Deductions Still Allowed Under the New Regime in 2026-27
- What section 202(2) removes
- What the new regime still allows
- A note on rule 280(3)
- Worked example: employer NPS under the new regime
- What this means for the regime choice
- Year labels
- Where this fits
The new tax regime for tax year 2026-27 removes most exemptions and deductions, but not all of them. Section 202(2) of the Income-tax Act, 2025 lists what is taken away. Everything it does not list survives. For a salaried person, the useful survivors are:
- the ₹75,000 standard deduction;
- the employer’s contribution to NPS, up to 14% of salary;
- the exempt portions of gratuity, leave encashment, commuted pension and voluntary retirement compensation;
- the family pension deduction.
Landlords keep the 30% standard deduction and interest on a let-out property’s loan. What goes includes HRA, leave travel concession, professional tax, interest on a self-occupied home, and almost all of Chapter VIII: section 123 (earlier 80C), health insurance, education loan interest and donations.
What section 202(2) removes
| Removed under the new regime | Provision (earlier section) |
|---|---|
| House rent allowance | Schedule III, Sl. No. 11 (earlier 10(13A)) |
| Leave travel concession | Schedule III, Sl. No. 8 (earlier 10(5)) |
| Allowances of MPs and MLAs; the ₹1,500 exemption for a minor child’s clubbed income | Schedule III, Sl. Nos. 5, 6, 7 and 17 |
| Special allowances, other than those prescribed for the new regime | Schedule III, Sl. Nos. 12 and 13 |
| Professional tax (tax on employment) | Section 19(1), Table Sl. No. 1 |
| Interest on a loan for a self-occupied house | Section 22(1)(b), for property under section 21(6) (earlier 24(b)) |
| Chapter VIII deductions other than sections 124(1), 124(2), 125(2) and 146, including sections 123 (80C), 124(3) (80CCD(1B)), 125(1), 126 (80D), 129 (80E), 133 (80G), 134 (80GG), 153 and others | Chapter VIII |
| Business items: additional depreciation, certain research payments, capital expenditure on specified businesses, agricultural extension, tea, coffee, rubber and petroleum deposits | Sections 33(8), 45(3), 46, 47(1)(a), 48, 49 |
| Setting off house property loss against other heads, and carried-forward losses attributable to the removed deductions | Section 202(2)(b) |
| Exemptions for allowances or perquisites under any other law | Section 202(2)(c) |
The Finance Act, 2026 omitted one entry, section 202(2)(a)(iii), which referred to the deduction under section 144 for SEZ units, with effect from 1 April 2026.
What the new regime still allows
For salaried employees
- Standard deduction of ₹75,000, or the salary if lower, under section 19(1) (Table Sl. No. 2(a)).
- Employer’s NPS contribution. Section 202(2) keeps section 124(1), and section 124(2) raises the limit for all employers to 14% of salary under the new regime; under the old regime a private employer’s limit is 10%. The contribution is first included in salary under section 16(k), then deducted. Under section 17(1)(h), employer contributions to recognised provident fund, NPS and approved superannuation fund above ₹7,50,000 in aggregate in a year are a taxable perquisite.
- Gratuity within the section 19(1) limits (Table Sl. Nos. 3 to 6).
- Commuted pension (Sl. Nos. 7 to 9), retrenchment compensation (Sl. Nos. 10 and 11) and voluntary retirement compensation up to ₹5,00,000 (Sl. No. 12).
- Leave encashment at retirement: fully exempt for government employees (Sl. No. 13), and within the formula and notified limit for others (Sl. No. 14).
- Prescribed allowances under rule 280: travel on tour or transfer, transfer-related expenses, daily allowance while on tour, conveyance for official duties, and the transport allowance for employees with specified disabilities. See the note below on how rule 280(3) is worded.
- Agnipath. The Central Government’s contribution to an Agniveer Corpus Fund account (section 125(2)); the Agniveer’s own contribution under section 125(1) is not deductible.
For pensioners and families
- Family pension: one-third of the family pension or ₹25,000, whichever is less, under section 93(1)(d)(i). The old regime limit is ₹15,000.
- NPS partial withdrawal up to 25% of own contributions remains exempt (Schedule III, Sl. No. 4).
For landlords and businesses
- Let-out property. The 30% standard deduction under section 22(1)(a) and interest on the loan under section 22(1)(b) remain available, because section 202(2)(a)(v) removes interest only for self-occupied property. But a resulting loss cannot be set off against salary or other heads (section 202(2)(b)(ii)).
- Additional employee cost. The 30% deduction under section 146, for businesses that need an audit under section 63, is retained.
- Share of profit from a firm and sums received from an HUF remain exempt (Schedule III, Sl. Nos. 1 and 2).
A note on rule 280(3)
Rule 280(3) of the Income-tax Rules, 2026 limits an employee to the travel, transfer, daily and conveyance allowances in rule 280(1)(a) to (d), plus the disability transport allowance in rule 280(2) (Table Sl. No. 10). Section 202(2)(a)(ii) contemplates exactly such a list for the new regime.
However, the rule’s text applies the restriction to an employee “who has exercised an option under section 202(4)”, which is the option to leave the new regime. That wording appears to be reversed, but until it is clarified, check how your employer applies it.
Worked example: employer NPS under the new regime
Vikas earns a gross salary of ₹15,00,000 in tax year 2026-27, of which ₹7,50,000 is basic pay. Compare two ways his employer could structure the same cost:
| Structure 1: ₹1,05,000 as employer NPS (14% of basic) | Structure 2: ₹1,05,000 as a taxable special allowance | |
|---|---|---|
| Gross salary | ₹15,00,000 | ₹15,00,000 |
| Standard deduction | ₹75,000 | ₹75,000 |
| Section 124(1) deduction | ₹1,05,000 | Nil |
| Total income | ₹13,20,000 | ₹14,25,000 |
| Slab tax (no rebate above about ₹12.7 lakh) | ₹78,000 | ₹93,750 |
| Cess at 4% | ₹3,120 | ₹3,750 |
| Total tax | ₹81,120 | ₹97,500 |
The NPS structure saves ₹16,380 a year. The trade-off is that the ₹1,05,000 is locked into NPS under its withdrawal rules.
Illustrative. Confirm with your employer how “salary” is measured for the 14% limit.
What this means for the regime choice
- Without big deductions, the new regime’s lower slabs and ₹60,000 rebate usually win.
- With HRA, a home loan on a self-occupied house and full section 123 use, the old regime can still be cheaper. Run both.
- Employer NPS works under both regimes, so it is not a reason to switch.
- Retirement benefits such as gratuity and leave encashment exemptions do not depend on the regime.
Year labels
This page applies to tax year 2026-27 onwards under the Income-tax Act, 2025. For FY 2025-26 (AY 2026-27), the equivalent rules were in section 115BAC of the Income-tax Act, 1961.
Where this fits
- The rates and rebate: new regime slabs for tax year 2026-27
- Choosing between regimes: old vs new tax regime
- Pension products compared: NPS vs ELSS
- Run both regimes: income tax calculator
Sources. Income-tax Act, 2025, sections 16, 17(1)(h), 19, 21, 22, 93, 123 to 125, 146 and 202 and Schedule III, Gazette of India, 21 August 2025. Finance Act, 2026, section 56, Gazette of India, 30 March 2026. Income-tax Rules, 2026, rule 280, notified 20 March 2026.