The Income-tax Act, 2025 has introduced a new statutory framework for determining taxable income from Tax Year (TY) 2026-27 onwards. With the transition to the new Act, taxpayers need to understand the allowances, deductions and exemptions available under different heads of income.
The Income Tax Department has published a category-wise document outlining the allowances available to different categories of taxpayers for TY 2026-27, incorporating amendments made by the Finance Act, 2026. The document covers benefits under salaries, house property, business or profession, capital gains and income from other sources.
Important Note on the Department's Document
The Income Tax Department has clarified that the document is intended to provide taxpayers with quick and easy access to information and should not be treated as a legal document. Taxpayers are advised to verify the relevant provisions against the Income-tax Act, Rules and applicable notifications.
1. Allowances and Exemptions Under Salaries
For salaried employees, the document lists several allowances that may be exempt, subject to prescribed conditions.
House Rent Allowance (HRA)
HRA exemption is available to eligible salaried employees based on the least of the following:
- Actual HRA received;
- 40% of salary, or 50% where the house is situated in specified cities including Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad or Bengaluru; and
- Rent paid minus 10% of salary.
For this purpose, salary includes basic salary, DA where it forms part of retirement benefits, and turnover-based commission.
HRA becomes fully taxable where an employee lives in their own house or does not actually pay rent. Further, where annual rent paid exceeds ₹1 lakh, the employee is required to report details such as the landlord's name, address, PAN and relationship with the landlord to the employer.
Children's Education and Hostel Allowances
The document also provides specified exemptions for allowances relating to children.
An exemption of up to ₹3,000 per month per child, subject to a maximum of two children, is available under the specified provision. A separate allowance provides an exemption of up to ₹9,000 per month per child, again subject to a maximum of two children.
Allowances for Employees With Disabilities
For eligible employees who are blind, deaf and dumb, or have specified orthopaedic disabilities affecting the lower or upper extremities, the exemption is specified at ₹15,000 per month for metro cities and ₹8,000 per month for other cities, as applicable.
The document also lists an exemption for certain allowances at the lower of 70% of the allowance or ₹25,000 per month.
Official-Duty Allowances
Several allowances provided to employees for official purposes are exempt to the extent of the expenditure actually incurred for those official purposes.
The document further specifies various monthly limits for different allowances, including ₹7,000, ₹4,500, ₹1,500, ₹13,500 and ₹8,000, depending on the nature of the allowance.
Special provisions are also listed for members of the Armed Forces, including allowances with monthly limits of up to ₹22,000 and location-based allowances depending on altitude and specified regions.
Standard Deduction for Salaried Employees and Pensioners
The standard deduction continues to provide an important tax benefit.
Under the regular tax regime, the deduction is ₹50,000 or the amount of salary, whichever is lower.
Under the alternative tax regime under Section 202, the deduction is ₹75,000 or the amount of salary, whichever is lower.
The benefit applies to salaried employees and pensioners.
2. Deductions Under Income From House Property
Taxpayers earning rental or other income from house property can claim several deductions under the Income-tax Act, 2025.
Municipal Taxes
Under Section 21(3), the amount of municipal taxes actually paid during the relevant tax year is allowed as a deduction. The provision applies to all assessees.
Property Held as Stock-in-Trade
Where a property is held as stock-in-trade and remains unlet for the whole or part of the tax year, its annual value may be taken as nil for a specified period. The document provides that this treatment can apply for up to two years from the end of the financial year in which the competent authority issues the certificate of completion of construction.
Standard Deduction of 30%
A deduction equal to 30% of the annual value, after considering municipal taxes, is available under Section 22(1)(a).
Interest on Housing Loan
Interest on borrowed capital is deductible subject to the applicable conditions.
For a self-occupied house property, the deduction can be up to ₹2 lakh where the borrowing is for construction or acquisition. For reconstruction, repair or renewal of a self-occupied property, the limit is ₹30,000.
For let-out property, the actual interest paid or payable during the year is allowed, subject to the applicable provisions. Pre-construction period interest can be claimed in five equal annual instalments, subject to conditions.
The document also clarifies that the interest deduction provision applies to two self-occupied house properties, while the aggregate deduction remains subject to the applicable ₹30,000 or ₹2 lakh limit.
A deduction of 30% of arrears of rent or unrealised rent is also provided under Section 23.
3. Business and Profession: Depreciation and Other Deductions
Businesses and professionals can claim a range of deductions under the new Act.
Depreciation
For taxpayers engaged in generation or generation and distribution of power, depreciation is allowed at prescribed rates on the actual cost of assets. Where an asset is acquired and put to use for less than 180 days during the tax year, depreciation is restricted to 50% of the otherwise allowable amount. Such taxpayers may have the option to claim depreciation using the straight-line or written-down-value method.
For other assessees, depreciation is generally computed at prescribed rates on the written-down value of the relevant block of assets. The 180-day rule similarly restricts the deduction to 50% where applicable.
Additional Depreciation
Eligible taxpayers engaged in manufacturing or production, or in specified power-related activities, can claim additional depreciation at 20% of the actual cost of new plant and machinery.
