Rebate, deduction, and exemption: the difference

Rebate, deduction, and exemption under the Income-tax Act 2025: Chapter III keeps income out, Chapter VIII cuts income, Chapter IX cuts the tax itself.

Updated 14 September 2026

An exemption, a deduction, and a rebate are three ways the Indian income tax on a salary or a pension is reduced, and the Income-tax Act 2025 puts each of them in a chapter of its own. Chapter III, headed Incomes which do not form part of total income, holds the exemptions: Section 11(1) provides that income enumerated in Schedules II to VI shall not be included in computing total income. Chapter VIII, headed Deductions to be made in computing total income, holds the deductions: Section 122(1) allows them from gross total income. Chapter IX, headed Rebates and reliefs, holds the rebate: Section 156 allows a deduction from the income-tax itself.

That architecture is the whole answer. An exemption acts before the income is counted, a deduction acts on income that has been counted, and a rebate acts on the tax after the slabs have done their work. All three lower the final bill, which is why the three words get used interchangeably in pay-slip conversation, but they are not worth the same and they do not survive the two regimes on the same terms.

The order is what makes the difference visible. Income is computed under its heads with exemptions kept out; the heads are aggregated into gross total income; deductions reduce that to the total income actually taxed; the Section 202(1) slab Table produces the tax; the Section 156 rebate is subtracted from that tax; and the surcharge and the 4% cess are added last. For a central government employee or a pensioner choosing between the new tax regime and the old tax regime, that sequence explains why one rupee of relief is not always worth the same as another.

This article defines each lever against the section that creates it, places it in the order of computation, shows what a rupee of each is worth, explains why Section 202(2)(a) strips one chapter and leaves another standing, and works two examples through from salary to cess.

The three levers in one line each

An exemption keeps income out of total income entirely, under Section 11(1) of the Income-tax Act 2025. Example: the House Rent Allowance exemption at Schedule III serial 11.
A deduction is subtracted from income that has already been computed, under Section 19(1), Section 93(1), or Chapter VIII. Example: the standard deduction at Section 19(1) Table serial 2, or the Section 80C successor at Section 123.
A rebate is subtracted from the income-tax after the tax has been calculated, under Chapter IX. Example: the Section 87A rebate, now Section 156.

Everything below follows from those three sentences. The rest of the article is the machinery, the figures, and the cases where the distinction changes the amount payable.

Exemption: income that never enters total income

An exemption is income that the Income-tax Act 2025 declines to include in total income at all. Section 11(1) states the mechanism in one line: in computing the total income of any person for a tax year, any income enumerated in Schedules II, III, IV, V and VI shall not be included, subject to fulfilment of the conditions specified in those Schedules. Section 11(2) supplies the consequence of failure, providing that where the conditions are not satisfied in a tax year, the income is charged to tax for that year. An exemption is therefore conditional, not automatic, and the condition lives in the Schedule rather than in the section.

For a government pay slip the exemptions that matter sit in Schedule III. The House Rent Allowance exemption, formerly Section 10(13A) of the repealed Income-tax Act 1961, is serial 11, computed under rule 279 of the Income-tax Rules 2026. The leave travel concession, formerly Section 10(5), is serial 8. The prescribed allowances, formerly Section 10(14) read with Rule 2BB, are serials 12 and 13, with the amounts now set by rule 280 of the Income-tax Rules 2026, which re-based nearly every cap rather than carrying the 1962 figures across. The children education allowance exemption is one of those re-based entries.

The practical mark of an exemption is that it never appears as a subtraction anywhere on the computation. The exempt part simply is not in the total that the deductions then work on. Which allowances on a central government pay slip are exempt and which are not is set out in salary allowances: taxable versus exempt.

Deduction: a subtraction from income, made in three different places

A deduction is subtracted from income that has already been computed, and the Income-tax Act 2025 provides for deductions in three separate places rather than one. Treating Chapter VIII as the whole of the deduction story is the most common mistake made about the salaried computation, and it is what makes a pensioner’s family-pension deduction look as though it has disappeared.

