Understanding Tax Deductions in India (2026-27)
Tax deductions are specific expenses, investments, or payments that reduce your taxable income, thereby lowering your overall tax liability. The Indian Income Tax Act provides various sections under which taxpayers can claim deductions to minimize their tax burden legally.
Key Tax Deduction Sections for FY 2026-27
Section 80C - Investment Deductions
Maximum deduction of ₹1.5 lakh for investments in PPF, EPF, ELSS mutual funds, life insurance premiums, NSC, tax-saving FDs (5-year), principal repayment of home loan, tuition fees (max 2 children), Sukanya Samriddhi Yojana, and Senior Citizens Savings Scheme.
Section 80D - Health Insurance
Deduction for health insurance premiums: ₹25,000 for self, spouse, and dependent children. Additional ₹25,000 for parents (below 60) or ₹50,000 (above 60). Critical illness coverage: Additional ₹50,000 for senior citizens (self or parents).
HRA Exemption & Home Loan Benefits
HRA exemption based on salary structure and rent paid. Home loan interest deduction under Section 24(b): ₹2 lakh for self-occupied property. Additional deduction of ₹1.5 lakh for affordable housing under Section 80EEA (first-time home buyers).
Real-Life Use Cases & Examples
Case Study 1: Software Engineer in Bangalore
Profile: 32-year-old professional, Annual Income: ₹18,00,000, Metro city residence
Deductions claimed:
- Section 80C (PPF+EPF+ELSS): ₹1,50,000
- Section 80D (Health insurance for family): ₹25,000
- HRA Exemption: ₹2,40,000 (Basic: ₹9,60,000, HRA: ₹2,88,000, Rent: ₹4,80,000)
- Home Loan Interest: ₹1,80,000
- Education Loan Interest: ₹40,000
- NPS Additional: ₹50,000
- Standard Deduction: ₹50,000
Tax Savings: Reduced tax liability from ₹3,45,600 to ₹1,78,320 – saving ₹1,67,280 annually.
Case Study 2: Business Professional in Pune
Profile: 45-year-old entrepreneur, Annual Income: ₹25,00,000, Non-metro residence
Deductions claimed:
- Section 80C (Various investments): ₹1,50,000
- Section 80D (Family + Senior parents): ₹75,000
- HRA Exemption: ₹1,92,000
- Home Loan Interest (2 properties): ₹2,00,000
- NPS Additional: ₹50,000
- Business Expenses (Professional): ₹1,50,000
- Medical Expenditure (Parents): ₹50,000
Tax Savings: Reduced tax liability from ₹5,72,500 to ₹3,24,560 – saving ₹2,47,940 annually.
Tax Calculation Formulas & Methodology
Professional Tax Planning Strategies for 2026
1. Optimize Section 80C Portfolio: Diversify across ELSS (for growth), PPF (for safety), and tax-saving FDs (for liquidity). Consider timing investments to maximize compounding benefits.
2. Leverage NPS Benefits: Beyond ₹1.5 lakh 80C limit, additional ₹50,000 deduction under Section 80CCD(1B) with employer contribution up to 10% of salary (Basic+DA) exempt from tax.
3. Health Insurance Optimization: For families with senior citizens, maximize ₹50,000 deduction. Consider critical illness riders for additional coverage and deductions.
4. Home Loan Planning: For joint home loans, allocate higher share to higher-income earner for maximum tax benefit. Consider balance transfer if better interest rates available.
5. Education Loan Strategy: No upper limit for deduction under Section 80E. Interest paid during moratorium period also deductible.
Frequently Asked Questions (FAQs)
What are the major tax deduction sections available in India for 2026?
The major tax deduction sections for FY 2026-27 include:
- Section 80C: ₹1.5 lakh for investments (PPF, EPF, ELSS, Life Insurance, NSC, Tax-saving FDs, Home Loan Principal, Tuition Fees)
- Section 80D: ₹25,000-75,000 for health insurance premiums
- Section 80E: Full deduction for education loan interest (no upper limit)
- Section 24(b): ₹2 lakh for home loan interest on self-occupied property
- HRA Exemption: Based on salary structure and actual rent paid
- Section 80TTA: ₹10,000 on savings account interest
- Standard Deduction: ₹50,000 for salaried individuals
- Section 80CCD(1B): Additional ₹50,000 for NPS contributions
- Section 80G: Donations to specified funds and charities
How do I calculate HRA exemption accurately?
