Life insurance premiums — for self, spouse, or children; premium must not exceed 10% of sum assured for policies issued after 1 April 2012
• EPF employee contribution — automatically credited, often fills a large portion of the limit before you invest a rupee elsewhere
• Principal repayment on home loan — on a residential property
• 5-year tax-saving bank FDs — no pre-closure; interest is taxable
• NSC — the accrued interest for years 1–5 re-invests and also qualifies under 80C
• Tuition fees — for up to two children in full-time education at any school, college, or university in India (coaching fees and hostel fees do not qualify)
• SSY (Sukanya Samriddhi Yojana), Senior Citizens Savings Scheme, 5-year Post Office Time Deposit

Practical check first: If your employer already deducts EPF at 12% of basic, and you are repaying a home loan, these two items often exhaust the Rs. 1.5 lakh limit before you make a single active 80C investment. Calculate your existing 80C footprint before buying additional ELSS or insurance.

Section 80CCD(1B) — The NPS Booster

This deduction is separate from and additive to Section 80C. You can claim up to Rs. 50,000 for voluntary contributions to your NPS Tier-I account, over and above the Rs. 1.5 lakh 80C ceiling. At the 30% slab, Rs. 50,000 in 80CCD(1B) saves Rs. 15,600 in tax (including cess). Contributions are made through the NSDL/PFRDA eNPS portal or your employer's NPS nodal office.

Section 80D — Health Insurance Premiums

Within the applicable ceiling, Rs. 5,000 (for persons below 60) or the overall senior ceiling can include preventive health check-up expenses. All premiums must be paid in non-cash mode — cash payments are excluded. A single-premium multi-year policy is deductible only in the year of payment (unless the insurer allocates it).

Section 24(b) — Home Loan Interest

Interest on a loan for purchase or construction of a self-occupied residential property: Rs. 2,00,000 per year. For let-out property, the entire interest is deductible but the net loss from house property that can be set off against other heads is capped at Rs. 2,00,000 — the balance is carried forward for up to 8 years.

The construction or acquisition must be completed within 5 years from the end of the financial year in which the loan was taken, or the deduction is restricted to Rs. 30,000.

Section 80E — Education Loan Interest

The entire interest paid on a loan for higher studies (any graduate, post-graduate, or professional course) for yourself, spouse, children, or a dependent student is deductible — no upper limit. The deduction is available for eight consecutive assessment years from the year repayment begins. The loan must be from a scheduled financial institution or approved charitable organisation; loans from relatives do not qualify.

Other Significant Deductions

• Section 80G: Donations to approved funds and institutions qualify at 50% or 100%, subject to qualifying amount ceilings where applicable. Payment must be non-cash above Rs. 2,000; you need Form 10BE from the donee and the donee must hold a valid 80G registration.
• Section 80TTA: Interest on savings bank accounts up to Rs. 10,000 (for individuals below 60). Replaced by Section 80TTB for senior citizens — Rs. 50,000 on interest from all deposits.
• Section 80GG: Rent paid deduction (alternative to HRA) for those who do not receive HRA — the least of Rs. 5,000/month, 25% of total income, or rent paid minus 10% of total income.

HRA and Salaried Exemptions (Old Regime)

How HRA Exemption Is Calculated Under Section 10(13A)

The exempt amount is the lowest of:

1. Actual HRA received from the employer
2. Rent paid minus 10% of "salary" (basic + DA forming part of retirement benefits; neither CTC nor gross pay)
3. 50% of salary for Mumbai, Chennai, Kolkata, or Delhi; 40% for all other cities

Worked HRA illustration: Suppose basic = Rs. 7,00,000 per year, DA (retirement component) = Rs. 1,00,000 per year, HRA received = Rs. 18,000 per month, rent paid = Rs. 20,000 per month, city = Pune.

• Salary (for HRA purposes) = Rs. 8,00,000 per year
• Limit 1: Rs. 18,000 × 12 = Rs. 2,16,000
• Limit 2: (Rs. 20,000 × 12) − 10% of Rs. 8,00,000 = Rs. 2,40,000 − Rs. 80,000 = Rs. 1,60,000
• Limit 3: 40% of Rs. 8,00,000 = Rs. 3,20,000
• Exempt HRA = Rs. 1,60,000 (the least of the three)

If annual rent exceeds Rs. 1,00,000 (i.e., Rs. 8,333/month), the landlord's PAN is mandatory for claiming HRA. Provide it to your employer for Form 12BB and retain it for your own records.

