Deductions under the Income-tax Act, 2025

What Is Available Under the Default and Optional Tax Regimes?

Deductions can reduce the portion of income on which tax is calculated, but the deductions available to a taxpayer depend significantly on the tax regime applicable to that person.

Under the Income-tax Act, 2025, deductions from Gross Total Income are primarily contained in Chapter VIII. Section 122 lays down the general framework, while Sections 123 onwards provide deductions for specified investments, payments, expenses and incomes.

A key point for Tax Year 2026-27 is that the new tax regime under Section 202 operates as the default regime for individuals, Hindu undivided families (HUFs), certain associations of persons, bodies of individuals and specified artificial juridical persons. Most Chapter VIII deductions are not available while computing income under this default regime.

First, understand the transition to the Income-tax Act, 2025

The Income-tax Act, 2025 came into force from 1 April 2026. Accordingly, income relating to Tax Year 2026-27 is governed by the new Act.

However, returns relating to income earned during FY 2025-26 are still governed by the Income-tax Act, 1961. Therefore, the return for FY 2025-26 / AY 2026-27 continues to use the provisions and section numbers of the Income-tax Act, 1961 even though the return may be filed after 1 April 2026.

From income earned on or after 1 April 2026, taxpayers should refer to the corresponding provisions of the Income-tax Act, 2025.

What is Gross Total Income?

Gross Total Income, or GTI, is broadly the income arrived at after computing income under the applicable heads, including relevant clubbing provisions and permissible set-off of losses, but before deductions under Chapter VIII are reduced.

Chapter VIII deductions are then deducted from the eligible Gross Total Income to arrive at Total Income, subject to the conditions attached to each deduction.

Section 122 also places an important overall restriction: Chapter VIII deductions cannot exceed Gross Total Income. Therefore, these deductions cannot by themselves create a negative Total Income or a loss to be carried forward.

Simple example

Suppose a taxpayer has Gross Total Income of ₹4,00,000 and otherwise qualifies for Chapter VIII deductions of ₹4,75,000.

The deduction cannot exceed ₹4,00,000. The taxpayer's Total Income may become nil, but the additional ₹75,000 cannot create a tax loss merely because the eligible deductions were higher than Gross Total Income.

Deduction and exemption are not the same

An exemption generally prevents a specified income from entering the taxable-income computation, subject to the applicable provision. A deduction works differently: the relevant income first forms part of the income computation and an eligible amount is subsequently reduced while determining Total Income.

This distinction becomes particularly important while checking whether a benefit is available under the default tax regime.

Default tax regime under Section 202

Section 202 of the Income-tax Act, 2025 contains the new tax regime for:

• Individuals;
• Hindu undivided families;
• Associations of persons, other than co-operative societies;
• Bodies of individuals; and
• Specified artificial juridical persons.

This regime applies by default unless an eligible taxpayer exercises the option to move out of it in accordance with Section 202.

While computing income under the default regime, most deductions contained in Chapter VIII cannot be claimed.

Which Chapter VIII deductions remain available under the default regime?

Section 202 specifically preserves a limited number of Chapter VIII deductions even when the taxpayer remains under the default regime i.e. new regime.

In addition, Section 202 contains a specific rule for a person having a qualifying unit in an International Financial Services Centre (IFSC), under which the Section 147 deduction may continue to be available subject to the conditions of that section.

Which common deductions are not available under the default regime?

Some of the most commonly used deductions are generally unavailable while computing income under Section 202's default regime. These include:

• Section 123: specified investments and payments such as PPF, eligible life insurance premium, provident fund, certain tuition fees, eligible housing-loan principal repayment and other specified investments;
• Section 124(3)/(4): specified own contributions to NPS and eligible NPS Vatsalya contributions;
• Section 126: eligible health insurance premium and specified medical expenditure;
• Section 127: maintenance and medical treatment of an eligible dependant with disability;
• Section 128: expenditure on treatment of specified diseases;
• Section 129: interest on eligible higher-education loans;
• Section 133: eligible donations to specified funds and charitable institutions;
• Section 134: eligible rent payments;
• Section 153: specified interest-income deductions; and
• Section 154: deduction available to an eligible person with disability.