HRA exemption is calculated as the minimum of these three amounts:
- Actual HRA received from employer
- 50% of basic salary if living in metro city (Delhi, Mumbai, Chennai, Kolkata) or 40% of basic salary for non-metro cities
- Actual rent paid minus 10% of basic salary
Example Calculation: Basic salary: ₹8,00,000, HRA received: ₹2,40,000, Rent paid: ₹3,60,000, Metro city: Yes
1. Actual HRA = ₹2,40,000
2. 50% of Basic = ₹4,00,000
3. Rent paid - 10% of Basic = ₹3,60,000 - ₹80,000 = ₹2,80,000
HRA Exemption = Minimum(₹2,40,000, ₹4,00,000, ₹2,80,000) = ₹2,40,000
What is the maximum deduction available under Section 80C for 2026?
For FY 2026-27, the maximum deduction under Section 80C remains ₹1.5 lakh. This includes:
- Public Provident Fund (PPF) contributions
- Employee Provident Fund (EPF) contributions
- Equity Linked Savings Scheme (ELSS) mutual funds
- Life insurance premiums (for self, spouse, children)
- National Savings Certificate (NSC)
- Tax-saving fixed deposits (5-year tenure)
- Principal repayment of home loan
- Tuition fees for up to two children
- Sukanya Samriddhi Yojana (for girl child)
- Senior Citizens Savings Scheme (SCSS)
Pro Tip: Diversify across 2-3 instruments for better returns and liquidity management.
Can I claim both standard deduction and professional tax deduction?
Yes, you can claim both deductions:
- Standard Deduction: ₹50,000 automatically available to all salaried individuals regardless of actual expenses. This replaced medical reimbursement (₹15,000) and transport allowance (₹19,200).
- Professional Tax: Up to ₹2,500 per year (varies by state) deducted from salary and shown separately in Form 16. This is deductible under Section 16(iii).
Important: Standard deduction is available only in the old tax regime. In the new tax regime, standard deduction was reintroduced in Budget 2023 and continues for FY 2026-27.
How does the new tax regime affect deductions for 2026?
Under the new tax regime (optional for FY 2026-27):
- Not Available: Most deductions including 80C, 80D, 80E, HRA, home loan interest (except for let-out property), LTA, and other chapter VI-A deductions
- Available: Standard deduction of ₹50,000 for salaried individuals and pensioners
- Tax Slabs: Lower rates - 0% up to ₹3 lakh, 5% (₹3-6L), 10% (₹6-9L), 15% (₹9-12L), 20% (₹12-15L), 30% (above ₹15L)
Comparison Example: For income of ₹15 lakh with deductions of ₹4 lakh, old regime tax might be lower despite higher slab rates in new regime. Use our calculator to determine which regime is better for your situation.
What documents are required to claim tax deductions?
Essential documents for claiming deductions:
- Section 80C: Investment proofs (PPF passbook, insurance premium receipts, ELSS statements, NSC certificates, home loan statement from bank)
- Section 80D: Health insurance premium payment receipts
- HRA: Rent receipts with landlord PAN (if annual rent exceeds ₹1 lakh), rental agreement
- Home Loan Interest: Interest certificate from bank (Form 12BB for salaried)
- Education Loan: Interest certificate from bank/financial institution
- Donations (80G): Receipts from donee institution with 80G registration details
- Medical Treatment (80DDB): Prescription and bills for specified diseases
Can I claim deductions for previous years if missed?
Yes, to some extent:
- Revised Return: If you missed claiming deductions in original return, file revised return under Section 139(5) within 3 months before end of relevant assessment year or before completion of assessment, whichever is earlier.
- Carry Forward Losses: Some losses (house property, capital gains) can be carried forward for 8 years.
- Limitations: Most deductions (80C, 80D, etc.) cannot be carried forward. They must be claimed in the year the expense/investment was made.
- Belated Return: If you didn't file return, file belated return within 3 years (extended due date) but interest under Section 234A may apply.
Pro Tip: Maintain proper documentation for at least 6 years as tax authorities can scrutinize returns during this period.