The landscape of Indian taxation is undergoing a massive transformation. Historically, the end of the financial year triggered a mad scramble among taxpayers. Individuals would blindly lock their hard-earned money into insurance policies, low-yield endowments, and five-year fixed deposits simply to exhaust the ₹1.5 Lakh limit under Section 80C. While the Old Tax Regime was rich in deductions, it penalized higher income brackets with steep tax rates and offered a highly restrictive basic exemption limit of just ₹2.5 to ₹5 lakhs depending on the year.

With the imminent application of the provisions relating to the financial year 2025-2026 (Assessment Year 2026-2027), the New Tax Regime has become aggressively lucrative. The government’s clear objective is to simplify compliance, reduce the paperwork burden on the salaried class, and put more disposable liquid cash directly into the hands of the consumer. Rather than forcing taxpayers to invest in specific government-mandated instruments, the revised tax structure encourages individuals to spend, save, or invest based on their actual life goals.

However, the narrative has drastically shifted, and a massive communication gap remains. Many taxpayers are under the stubborn misconception that adopting the New Tax Regime strips them of absolutely all tax-saving opportunities. This is a complete myth. Not only does the New Regime offer much wider, lower tax slabs, but it also allows a surprisingly large number of highly effective exemptions and deductions. In fact, a salaried individual can earn up to ₹12.75 Lakhs completely tax-free in the New Tax Regime without making a single traditional 80C investment.

Welcome to CMA Knowledge. In this extensive, deep-dive guide, we will break down the 25 crucial deductions and exemptions that remain fully available and legally compliant under the New Tax Regime. Whether you are a salaried professional looking to restructure your pay, a pensioner seeking relief, an active stock market investor, or a business owner, this article will equip you with the knowledge to legally minimize your tax outgo in FY 2025-26.

Salary and Pension Related Deductions

1. Standard Deduction of ₹75,000

One of the most celebrated updates for the salaried class and pensioners is the enhancement of the Standard Deduction. While the Old Tax Regime restricted this to ₹50,000, the New Tax Regime for the financial year 2025-26 boosts this flat deduction to ₹75,000. You do not need to submit any proof of expenses, travel tickets, or medical bills to claim this. It is a straight reduction from your gross salary. This means if your gross salary is ₹12,75,000, your taxable income immediately drops to ₹12,00,000, bringing you entirely into the tax-free bracket under the newly expanded Section 87A rebate.

2. Employer’s Contribution to NPS (Section 80CCD(2))

The National Pension System (NPS) remains one of the most powerful wealth-creation and tax-saving tools available. While your own voluntary contribution (the employee share) under 80CCD(1B) is not deductible in the New Regime, the Employer’s Contribution to your NPS Tier-1 account is fully deductible under Section 80CCD(2). Private sector employees can claim a deduction of up to 14% of their Basic Salary + Dearness Allowance (DA), while government employees can also claim up to 14%. If your employer does not currently offer this, you should immediately request an HR restructuring of your Cost to Company (CTC) to route a portion of your special allowance into NPS.

3. Family Pension Deduction

In the unfortunate event of a taxpayer’s demise, the pension received by their legal heirs (commonly referred to as family pension) is taxable under the head “Income from Other Sources.” However, the New Tax Regime provides a generous safety net for the bereaved family. You can claim a direct deduction of 1/3rd of the family pension received, subject to a maximum cap of ₹25,000. Previously, in the old regime, this limit was capped at a mere ₹15,000, making this a distinct upgrade for dependents.

Housing and Real Estate

4. Interest on Home Loan for Let-Out Property (Section 24b)

A major grievance taxpayers have with the New Regime is the loss of the ₹2 Lakh deduction on home loan interest for self-occupied properties. However, real estate investors rejoice: if you own a Let-Out Property (rented out), you can still claim the interest paid on the housing loan against the rental income generated by that specific property. Furthermore, you can also deduct the municipal taxes paid and claim a flat 30% standard deduction on the Net Annual Value for maintenance.

