List of Deductions Allowed in New Tax Regime in AY 2026-27

Under Section 80CCD(2), the deduction for the employer’s contribution to the National Pension System (NPS) is one of the few powerful tax-saving tools that survived the shift to the New Tax Regime.

For AY 2026-27 (Financial Year 2025-26), a significant update has been implemented to bring parity between private and government sector employees.

Key Rules for AY 2026-27

• Unified Limit: The deduction limit is now 14% of Salary (Basic + DA) for all employees (Central Govt, State Govt, and Private Sector) under the New Tax Regime.

• Old Regime Note: If you stick to the Old Tax Regime, the limit for private-sector employees remains at 10%, while government employees stay at 14%.

• Over & Above 80C: This deduction is independent of the ₹1.5 lakh limit of Section 80C.

• The ₹7.5 Lakh Cap: Under Section 17(2)(vii), the combined employer contribution to PF, NPS, and Superannuation exceeding ₹7.5 lakh per annum is taxable as a perquisite in the hands of the employee.

Calculation Example (New Tax Regime)

Let’s look at a private sector professional’s scenario for the financial year:

Employee Profile:

• Monthly Basic + DA: ₹1,00,000

• Annual Basic + DA: ₹12,00,000

• Employer’s NPS Contribution: 14% of Basic + DA

The Result: Even though the employer “paid” you an extra ₹1.68 lakh into your pension, you don’t pay a single rupee of tax on that specific amount because the deduction under 80CCD(2) exactly offsets the contribution added to your gross salary.

Critical Reminders for the New Regime

1. Employee’s Own Contribution: Under the New Tax Regime, you cannot claim the ₹1.5 lakh (80CCD(1)) or the additional ₹50,000 (80CCD(1B)) for your personal contributions. Only the employer’s portion is deductible.

2. Tax-Free Exit: Upon retirement (age 60), 60% of the total corpus can be withdrawn tax-free. The remaining 40% must be used to purchase an annuity, which provides a taxable monthly pension.

Section 87A rebate is a tax relief mechanism designed to ensure that taxpayers below a certain income threshold pay zero tax. It is applied to your total tax liability after all deductions but before adding the 4% Health and Education Cess.

For AY 2026-27, the rules significantly favor the New Tax Regime following the updates in the Budget 2025 and the Income Tax Act 2025.

A. The Threshold Limits (AY 2026-27)

Note for Salaried Individuals: Since you get a ₹75,000 Standard Deduction in the New Regime, you can earn a gross salary of up to ₹12,75,000 and still pay zero tax because your “Taxable Income” will be exactly ₹12,00,000.

B. Example: Salaried Individual (New Tax Regime)

Let’s calculate the tax for a resident individual with a gross annual salary of ₹12,70,000.

• Gross Salary: ₹12,70,000

• Less: Standard Deduction: (₹75,000)

• Net Taxable Income: ₹11,95,000

Step 1: Calculate Tax as per Slabs (AY 2026-27)

• Up to ₹4,00,000: Nil

• ₹4,00,001 to ₹8,00,000 (5% of ₹4L): ₹20,000

• ₹8,00,001 to ₹11,95,000 (10% of ₹3.95L): ₹39,500

• Total Tax Calculated: ₹59,500

Step 2: Apply Section 87A Rebate

• Since the Taxable Income (₹11,95,000) is under the ₹12 Lakh limit, the individual is eligible for a rebate.

• The rebate is the lower of: Actual Tax (₹59,500) or Max Cap (₹60,000).

• Rebate Allowed: ₹59,500

Step 3: Final Tax Liability

• Net Tax (₹59,500 – ₹59,500) = ₹0

C. What happens if you exceed the limit?

If your taxable income is even ₹1 above the limit (e.g., ₹12,00,100), the rebate drops to zero (unless Marginal Relief applies).

Marginal Relief: To prevent a situation where earning ₹100 extra results in a ₹60,000 tax bill, the government provides relief. In the New Regime, if your income marginally exceeds ₹12 Lakh, your tax is capped so that it does not exceed the amount by which your income exceeds ₹12 Lakh.

D. Eligibility Criteria

• Resident Status: Only Resident Individuals can claim this. Non-Residents (NRIs) are not eligible.

• Income Type: The rebate is available against normal tax but cannot be used to offset tax on Long-Term Capital Gains (LTCG) under Section 112A (on equity shares/mutual funds).

Marginal Relief is a safeguard that prevents a “tax cliff”—a situation where a small increase in income leads to a disproportionately large increase in tax.

For AY 2026-27, marginal relief is primarily used in two scenarios under the New Tax Regime:

1. Near the ₹12 Lakh Threshold: To protect those who earn slightly more than the ₹12 lakh rebate limit.

2. Near Surcharge Thresholds: To protect high-income earners (e.g., those earning just over ₹50 lakh).

A. Marginal Relief near the ₹12 Lakh Limit

Under the New Tax Regime, if your taxable income is up to ₹12,00,000, your tax is zero due to the Section 87A rebate (₹60,000).

However, if you earn ₹12,10,000, you technically lose the entire rebate. Without marginal relief, your tax would jump from ₹0 to over ₹60,000 for earning just ₹10,000 more. Marginal relief steps in to cap your tax at the extra income earned above ₹12 lakh.

Example: Taxable Income of ₹12,10,000

• Income exceeding threshold: ₹10,000 (₹12,10,000 – ₹12,00,000)

• Tax as per slabs (before relief):

  • 0 – 4L: Nil

  • 4L – 8L (5%): ₹20,000

  • 8L – 12L (10%): ₹40,000

  • 12L – 12.1L (15%): ₹1,500

  • Total Tax: ₹61,500

• The Problem: You earned ₹10,000 extra but are being asked to pay ₹61,500 in tax.

• Marginal Relief Calculation: The tax is restricted to the excess income over ₹12 lakh.

  • Final Tax Payable: ₹10,000 (plus 4% Cess)

• Tax Saved by Relief: ₹51,500.

  Note: This relief is available for taxable incomes up to approximately ₹12.75 lakh. Beyond this point, the normal slab tax becomes lower than the “excess income” calculation, and the relief naturally fades out.

B. Marginal Relief for Surcharge (High Income)

Surcharges apply when income exceeds ₹50 lakh, ₹1 crore, etc. Marginal relief ensures that the increase in tax (including surcharge) is not more than the increase in income.

Example: Taxable Income of ₹51,00,000

• Income exceeding threshold: ₹1,00,000 (over ₹50 lakh)

• Tax on ₹50 Lakh: ₹13,12,500

• Tax on ₹51 Lakh (including 10% Surcharge):

  • Slab Tax: ₹13,42,500

  • Surcharge (10%): ₹1,34,250

  • Total: ₹14,76,750

• The Problem: By earning ₹1,00,000 more, your tax increased by ₹1,64,250 (₹14,76,750 – ₹13,12,500).

• Marginal Relief: Your tax is capped at:

  • (Tax on ₹50L) + (Income above ₹50L)

  • ₹13,12,500 + ₹1,00,000 = ₹14,12,500

• Final Tax Payable: ₹14,12,500 (plus 4% Cess).

Summary Table

9.Deduction for Contribution to Agniveer Corpus Fund u/s 80CCH(2)