LTA, Children's Education and Other Allowances

• Leave Travel Allowance: Exempt for two journeys in a four-calendar-year block (current block: 2026–2029). Only domestic travel qualifies, and the exemption covers actual travel cost by the shortest route in economy class. The family definition includes spouse, children, and wholly dependent parents and siblings.
• Children's Education Allowance: Rs. 100 per month per child (maximum two children) = Rs. 2,400 per year.
• Hostel Allowance: Rs. 300 per month per child (maximum two children) = Rs. 7,200 per year.
• Standard deduction: Rs. 75,000 — available under both regimes for salary and pension.

Deductions That Work Under Both Regimes

The 80CCD(2) employer NPS route deserves special attention. If you are on a corporate payroll and your employer offers NPS, shifting a portion of your CTC into employer NPS contribution reduces your gross salary for tax purposes and requires no personal cash outflow. At Rs. 80,000 employer NPS on a Rs. 8,00,000 salary component, you save Rs. 24,960 in tax at the 30% slab plus cess — regardless of which regime you file under.

How to Choose the Right Regime: A Five-Step Process

Run this exercise in April 2026 — not in February 2027.

1. Estimate gross total income for FY 2026-27 — salary, interest, dividends, rental income, capital gains, any professional income.
2. List only the deductions you will actually claim under the old regime — not aspirational ones. Use actual current PPF contribution, actual rent, actual insurance premium. Most people overstate deductions they have not yet made.
3. Compute tax under both regimes using the slabs above, applying the correct surcharge rate and 4% cess.
4. Check the 87A boundary. If your taxable income under the new regime is close to Rs. 12,00,000, verify whether marginal relief applies — the incremental tax above the rebate threshold cannot exceed the incremental income.
5. Factor in your flexibility. If you have PGBP income, switching to old is a one-time decision. If you are purely salaried, you can re-run this exercise every year.

Worked Example: Rs. 15 Lakh Salary — Old Regime vs New Regime

Taxpayer profile: Age 38, salaried in Pune, gross CTC Rs. 15,00,000 (includes employer NPS of Rs. 80,000). Basic + DA (retirement): Rs. 8,00,000. HRA received: Rs. 18,000/month. Rent paid: Rs. 20,000/month. Own investments: PPF Rs. 1,50,000, NPS Rs. 50,000. Health insurance premium: Rs. 25,000 (self and spouse, both below 60). Home loan interest: Rs. 2,00,000 (self-occupied property).

Old Regime Computation

Tax on Rs. 7,60,000 (old regime slabs):

• Rs. 0–2,50,000: Nil
• Rs. 2,50,001–5,00,000: 5% × Rs. 2,50,000 = Rs. 12,500
• Rs. 5,00,001–7,60,000: 20% × Rs. 2,60,000 = Rs. 52,000
• Tax before cess: Rs. 64,500
• 4% health and education cess: Rs. 2,580
• Net tax payable: Rs. 67,080

New Regime Computation

Tax on Rs. 13,45,000 (new regime slabs):

• Rs. 0–4,00,000: Nil
• Rs. 4,00,001–8,00,000: 5% × Rs. 4,00,000 = Rs. 20,000
• Rs. 8,00,001–12,00,000: 10% × Rs. 4,00,000 = Rs. 40,000
• Rs. 12,00,001–13,45,000: 15% × Rs. 1,45,000 = Rs. 21,750
• Tax before cess: Rs. 81,750
• 4% cess: Rs. 3,270
• Net tax payable: Rs. 85,020

Verdict

The old regime saves Rs. 17,940 for this taxpayer — a material difference driven by the combined effect of HRA, home loan interest, NPS, and 80C deductions reducing taxable income by Rs. 5,05,000.

Now test the sensitivity: remove the home loan (no Section 24(b) deduction). Taxable income under old regime rises to Rs. 9,60,000; tax increases to approximately Rs. 1,06,080 (including cess), making the gap narrow sharply. This confirms the general rule: the home loan interest deduction is often the deciding lever for mid-income taxpayers choosing between regimes.

Common Mistakes and Pitfalls to Avoid

1. Computing HRA on CTC instead of basic + DA. HRA exemption is based on "salary" meaning basic pay plus DA that forms part of retirement benefits — not total CTC. Using the wrong base inflates the exemption and creates a mismatch with Form 16 that flags in processing.

2. Assuming 80C always has room left. EPF contribution at 12% of basic plus home loan principal repayment frequently saturates the Rs. 1.5 lakh limit before any active investment. Verify your Form 16 Part B before buying additional ELSS or insurance in March.