Where the asset is acquired and put to use for less than 180 days during the tax year, 50% of the additional depreciation is allowed in the year of acquisition and the balance 50% in the following year.
4. Special Business Deductions
The document also identifies specific deductions available to businesses operating in certain sectors.
For businesses engaged in growing and manufacturing tea, coffee or rubber, the deduction is restricted to the lower of the amount deposited in the specified account under the approved scheme or 40% of profits, subject to the prescribed conditions.
For businesses involved in prospecting for, extraction or production of petroleum or natural gas in India, the deduction is the lower of the amount deposited in the specified account or 20% of profits, subject to the applicable conditions.
5. Scientific Research Expenditure
The Income-tax Act, 2025 also provides deductions for eligible scientific research expenditure.
The document states that expenditure on scientific research can be allowed as a deduction, including specified expenditure incurred during the three years before commencement of business, subject to the applicable conditions and certification requirements.
Payments made to specified associations, universities, colleges or other institutions can also qualify for 100% deduction, subject to the relevant provisions.
For eligible companies engaged in biotechnology or manufacturing or production of specified articles or things, the document provides for deduction of 100% of qualifying expenditure on research and development, subject to conditions relating to agreements, accounts, audit and reporting.
6. Capital Expenditure and Specified Businesses
Certain capital expenditure incurred for business purposes is eligible for 100% deduction, subject to prescribed conditions.
The document also highlights a cash-payment restriction: capital expenditure above ₹10,000 paid in cash is not eligible for deduction in the specified cases.
Similar provisions are listed for specified businesses such as cross-country natural gas or crude/petroleum oil pipeline networks and eligible infrastructure facilities, subject to commencement and other statutory conditions.
7. Capital Gains Exemptions
The document provides a detailed framework of exemptions available against different types of capital gains.
The listed provisions cover exemptions involving:
-
Transfer of residential house property;
-
Agricultural land used for agricultural purposes;
-
Compulsory acquisition of land or building forming part of an industrial undertaking;
-
Investment in specified residential properties;
-
Investment in specified bonds; and
-
Shifting an industrial undertaking from an urban area to a rural or specified area.
The eligible taxpayer varies depending on the exemption, with certain provisions specifically available to individuals and HUFs while others are available to any person.
Investment in Residential Property
For one of the residential property exemptions, the taxpayer can purchase a new residential house within one year before or two years after the transfer, or construct it within three years after the transfer.
The document also provides an option to invest in two residential houses in India, subject to the specified conditions. This option can be exercised only once in a lifetime where the long-term capital gain does not exceed ₹2 crore.
Capital Gains Exemption Limits
In certain cases, the exemption is linked to the amount invested in the new asset or the capital gain, whichever is lower.
The document notes that where the cost of a new asset exceeds ₹10 crore, the excess is ignored for computing the exemption under the specified provisions.
Another exemption involving specified bonds is subject to a ₹50 lakh limit in a financial year.
Taxpayers should also be mindful of the conditions for withdrawal of exemption. Depending on the relevant provision, transferring the new asset within three or five years, or undertaking certain subsequent transactions, can result in withdrawal of the benefit.
8. Capital Gains Account Scheme
The Capital Gains Account Scheme, 1988 continues to provide a mechanism for taxpayers who are unable to utilise capital gains for acquiring the specified asset before the due date for filing the return.
The document states that the scheme is available to taxpayers seeking exemption under Sections 82, 83, 84, 86, 87 or 88.
Where the capital gain cannot be invested before the return filing due date, it can be deposited in an account with a nationalised bank in accordance with the Capital Gains Account Scheme.
The document also specifies a ₹10 crore ceiling for the amount taken into account for exemption under certain provisions where the amount deposited or net consideration exceeds that threshold.
9. Income From Other Sources
The document also covers certain receipts taxable under the head "Income from other sources".
Under Section 92(2)(m), money or movable or immovable property received without consideration or for inadequate consideration can fall within the specified tax provisions, subject to the applicable conditions.
For immovable property, inadequate consideration is linked to the difference between the stamp duty value and actual consideration, where the specified threshold is exceeded.
Amounts received from specified relatives or in specified circumstances are not included in taxable income, as indicated in the departmental document.
10. Family Pension Deduction
A standard deduction is available in respect of family pension.
Under the regular tax regime, the deduction is 33.33% of family pension, subject to a maximum of ₹15,000.
Under the alternative tax regime under Section 202, the deduction is 33.33% of family pension, subject to a maximum of ₹25,000.
These figures reflect the provisions as amended by the Finance Act, 2026.
What Taxpayers Should Keep in Mind for TY 2026-27
The Income-tax Act, 2025 provides a broad range of allowances, deductions and exemptions across different sources of income. However, many of these benefits are subject to specific eligibility conditions, monetary limits, time limits and compliance requirements.
For taxpayers, the key takeaway is that merely incurring an expenditure or making an investment does not automatically guarantee a deduction or exemption. The relevant section, nature of income, taxpayer category and statutory conditions must be checked before claiming the benefit.
The Income Tax Department's document offers a useful quick-reference guide for TY 2026-27, but taxpayers should verify the applicable provision in the Act, Rules and notifications before finalising their tax position.
CAclubindia
