Deductions allowed in the new tax regime

The new tax regime buys its lower rates by removing almost every deduction and exemption the old regime allowed. What survives is a short list, and knowing exactly what is on it is the key to computing tax correctly under the new regime and to deciding whether the old regime is worth choosing instead. This article is that list: the handful of deductions and exemptions a central government employee or pensioner can still claim in the new regime, and the long list of what is gone.

The one that matters most for a government employee is the deduction for the employer’s contribution to the National Pension System under Section 80CCD(2). It is the only substantial investment-linked deduction that survives, and for a government employee it is worth 14 per cent of basic pay plus dearness allowance, a large figure that the old regime and the new regime both allow. Beyond it, the survivors are mostly the standard deduction and a few narrow allowances.

This article sets out the allowed list in full, with the limits and the government-specific detail, then the removed list, then what the two together mean in practice, and how the position carries into the Income-tax Act 2025 . For the regime itself, see the new tax regime article, and for the head-to-head choice, old versus new tax regime .

What the new regime allows

The standard deduction of Rs. 75,000

Every salaried employee and every pensioner gets a standard deduction of Rs. 75,000 from salary or pension income in the new regime, higher than the Rs. 50,000 the old regime gives. It is applied automatically, needs no proof of expense, and is the single largest reduction most people get under the new regime. It is what lifts the effective zero-tax threshold for a salaried person to Rs. 12.75 lakh, the Rs. 12 lakh rebate ceiling plus this Rs. 75,000.

The employer’s NPS contribution under Section 80CCD(2)

This is the most valuable deduction that survives, and for a government employee it is substantial. The deduction under Section 80CCD(2) is for the employer’s contribution to the employee’s National Pension System account, and from the financial year 2025-26 it is a uniform 14 per cent of basic pay plus dearness allowance for all employees, government and private alike. For a central government employee, whose employer contributes 14 per cent of basic and dearness allowance to the NPS, the whole of that contribution is deductible in the new regime, which can be a large sum on a senior salary. It is claimed on top of the standard deduction.

The employee’s own NPS contribution is treated differently, and this is a common trap. The deduction for the employee’s own contribution, under Section 80CCD(1) within the Rs. 1.5 lakh limit and the additional Rs. 50,000 under Section 80CCD(1B), is not available in the new regime. So in the new regime the NPS benefit is the employer’s 14 per cent under 80CCD(2), not the employee’s own contribution. The full mechanics are in the NPS tax benefits article.

The Agniveer Corpus Fund under Section 80CCH

A deduction under Section 80CCH is available for a contribution to the Agniveer Corpus Fund , the Seva Nidhi account of an Agniveer under the Agnipath scheme. Both the Agniveer’s own contribution and the central government’s matching contribution to the fund qualify for the deduction, and it is one of the few Chapter VI-A style deductions the new regime keeps, reflecting the government’s decision not to disadvantage Agniveers who default into the new regime.

The family-pension deduction

A family pensioner is not left without any deduction in the new regime. Under Section 57(iia), a family pensioner may deduct the lower of Rs. 25,000 or one-third of the family pension from the family pension taxed under the head income from other sources. The Finance Act 2024 raised this deduction from Rs. 15,000 to Rs. 25,000 specifically for the new regime, so a widow or other family pensioner receiving a family pension keeps a meaningful deduction there. This is covered further in the income tax for pensioners article.

Allowances that survive

A few allowances remain exempt in the new regime because they meet an actual cost of duty rather than being a general benefit. The transport allowance for a differently-abled (Divyang) employee remains exempt under Section 10(14), at Rs. 3,200 a month. The allowances granted specifically for the performance of official duties survive too: the conveyance allowance for official duties, any allowance for the cost of travel on tour or transfer, and the daily allowance to meet the cost of a tour. What does not survive is the general transport allowance for an able-bodied employee, which was in any case subsumed into the standard deduction, the children education allowance exemption, and the house rent allowance and leave travel concession exemptions.

Home-loan interest on a let-out house

Interest on a home loan is allowed in the new regime in one case only. For a let-out (rented) property, the interest under Section 24(b) is deductible against the rental income, though the house-property loss that results cannot be set off against salary income in the new regime. For a self-occupied house, the deduction of up to Rs. 2 lakh that the old regime gives under Section 24(b) is not available at all in the new regime. The detail is in the home loan interest under Section 24(b) article.