The first place is the head itself. Section 19(1) provides that income chargeable under the head Salaries shall be computed after making the deductions listed in the Table to that sub-section. Serial 1 is the tax on employment levied under article 276(2) of the Constitution, which is the professional tax deduction. Serial 2 is the standard deduction, and the Table states both figures in one entry: Rs. 75,000 or the salary, whichever is less, where income-tax is computed under Section 202(1), and Rs. 50,000 or the salary, whichever is less, in any other case. The entertainment allowance deduction for government employees, formerly Section 16(ii) of the 1961 Act, has no counterpart in the 2025 Act and ceased on 1 April 2026.

The second place is the other-sources head, and it is where a family pensioner’s relief sits. Section 93(1)(d) allows, for income in the nature of family pension, one-third of that income or Rs. 25,000, whichever is less, where income-tax is computed under Section 202(1), and one-third or Rs. 15,000, whichever is less, in any other case. A family pension is charged under income from other sources rather than under salaries, so the deduction had to be placed at Section 93 and not at Section 19.

The third place is Chapter VIII. Section 122(1) provides that the deductions specified in that Chapter shall be allowed from gross total income, and Section 122(10) defines gross total income as the total income computed before making any Chapter VIII deduction. Section 123 is the Rs. 1,50,000 aggregate deduction for the sums enumerated in Schedule XV, which is where Section 80C went. Section 124(3) is the additional NPS deduction formerly at Section 80CCD(1B), Section 124(1)(a) the employer’s National Pension System contribution at 14% for a Central or State Government employer, Section 126 the health insurance deduction formerly at Section 80D, and Section 153 the interest deduction for senior citizens formerly at Section 80TTB.

What every deduction has in common is that its worth is the rate that would have applied to the income it removes. A deduction that takes income out of the 30% band of the Section 202(1) Table saves 30% of itself; the same deduction for a taxpayer in the 5% band saves 5%; and for a taxpayer whose total income is already below Rs. 4,00,000 it saves nothing, because that income was not being taxed.

Rebate: a subtraction from the tax itself

A rebate is subtracted from the income-tax, not from the income, and the Income-tax Act 2025 gives it a separate chapter to make the point. Chapter IX is headed Rebates and reliefs. Section 155(1) provides that in computing income-tax on the total income on which an assessee is chargeable, there shall be allowed from the income-tax, as computed before allowing the deductions under that Part, the deductions specified in Chapter IX, subject to Section 156.

Section 156 is the individual rebate, the successor to Section 87A of the repealed Income-tax Act 1961. It carries both rebates in one section. Section 156(1) gives a resident individual a deduction of 100% of the income-tax payable or Rs. 12,500, whichever is less, where total income does not exceed Rs. 5,00,000. Section 156(2)(a) gives a resident individual whose income is chargeable under Section 202(1) a deduction of 100% of the income-tax payable or Rs. 60,000, whichever is less, where the income does not exceed Rs. 12,00,000.

Note the word the Act uses. Section 156 calls the rebate a deduction, and so does the marginal note to Section 155. The word is the same; what differs is the thing it is taken from. A Chapter VIII deduction comes off gross total income under Section 122(1). A Chapter IX deduction comes off the income-tax under Section 155(1). Anyone reading the bare Act and concluding that the rebate is a deduction has read it correctly and drawn the wrong conclusion, because the distinction the article is about is not the label but the base.

Because a rebate is applied to tax, a rupee of rebate is worth a full rupee of tax saved whatever the taxpayer’s slab. It is also bounded in a way a deduction is not: it stops at Rs. 60,000 or Rs. 12,500, it is available only below a stated income, and above that income it is withdrawn subject to the taper in Section 156(2)(b).

Relief under Section 157, the fourth lever

Section 157 of the Income-tax Act 2025 is a fourth lever, and it is neither an exemption, a deduction, nor a rebate. It is relief, and it corrects a rate distortion rather than granting a concession. Section 157(1) applies where the total income of an assessee is assessed at a rate higher than the rate at which it would otherwise have been assessed, because salary, family pension or compensation was received in arrears or in advance.