Allowances and Reimbursements

5. Official Allowances and Reimbursements

Many employees undertake travel, host clients, or incur expenses strictly for company operations. If your employer reimburses you for actual expenses incurred during official duties—such as daily allowances, travel allowances, conveyance for official duties, or tour expenses—these are completely exempt from tax. Because these are operational reimbursements designed to make you whole, and not personal income, the New Tax Regime does not tax them. Ensure you keep valid GST invoices and submit them to your employer.

6. Transport Allowance for Divyang (Disabled) Persons

While the standard transport allowance is now subsumed under the massive ₹75,000 Standard Deduction for regular taxpayers, differently-abled (Divyang) employees are eligible for a specific, ongoing exemption. To support their mobility and independence, they can claim up to ₹3,200 per month (amounting to ₹38,400 annually) as a completely tax-free transport allowance to meet their daily commuting expenses between their residence and workplace.

Retirement and Terminal Benefits

7. Gratuity Exemption (Section 10(10))

Gratuity is a lump sum paid by the employer as a statutory token of appreciation for long-term service (minimum 5 years). The New Tax Regime fully respects this critical retirement benefit. For central and state government employees, the entire gratuity amount is 100% tax-free. For non-government employees covered under the Payment of Gratuity Act, the exemption limit stands at a massive ₹20 Lakhs. This ensures that the bulk of your retirement nest egg remains untouched by taxation.

8. Leave Encashment Exemption (Section 10(10AA))

Did you diligently accumulate earned leaves over your long career rather than taking vacations? When you encash these leaves at the time of retirement or resignation, the amount received is heavily tax-exempt. Following recent, highly favorable amendments to the tax code, the maximum exemption limit for leave encashment for non-government employees has been increased to a staggering ₹25 Lakhs. For central and state government employees, the encashment remains fully tax-free without any upper limit.

9. Voluntary Retirement Scheme (VRS) Exemption (Section 10(10C))

Corporate restructuring often involves offering employees an early exit. If you opt for early retirement under a recognized and compliant Voluntary Retirement Scheme (VRS), the compensation received is exempt from tax up to ₹5 Lakhs. This serves as a vital financial cushion for those transitioning out of the workforce early, allowing them to secure capital to start a business or fund early retirement, and it is fully accessible under the New Tax Regime.

Investments and Savings Exemptions

10. Public Provident Fund (PPF) Interest and Maturity

A common myth is that PPF is dead under the New Tax Regime. This is entirely false. Even though you cannot claim the upfront ₹1.5 Lakh Section 80C deduction for investing money into your PPF account under the New Regime, the backend benefits remain absolutely untouched. The interest earned annually (currently around 7.1% compounded) and the final maturity corpus accumulated over the 15-year lock-in period remain 100% tax-free. It retains its highly coveted “Exempt-Exempt-Exempt” (EEE) status at the withdrawal stage, making it an excellent debt instrument for safe, long-term capital appreciation.

11. Employee Provident Fund (EPF) Interest and Maturity

Similar to PPF, your mandatory Employee Provident Fund (EPF) deductions yield interest that is completely tax-free, provided the employee’s own contribution does not exceed ₹2.5 lakhs per financial year. When you retire, resign, or withdraw the EPF corpus after completing 5 continuous years of service, the entire lump sum withdrawal—comprising your contribution, the employer’s contribution, and all accumulated interest—is totally exempt from income tax.

12. Sukanya Samriddhi Yojana (SSY)

For parents aiming to secure the educational and marital future of their girl child (below 10 years of age at the time of account opening), the Sukanya Samriddhi Yojana is a phenomenal sovereign-backed tool. Currently offering premium interest rates (often above 8%), both the annual interest accrued and the substantial maturity amount paid out at the end of the tenure are entirely tax-free under the New Tax Regime. It remains one of the best child-focused investment vehicles in India.

13. Life Insurance Maturity Proceeds (Section 10(10D))

Life Insurance provides vital financial security to your dependents. If you or your nominees receive a maturity amount or a death benefit payout from a traditional life insurance policy, it is entirely tax-free under Section 10(10D). The only caveat is that the annual premium paid must not exceed 10% of the core sum assured. (Note: For policies issued after April 1, 2023, if your aggregate annual premium across all policies exceeds ₹5 Lakhs, the maturity proceeds become taxable. However, payouts received due to the death of the insured person remain universally exempt regardless of premium size).