3. Claiming Section 24(b) during the pre-possession period. Interest accrued while a property is under construction is not immediately deductible. It is aggregated and deductible in five equal instalments from the year of possession. Claiming it year-by-year during construction is incorrect.

4. Cash donations above Rs. 2,000 under Section 80G. These are categorically disallowed. The denial is automatic in CPC processing if Form 10BD filed by the donee does not include your PAN. Always pay by bank transfer or UPI, obtain Form 10BE, and confirm the donee's active 80G registration on the income tax portal (incometax.gov.in).

5. Missing the 80CCD(2) deduction under the new regime. This is the single most overlooked new-regime benefit for corporate employees. If your employer contributes to NPS, the deduction must appear separately in Form 16 Part B. Cross-check and claim it even if your employer missed it in TDS.

6. Ignoring AIS/TIS mismatches before filing. The Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) on the e-filing portal aggregate third-party reported data — bank interest, dividends, capital gains, freelance TDS credits. Any income that appears in AIS but is not reported in your ITR is a primary trigger for Section 143(1)(a) adjustment or Section 148A notice. Review AIS at least once before April 2027.

7. Not factoring marginal relief near the Rs. 12 lakh boundary (new regime). A taxpayer with taxable income of Rs. 12,10,000 loses the full Rs. 60,000 rebate and pays tax on the entire Rs. 12,10,000. However, marginal relief ensures the incremental tax (income Rs. 10,000 above the threshold) does not exceed Rs. 10,000. Run this calculation before making an additional investment that might push your income fractionally above the threshold.

8. Filing under the wrong regime by default. If no regime choice is actively made, the system defaults to new. Old regime must be explicitly opted. Salaried taxpayers who want old regime but do nothing will have TDS computed under new, and the ITR will also default to new if not actively changed.

Year-End Tax Planning Calendar for FY 2026-27

Begin planning in April 2026, not February 2027.

• April 2026: Declare regime choice to employer. Make the April 5 PPF contribution — it earns interest for the full year when invested before the 5th of each month.
• May–August: Review Form 26AS and AIS quarterly for any third-party income credits you may have overlooked.
• September 2026: Second advance tax instalment due 15 September (45% of assessed tax). If your advance tax in June was under-estimated, correct it now to avoid Section 234B and 234C interest.
• October: Project year-end income. Identify gaps in 80C, 80D, NPS. Log in to eNPS portal (enps.nsdl.com) to make additional NPS Tier-I contributions for 80CCD(1B).
• November: Renew health insurance policies — annual premiums paid before December ensure continuity of cover and deductibility in the same financial year. Parents' insurance premiums are often overlooked and add Rs. 25,000–50,000 to 80D.
• December: Obtain your home loan provisional interest certificate from your lender — this is the document your employer needs to compute Form 16 correctly.
• March 2027: Final advance tax instalment due 15 March (100% of assessed tax). Do not make last-minute 80C investments in products you would not otherwise choose — the tax saving is rarely worth the product.
• April–July 2027: File ITR for AY 2027-28 by 31 July 2027. Use the e-filing portal (incometax.gov.in), pre-fill data from AIS, and verify within 30 days using e-verification (Aadhaar OTP or net banking).

Key Takeaways

• The new regime is default for AY 2027-28 — you must actively declare the old regime to your employer (if salaried) or at filing time. Missing this declaration means 12 months of TDS under new regime.
• A salaried taxpayer with gross salary up to Rs. 12,75,000 pays zero tax under the new regime — no investments, no documentation, just the Rs. 75,000 standard deduction and Rs. 60,000 Section 87A rebate.
• The old regime pays off when your deduction footprint is large — the combination of HRA, 80C (Rs. 1.5 lakh), 80CCD(1B) (Rs. 50,000), home loan interest (Rs. 2 lakh), and 80D can together reduce taxable income by Rs. 5–7 lakh for a well-positioned taxpayer.
• Section 80CCD(2) (employer NPS) survives in both regimes — this is one of the highest-value salary restructuring moves available regardless of which regime you choose.
• 80G cash donations above Rs. 2,000 are not deductible — Form 10BE from the donee is mandatory, and the donee's 80G registration must be valid and active at the time of donation.
• Business income taxpayers have only one chance to switch back to old regime — if you have PGBP income, the regime decision is not reversible after a single switch, making it a long-term financial planning decision.
• Review AIS/TIS before filing, not just at filing — third-party-reported income that does not appear in your ITR is the most common source of post-filing notices and is entirely avoidable.