The mechanism is a recomputation rather than a subtraction of a fixed sum. The tax is worked out as though the money had been received in the years to which it relates, and the difference between the two computations is the relief. Section 89 of the repealed Income-tax Act 1961 is the predecessor, and the claim is made on Form 39 under rule 73 of the Income-tax Rules 2026, which replaced Form 10E under Rule 21AA. Rule 73 is a Table of five entries rather than a set of sub-rules, with salary and family pension at entry 1 and commutation at entry 5.

Relief matters to central government employees more often than to most taxpayers, because a pay commission settlement or a pension arrears payment routinely lands several years of money in one tax year. Section 157 is the provision that stops that timing from pushing the recipient into a higher band permanently.

The order of computation, step by step

The four levers sit at fixed points in a fixed sequence, and reading any Indian income tax computation is a matter of following it:

Compute income under the five heads, salaries, house property, capital gains, profits and gains of business or profession, and income from other sources, keeping out the exemptions that Section 11(1) and Schedules II to VI provide for, and taking the head-level deductions at Section 19(1) and Section 93(1) as each head is computed.
Aggregate the heads to reach the gross total income, defined by Section 122(10).
Subtract the Chapter VIII deductions under Section 122(1), capped by Section 122(2) at the gross total income, to reach the total income, which is the figure actually taxed.
Apply the rates to the total income, the Section 202(1) Table in the default regime or Paragraph A of Part I-B of the First Schedule to the Finance Act 2026 in the old regime.
Subtract the rebate under Section 156, with the Section 156(2)(b) taper where it applies, and any relief under Section 157.
Add the surcharge where the income crosses a threshold in the Table to Section 3(4)(b) of the Finance Act 2026, with marginal relief under Section 3(5).
Add the 4% health and education cess under Section 3(15) of the Finance Act 2026, on the income-tax as increased by surcharge.

Exemptions act at step 1, deductions at steps 1 and 3, the rebate and relief at step 5, and surcharge and cess at steps 6 and 7. Nothing at steps 1 to 5 touches the cess directly; all of it touches the cess through the tax.

The value of a rupee of each lever

A rupee of exemption and a rupee of deduction are worth the marginal rate, and a rupee of rebate is worth a rupee. That single sentence decides most of the practical questions a taxpayer asks about the three.

Under the Section 202(1) Table the marginal rate is nil up to Rs. 4,00,000, 5% from Rs. 4,00,001 to Rs. 8,00,000, 10% to Rs. 12,00,000, 15% to Rs. 16,00,000, 20% to Rs. 20,00,000, 25% to Rs. 24,00,000, and 30% above that. A rupee of deduction is therefore worth 30 paise to a taxpayer at Level 13 with a total income above Rs. 24,00,000 and nothing at all to one below Rs. 4,00,000. Filling the Rs. 1,50,000 limit at Section 123 in the old regime saves Rs. 45,000 for a taxpayer in the 30% band and Rs. 30,000 in the 20% band, for the same Rs. 1,50,000 committed.

The Section 156 rebate behaves in the opposite way. It saves the same rupees for everyone who qualifies for it, because it is applied to the tax rather than to the income, and then it stops. The consequence for a central government employee is that a deduction is worth chasing in proportion to the rate it displaces, while the rebate is either available in full or not available at all.

Retirement money moved from the exemption column to the deduction column

Three of the largest sums a central government servant ever receives changed lever on 1 April 2026, when Section 536(1) of the Income-tax Act 2025 repealed the Income-tax Act 1961. Under the old Act they were exemptions in the Section 10(10) family. Under the new Act they are deductions in the Table to Section 19(1).

Retirement gratuity, formerly exempt under Section 10(10)(i), is now serial 3 of the Section 19(1) Table, read with Section 19(2)(g), which names the CCS (Pension) Rules 2021 and the revised pension rules by title; the amount of deduction is the entire amount. Commuted pension, formerly Section 10(10A)(i), is serial 7. Leave encashment, formerly Section 10(10AA)(i), is serial 13.