Agriculture, Gifts, and Inheritance

14. Agricultural Income Exemption (Section 10(1))

India is deeply rooted as an agrarian economy, and the Income Tax Act respects this foundation. If your sole source of income is derived purely from agricultural activities (farming, renting agricultural land, etc.), it is 100% tax-free, regardless of the amount—even if you earn crores. However, if you have both agricultural and non-agricultural income (like salary or business profits), a specific method of “partial integration” is used to calculate your tax slab, ensuring that the agricultural portion remains functionally exempt from the final tax calculation.

15. Gifts from Relatives

Receiving gifts from immediate family members is a common cultural tradition in India, often used for wealth transfer. Under Section 56(2)(x), any gift—be it hard cash, bank transfers, jewelry, shares, or real estate property—received from defined “relatives” (which includes parents, spouse, siblings, grandparents, and parents-in-law) is unlimitedly tax-free. The New Tax Regime does not alter this fundamental rule, allowing seamless inter-generational wealth movement.

16. Gifts on the Occasion of Marriage

Weddings in India are grand affairs, and the gifting scale often matches the grandeur. The tax department acknowledges this. Any gift received by the bride or groom strictly on the occasion of their marriage is entirely exempt from income tax. This applies regardless of the monetary value of the gift and regardless of whether the giver is a close blood relative or a distant friend.

17. Exemption on Small Gifts from Non-Relatives

If you receive gifts from non-relatives (such as friends, colleagues, or distant acquaintances) on occasions other than your marriage (like birthdays or anniversaries), the New Regime allows an exemption up to a cumulative value of ₹50,000 per financial year. However, there is a catch: if the aggregate value of all such gifts crosses ₹50,000 in a year, the *entire* amount becomes taxable under “Income from Other Sources,” not just the excess amount. Therefore, tracking these inflows carefully is essential.

18. Inheritance and Will

India currently does not have an inheritance tax or estate duty. Therefore, wealth transferred through inheritance, legal succession, or a registered Will is not treated as taxable income. Any property, cash in bank accounts, mutual funds, or physical assets received as an inheritance from your ancestors is absolutely tax-free at the time of receipt. You will only pay tax on the income those assets generate in the future (e.g., rent from an inherited house).

Capital Gains and Business Exemption

19. Exemption on Long-Term Capital Gains (LTCG) on Equity/Mutual Funds

Investing in the stock market is highly rewarding and is essential for beating inflation. If you hold equity shares or equity-oriented mutual funds for more than one year, the profits are classified as Long-Term Capital Gains (LTCG). The New Tax Regime continues to offer a generous baseline exemption of up to ₹1.25 Lakhs per financial year on these gains. Any gain above this ₹1.25 Lakh threshold is taxed at a flat, newly revised rate of 12.5%. Smart investors use a strategy called “tax harvesting” to book ₹1.25 lakhs of tax-free profit every year to reduce their future tax burden.

20. Capital Gains Exemption on Real Estate (Section 54 & 54F)

Selling a physical house property or a plot of land often results in massive, multi-lakh capital gains, which could attract a heavy 12.5% or 20% tax hit. You can legally escape this tax by reinvesting the profits back into the real estate ecosystem. Section 54 (which allows reinvesting the sale proceeds of a residential house into another residential house) and Section 54F (which allows reinvesting the sale proceeds of any other capital asset, like gold or commercial land, into a residential house) are fully available in the New Tax Regime. These sections act as absolute shields for your real estate wealth.

21. Additional Deduction for Employment Generation (Section 80JJAA)

For business owners, entrepreneurs, and startups who are subjected to tax audits under Section 44AB, the government heavily encourages job creation. If your business hires new, regular employees, you can claim a massive deduction of 30% of the additional employee wage cost for three consecutive years under Section 80JJAA. This drastically reduces a growing business’s taxable profit and is a core feature retained in the New Tax Regime to boost the economy.

22. Agniveer Corpus Fund Contribution (Section 80CCH)

In a patriotic move to support the Armed Forces and the youth joining the military, any contribution made by the Central Government to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme is fully allowed as a deduction under the New Tax Regime. The final corpus received upon exiting the scheme is also completely tax-free.