Retirement exemptions that apply in both regimes

One point clears up a frequent confusion. The exemptions for terminal retirement benefits, the gratuity exemption under Section 10(10), the leave-encashment exemption under Section 10(10AA), and the commuted-pension exemption under Section 10(10A), are not deductions and are not regime-specific. They exempt a receipt from tax, and they apply in both the old and the new regime. A retiring government employee keeps the full exemption on gratuity, leave encashment, and commuted pension whichever regime they are in; the new regime does not touch them.

What the new regime removes

The list of what is gone is much longer, and it is worth setting out so a taxpayer does not claim a deduction the new regime disallows.

In short, the whole of the Chapter VI-A menu that the old regime relies on, and the salary exemptions for HRA, LTA, and the entertainment allowance, are removed. This is the price of the lower rates.

What it means in practice

For a central government employee the upshot is simple. In the new regime the deductions reduce to the standard deduction of Rs. 75,000 and the employer’s NPS contribution under 80CCD(2), plus, for the right person, the Agniveer Corpus Fund or the family-pension deduction. There is no scope to reduce tax through the general provident fund , life insurance, health insurance, HRA, or a self-occupied home loan; those levers exist only in the old regime. An employee covered by the National Pension System therefore keeps a genuinely valuable deduction in the new regime through the employer’s 14 per cent, while an older employee on the old pension scheme , with no NPS employer contribution, has little beyond the standard deduction in the new regime and may find the old regime, with its Section 80C and home-loan interest, worth a closer look.

This is exactly why the choice of regime turns on the deductions a person actually has, and why it should be computed both ways, as the old versus new tax regime article and the calculators set out.

Under the Income-tax Act 2025

The Income-tax Act 2025 , in force from 1 April 2026, keeps the same short list of allowed deductions, renumbered. The standard deduction sits in the new Section 19, and the surviving deductions such as 80CCD(2) and 80CCH carry forward with new numbers. For the financial year 2025-26, whose returns are filed from mid-2026, the position is governed by the 1961 Act; the 2025 Act first applies to the tax year 2026-27. The substance, a short allowed list dominated by the standard deduction and the employer NPS contribution, is unchanged.

Related Articles

• New tax regime
• Old tax regime
• Old versus new tax regime
• Standard deduction
• NPS tax benefits
• National Pension System
• Agniveer Corpus Fund
• Section 80C
• Section 80D
• Section 80TTB
• Home loan interest under Section 24(b)
• HRA exemption under Section 10(13A)
• Leave travel concession
• Entertainment allowance
• Transport allowance
• Children education allowance
• Family pension
• Section 87A rebate
• Income-tax Act 2025
• Income tax for government employees
• Income tax for pensioners
• General Provident Fund
• Old Pension Scheme
• Central government employees in India

External references

• Income Tax Department: e-filing portal
• Income Tax Department: deductions
• Central Board of Direct Taxes
• Ministry of Finance

References

1. Income-tax Act, Section 115BAC (the new regime and the deductions it disallows), renumbered as Section 202 of the Income-tax Act, 2025 (in force from 1 April 2026).
2. Income-tax Act, Section 16(ia) (standard deduction of Rs. 75,000 in the new regime for salary and pension) and Section 57(iia) (family-pension deduction, the lower of Rs. 25,000 or one-third of the family pension, raised from Rs. 15,000 by the Finance Act 2024 for the new regime).
3. Income-tax Act, Section 80CCD(2) (employer contribution to the National Pension System, 14 per cent of basic pay plus dearness allowance for all employees from the financial year 2025-26), the principal deduction that survives in the new regime; the employee’s own contribution under Section 80CCD(1) and 80CCD(1B) is not allowed.
4. Income-tax Act, Section 80CCH (Agniveer Corpus Fund) and the allowances that remain exempt under Section 10(14) in the new regime (transport allowance for a differently-abled employee, and allowances for the performance of official duties); and Section 24(b) (interest on a let-out house allowed, a self-occupied house not).
5. Income-tax Act, Sections 10(10), 10(10AA), and 10(10A) (gratuity, leave-encashment, and commuted-pension exemptions), which apply in both regimes; and the Chapter VI-A deductions (80C, 80D, and the rest) and salary exemptions (10(13A), 10(5), 16(ii), 16(iii)) that the new regime removes.