This means that merely making an eligible investment or expenditure does not automatically result in a tax deduction. The tax regime under which the taxpayer is being assessed must also permit that deduction.

What happens if you opt out of the default regime?

An eligible taxpayer may exercise the option under Section 202 to move out of the default regime and be taxed under the normal provisions of the Income-tax Act, 2025.

This is an important terminology point: opting out of the default regime does not mean that the taxpayer goes back to the Income-tax Act, 1961. For Tax Year 2026-27 onwards, the taxpayer continues to be governed by the Income-tax Act, 2025, but the income is calculated according to its normal provisions rather than the concessional default regime under Section 202.

Subject to individual eligibility conditions, this opens access to the wider range of deductions provided in Chapter VIII.

Default regime vs opting out: deduction comparison

How have the familiar deduction section numbers changed?

Many deductions that taxpayers previously recognised by their Income-tax Act, 1961 section numbers continue under the new legislation but have been reorganised and renumbered.

Example: how the tax regime changes deductions

Assume an individual has Gross Total Income of ₹8,00,000 for Tax Year 2026-27 and makes the following qualifying payments:

• ₹1,50,000 in eligible investments covered by Section 123; and
• ₹25,000 towards qualifying health insurance covered by Section 126.

If the individual remains under the default regime of Section 202, these two deductions would generally not be available. Therefore, the ₹1,75,000 cannot be reduced from Gross Total Income merely because the payments satisfy Sections 123 and 126.

If the individual validly opts out of the default regime and all the conditions of the respective deductions are fulfilled, the eligible deductions may be claimed. The Gross Total Income of ₹8,00,000 could consequently be reduced by ₹1,75,000 to ₹6,25,000 before considering any other applicable provisions.

This does not necessarily mean that opting out will result in lower tax. The taxpayer must compare the tax rates, deductions, exemptions and other applicable provisions under both alternatives before deciding.

Special rule for taxpayers with business or professional income

The option mechanism under Section 202 is more restrictive for a person having income from business or profession.

Such a taxpayer must exercise the option within the prescribed time linked to the due date for furnishing the return. Once exercised, the option generally continues for subsequent tax years. The ability to withdraw and subsequently exercise the option again is also restricted by Section 202.

Taxpayers without business or professional income generally have greater flexibility to make the regime choice for the relevant tax year through the return process.

Timely filing can also affect certain deductions

For specified profit-linked deductions falling under Part C of Chapter VIII, Section 122 requires the return of income to be furnished within the applicable due date and the deduction to be claimed in the return.

Therefore, an assessee may lose an otherwise eligible deduction if the statutory return-filing condition attached to that deduction is not satisfied.

Common mistakes taxpayers should avoid

• Using old section numbers for Tax Year 2026-27: Sections such as 80C, 80D and 80E belong to the Income-tax Act, 1961. Their corresponding provisions under the 2025 Act have different numbers.
• Confusing AY 2026-27 with Tax Year 2026-27: AY 2026-27 relates to FY 2025-26 and remains governed by the 1961 Act. Tax Year 2026-27 relates to income from 1 April 2026 onwards and is governed by the 2025 Act.
• Assuming an eligible investment always gives a deduction: The taxpayer's chosen tax regime must permit the deduction.
• Claiming deductions above Gross Total Income: Aggregate Chapter VIII deductions cannot exceed GTI.
• Ignoring specific conditions: Each deduction has separate eligibility requirements, limits, payment modes, documentation rules and, in some cases, holding periods.
• Choosing a tax regime only on the basis of deductions: The final tax payable under both alternatives should be compared before making the decision.

Key takeaway

The Income-tax Act, 2025 has reorganised the deduction framework, but the basic concept remains straightforward: eligible deductions reduce Gross Total Income only when the relevant provision and the taxpayer's tax regime permit them.

For taxpayers covered by Section 202, the default regime allows only a limited set of Chapter VIII deductions. A taxpayer who validly opts out may access a much broader range of deductions under the normal provisions of the Income-tax Act, 2025.

Before filing the return, taxpayers should therefore check three things together: the applicable tax year, the tax regime selected and the new section number governing the deduction.

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