Deductions, Rebate and the Old and New Tax Regimes

After income under the five heads is computed and aggregated, deductions reduce gross total income to total income, and a rebate may reduce the tax itself. Individuals now choose between two regimes: the new regime, which is the default and has lower rates but few deductions, and the old regime, with higher rates and the full range of deductions. This note covers the deductions, the two regimes and the rebate under the Income-tax Act, 2025.

1. Deductions from Gross Total Income

Figure 1: Main deductions, 2025 Act and 1961 Act

• Section 122. Deductions under the chapter are allowed from gross total income, and cannot exceed it.
• Savings and insurance. Life insurance premiums, provident fund and other specified savings (s.123, old s.80C); pension scheme contributions (s.124, old s.80CCD); health insurance (s.126, old s.80D)
• Loans and donations. Interest on education loans (s.129, old s.80E); donations to specified funds and charities (s.133, old s.80G); interest on deposits (s.153, old ss.80TTA and 80TTB)
• Business incentives. Profit linked deductions for specified undertakings, such as infrastructure and units in special economic zones (ss.138 to 147)

2. The New Tax Regime: Section 202

Figure 2: New regime slabs for tax year 2026-27

• Default. The new regime applies unless the taxpayer opts out; the same slabs apply at all ages.
• Rates. Nil up to Rs 4 lakh, then 5, 10, 15, 20 and 25 per cent in Rs 4 lakh bands, and 30 per cent above Rs 24 lakh.
• Deductions. Most deductions and exemptions are not available, but the standard deduction for salaried employees and pensioners is.
• Rebate, s.156. A resident individual whose total income does not exceed Rs 12 lakh gets a rebate of up to Rs 60,000, so no tax is payable; with the standard deduction, salary of about Rs 12.75 lakh is effectively tax free.

3. The Two Regimes Compared

Figure 3: New regime and old regime

Under the old regime, income up to Rs 2.5 lakh is exempt for individuals below 60, with higher exemption limits for senior and very senior citizens; the rates are 5 per cent up to Rs 5 lakh, 20 per cent up to Rs 10 lakh and 30 per cent above, with a rebate of up to Rs 12,500 where income does not exceed Rs 5 lakh. A taxpayer without business income may choose the regime each year while filing the return; a taxpayer with business income opts out through a prescribed form and has a limited right to switch back. Health and education cess of 4 per cent applies under both regimes, and surcharge on high incomes is capped at 25 per cent under the new regime.

4. Frequently Asked Questions

Up to what income is no tax payable under the new regime?

A resident individual with total income up to Rs 12 lakh pays no tax, because of the rebate of up to Rs 60,000 under s.156. For a salaried individual, the Rs 75,000 standard deduction takes this to about Rs 12.75 lakh of salary.

Can a salaried employee switch between regimes every year?

Yes. A taxpayer without business or professional income may choose either regime each year when filing the return. Those with business income have a more limited option.

Which section of the 2025 Act replaced section 80C?

Section 123, which allows the deduction for life insurance premiums, provident fund contributions and other specified savings, available under the old regime.

Is a health insurance deduction available under the new regime?

Generally no. Deductions such as those for health insurance (s.126, old s.80D) and donations (s.133, old s.80G) are available only to taxpayers who opt for the old regime.

5. Related Topics

• Topic 13: Income from Salaries. The standard deduction.
• Topic 18: Clubbing, Set Off and Carry Forward. From heads to gross total income.
• Topic 20: Return of Income and Assessment. Choosing the regime in the return.