The rupees are unchanged. A retiring Central Government servant pays no tax on any of the three, exactly as before. What changed is the mechanism and therefore the citation, and the change is not cosmetic on an article about this distinction: writing that gratuity is exempt is now wrong twice over, wrong on the Act and wrong on the lever. It also changes the regime analysis, because Section 202(2)(a)(iv) withdraws serial 1 of the Section 19(1) Table and no other entry, so all three of these deductions survive in the default regime.

Why the rebate does not reach capital gains

The Section 156(2) rebate cannot be set against tax charged at a special rate, and the reason is in the drafting rather than in an exclusion clause. Section 156(2) opens by requiring that the total income of the resident individual be chargeable to tax under Section 202(1), which is the slab Table of the default regime. Section 156(3) then provides that the deduction under sub-section (2) shall not exceed the income-tax payable as per the rates provided in Section 202(1).

Special-rate income is charged elsewhere. Short-term capital gains on equity on which securities transaction tax has been paid are charged at 20% under Section 196, and long-term capital gains at 12.5% under Section 197 and Section 198. None of that tax is payable at Section 202(1) rates, so the Rs. 60,000 ceiling in Section 156(2)(a) has nothing to bite on in respect of it.

The practical consequence for a government employee is narrow but real. A taxpayer whose salary income is inside the rebate limit but who sold listed equity during the year does not get the gains cancelled by the rebate. The rebate extinguishes the slab tax and the capital gains tax stands. This is one of the few places where the difference between a rebate and a deduction changes the amount payable rather than only the arithmetic used to reach it.

Marginal relief attaches to the new-regime rebate only

Marginal relief on the rebate exists in the default regime and does not exist in the old regime. Section 156(2)(b) of the Income-tax Act 2025 provides that where total income exceeds Rs. 12,00,000 and the income-tax payable on it exceeds the amount by which the total income exceeds Rs. 12,00,000, the deduction is the excess of the tax over that difference. That is the taper which stops a rupee of income above Rs. 12,00,000 from costing far more than a rupee in tax.

Section 156(1) has no corresponding limb. The old-regime rebate of Rs. 12,500 is available where total income does not exceed Rs. 5,00,000, and at Rs. 5,00,001 it is gone in full. A taxpayer in the old regime who crosses that line by one rupee loses the whole Rs. 12,500, and no provision softens the step.

Marginal relief on surcharge is a separate provision again, at Section 3(5) of the Finance Act 2026, and it caps the total of income-tax and surcharge by reference to the tax on the threshold income. The two reliefs share a name and nothing else. Marginal relief on income tax sets out both formulas.

Neither lever can take the liability below nil

Neither a deduction nor a rebate can generate a negative figure, and both chapters of the Income-tax Act 2025 say so in terms. Section 122(2) provides that the aggregate amount of the deductions under Chapter VIII shall not, in any case, exceed the gross total income of the assessee. Section 155(2) provides that the deduction under Section 156 shall not, in any case, exceed the income-tax on the total income on which the assessee is chargeable.

The effect is a floor at zero on both levers. A taxpayer with Rs. 2,00,000 of gross total income who has paid Rs. 1,50,000 into instruments listed in Schedule XV takes a Section 123 deduction of Rs. 1,50,000 and reaches a total income of Rs. 50,000, not a loss of anything. A taxpayer whose slab tax is Rs. 18,000 takes a Section 156(2)(a) rebate of Rs. 18,000 and not Rs. 60,000, because the sub-section allows 100% of the income-tax payable or Rs. 60,000, whichever is less.

A refund therefore never comes from an unused deduction or an unused rebate. It comes from tax already deducted at source under Section 392 and credited under rule 203 of the Income-tax Rules 2026 in excess of the liability computed after all four levers have run.

The new regime keeps the rebate and strips the deductions

Section 202(2)(a) of the Income-tax Act 2025 is the provision that makes the regime choice a choice about which lever does the work, and it is a closed list of what is withdrawn rather than a list of what survives. Its opening words are “without any exemption or deduction under”, and it then names twelve limbs. Anything it does not name continues to apply in the default regime.