23. Tax-Free Bonuses and Capital Receipts

While standard Diwali bonuses or performance bonuses are fully taxable as salary, certain specific statutory payouts, capital receipts, or compensation received under specific government notifications or tribunal rulings can be treated as non-taxable. Structuring these correctly requires adherence to strict compliance guidelines. It is always recommended to consult a Chartered Accountant to classify business receipts correctly to avoid unnecessary taxation.

Rebates, Reliefs, and Basic Exemptions

24. Massive Enhancement in Basic Exemption & Section 87A Rebate

This is undeniably the crown jewel of the New Tax Regime. In the Old Regime, the basic exemption was a mere ₹2.5 Lakhs, and the 87A rebate protected income only up to ₹5 Lakhs. Under the updated laws for 2026, the Section 87A rebate is heavily expanded. If your net taxable income (after claiming your ₹75,000 standard deduction and any 80CCD(2) employer NPS) is up to ₹12 Lakhs, the tax calculated on the slab rates is completely wiped out by the rebate. Your final tax liability becomes a beautiful ZERO.

25. Introduction of Marginal Relief

What happens if your income is slightly above the ₹12 Lakh tax-free threshold? Let’s break down the math. Let’s say your taxable income is ₹12,10,000 (meaning you exceeded the limit by ₹10,000). Without marginal relief, your tax calculated on the slabs would be roughly ₹55,000. It is incredibly unfair to pay ₹55,000 in tax just because you earned an extra ₹10,000 at work.

The New Tax Regime introduces Marginal Relief to fix this math anomaly. The law ensures that the tax payable on the income exceeding ₹12 Lakhs will never be more than the excess income earned itself. In this scenario, since you earned only ₹10,000 above the limit, your maximum tax liability will be capped at exactly ₹10,000. The remaining ₹45,000 is forgiven as Marginal Relief, protecting you from a disproportionate and unfair tax shock.

Strategic Salary Structuring for 2026

To truly maximize the New Tax Regime, you must move away from “End of Year Tax Planning” and move toward “Beginning of Year Salary Structuring.” Sit down with your HR or payroll department and implement these steps:

• Maximize NPS 80CCD(2): Ask your employer to route 14% of your Basic Pay into the Tier-1 NPS account. If your CTC is ₹15 Lakhs and your basic is ₹7.5 Lakhs, that’s ₹1.05 Lakhs directly removed from your taxable income.
• Utilize Allowances: Ensure that your travel, internet, and mobile expenses incurred for official work are structured as reimbursements against actual bills, rather than a flat, taxable “Special Allowance.”
• Harvest Capital Gains: If you invest in mutual funds, sell and immediately rebuy your units once a year to book up to ₹1.25 Lakhs of tax-free Long-Term Capital Gains. This resets your purchase price and saves you 12.5% tax on that amount in the future.

Summary Comparison: Why the New Tax Regime Wins in 2026

Conclusion

The transition to the Income Tax Act 2025 brings a massive breath of fresh air for Indian taxpayers. The cynical notion that the New Tax Regime strips away all benefits to extract more tax is fundamentally incorrect and outdated. As we have explored in deep detail, 25 distinct deductions, exemptions, and strategic allowances are readily available to ensure your wealth stays exactly where it belongs: in your pocket.

From the newly enhanced ₹75,000 standard deduction to tax-free PPF maturity, from generous employer NPS contributions to robust capital gain exemptions on real estate, the New Regime is meticulously designed for modern simplicity and maximum retention of liquid cash. You no longer need to forcefully lock your money into sub-par life insurance policies or low-yield fixed deposits just to save a few thousand rupees in tax. You can now design your financial portfolio based on your actual life goals—buying a house, traveling, or investing in high-growth equity—rather than tax compulsions, while easily enjoying a fully tax-free income of up to ₹12.75 lakhs.

Disclaimer: Tax laws are highly complex and subject to dynamic changes based on ongoing government notifications. While we at CMA Knowledge strive for absolute accuracy in our educational content, this article is for informational purposes. It is highly recommended to consult with your personal Chartered Accountant or certified tax advisor before finalizing your CTC structure, filing your Annual Information Statement (AIS), or submitting your ITR.