It withdraws Schedule III Table serials 5, 6, 7, 8, 11 and 17 at limb (i), which takes away the leave travel concession at serial 8 and the House Rent Allowance exemption at serial 11. Limb (ii) withdraws Schedule III serials 12 and 13 other than those prescribed for the purpose, the prescription being rule 280 of the Income-tax Rules 2026, so the Section 10(14) successors are not withdrawn absolutely. Limb (iii) is now blank, the Finance Act 2026 having omitted its reference to Section 144 with effect from 1 April 2026. Limb (iv) withdraws serial 1 of the Section 19(1) Table and nothing else. Limb (v) withdraws Section 22(1)(b) for properties in Section 21(6), which is the self-occupied home-loan interest. Limb (xii) withdraws the whole of Chapter VIII other than Sections 124(1), 124(2), 125(2) and 146.

Chapter IX is not in that list. Neither is Section 19(1) Table serial 2 onwards, nor Section 93(1)(d), nor any part of Schedule II. So the default regime keeps the Rs. 75,000 standard deduction, the gratuity, commutation and leave encashment deductions, the Rs. 25,000 family-pension deduction, the employer’s 14% NPS contribution under Section 124(1)(a), and the Central Government’s Agniveer Corpus Fund contribution under Section 125(2), though not the Agniveer’s own contribution under Section 125(1). What it loses is the Section 123 deduction, the Section 124(3) additional NPS deduction, Section 126, Section 153, the House Rent Allowance exemption and the leave travel concession. In exchange its rebate is Rs. 60,000 against the old regime’s Rs. 12,500.

The old regime therefore runs its relief through Chapter III and Chapter VIII, and the new regime runs it through Chapter IX. Deductions allowed in the new tax regime lists the survivors limb by limb, and the break-even guide turns the trade into arithmetic.

Why Rs. 12 lakh of total income means Rs. 12.75 lakh of salary

The Rs. 12 lakh figure quoted for the default regime is a total income figure, not a salary figure, and the gap between the two is exactly the deduction that runs one step earlier. Section 156(2)(a) allows the rebate where the income does not exceed Rs. 12,00,000, and total income under Section 122(10) and Section 19(1) is what remains after the head-level deduction has been taken.

A salaried taxpayer in the default regime takes the Rs. 75,000 standard deduction at Section 19(1) Table serial 2. A salary of Rs. 12,75,000 less Rs. 75,000 is a total income of Rs. 12,00,000. The tax on that under the Section 202(1) Table is nil on the first Rs. 4,00,000, 5% of Rs. 4,00,000 which is Rs. 20,000, and 10% of Rs. 4,00,000 which is Rs. 40,000, giving Rs. 60,000. The Section 156(2)(a) rebate is 100% of Rs. 60,000 or Rs. 60,000, whichever is less, so the tax is nil and the cess under Section 3(15) of the Finance Act 2026 is nil with it.

This is the clearest illustration of why the order matters. Swap the two steps and the answer changes: apply the rebate test to the salary of Rs. 12,75,000 rather than to the total income of Rs. 12,00,000 and the taxpayer appears to be over the limit and liable for roughly Rs. 71,000. The deduction runs first and the rebate runs on its result.

Surcharge and cess are charged after all three

Surcharge and cess sit at the end of the computation, after the rebate, which is why none of the three levers reduces either of them directly. Section 3(4)(b) of the Finance Act 2026 carries the surcharge Table, and surcharge is charged on the income-tax. Section 3(15) charges the health and education cess at 4% on the income-tax as increased by the surcharge.

The relationship is arithmetic rather than legal. An exemption or a deduction lowers the income, which lowers the slab tax, which lowers both the surcharge and the 4% cess computed on it. The Section 156 rebate lowers the tax itself, with the same downstream effect. But there is no provision allowing a deduction against surcharge and none allowing one against cess, and a taxpayer whose tax is extinguished by the rebate pays no cess only because 4% of nil is nil.

One consequence catches out taxpayers near a surcharge threshold. Because surcharge is triggered by total income rather than by tax, a deduction that brings total income below a threshold in the Section 3(4)(b) Table removes the surcharge entirely, which makes that particular rupee of deduction worth far more than the marginal rate. Section 3(5) marginal relief exists to blunt that step, and the surcharge article sets out where the thresholds fall.

Two worked examples

The first example runs the old regime, where the exemptions and deductions carry the relief. Take a central government employee with a salary of Rs. 10,00,000, a House Rent Allowance exemption of Rs. 1,20,000 under Schedule III serial 11 read with rule 279, the Rs. 50,000 standard deduction at Section 19(1) Table serial 2, and Rs. 1,50,000 deposited in instruments enumerated in Schedule XV.

The exemption keeps Rs. 1,20,000 out of the salary under Section 11(1), so the salary computed is Rs. 8,80,000.
The deductions of Rs. 50,000 at the head and Rs. 1,50,000 under Section 123 reduce that to a total income of Rs. 6,80,000.
The tax under Paragraph A of Part I-B of the First Schedule to the Finance Act 2026 is Rs. 12,500 on the Rs. 2,50,000 to Rs. 5,00,000 band plus 20% of Rs. 1,80,000, which is Rs. 36,000, giving Rs. 48,500.
The rebate under Section 156(1) does not apply, because the total income exceeds Rs. 5,00,000, and Section 156(1) has no marginal-relief limb.
The cess under Section 3(15) of the Finance Act 2026 adds 4% of Rs. 48,500, which is Rs. 1,940, for Rs. 50,440 payable.

The second example runs the default regime on the same salary, where the rebate carries the relief instead. The House Rent Allowance exemption is withdrawn by Section 202(2)(a)(i) and the Section 123 deduction by Section 202(2)(a)(xii), so neither is available.

The exemption is gone, so the salary computed is Rs. 10,00,000.
The deduction is the Rs. 75,000 standard deduction at Section 19(1) Table serial 2, which survives because Section 202(2)(a)(iv) withdraws serial 1 only, giving a total income of Rs. 9,25,000.
The tax under the Section 202(1) Table is nil on Rs. 4,00,000, 5% of Rs. 4,00,000 which is Rs. 20,000, and 10% of Rs. 1,25,000 which is Rs. 12,500, giving Rs. 32,500.
The rebate under Section 156(2)(a) is 100% of Rs. 32,500 or Rs. 60,000, whichever is less, so it is Rs. 32,500 and the tax falls to nil.
The cess is nil, because 4% of nil is nil.

The same salary produces Rs. 50,440 through one route and nothing through the other, and the reason is not that one regime is more generous in total. It is that the levers sit at different points: Rs. 2,70,000 of exemption and deduction in the old regime saves 20 paise in the rupee, while Rs. 32,500 of rebate in the default regime saves a full rupee each. Trace the order on any computation and the three stop being confusing.

Frequently Asked Questions (FAQs)

What is the difference between a rebate, a deduction, and an exemption?

An exemption keeps income out of total income altogether, so it is never counted: Section 11(1) of the Income-tax Act 2025 provides that income enumerated in Schedules II to VI shall not be included, and the House Rent Allowance exemption sits at Schedule III serial 11. A deduction is subtracted from income that has already been computed, either at the head, as with the standard deduction at Section 19(1) Table serial 2, or from gross total income under Chapter VIII, as with the Rs. 1,50,000 deduction at Section 123. A rebate is subtracted from the income-tax after the tax has been worked out, under Chapter IX, and the individual rebate is Section 156. In short, exemptions and deductions act on income, while a rebate acts on tax.

Which saves more tax, a deduction or a rebate?

Rupee for rupee a rebate saves more, because it comes off the tax rather than the income. A rupee of deduction saves only the marginal rate, so Rs. 1 saves 30 paise for a taxpayer in the 30% band of the Section 202(1) Table and nothing at all for one whose total income is below Rs. 4,00,000. A rupee of rebate under Section 156 saves a full rupee. The rebate is bounded, at Rs. 60,000 under Section 156(2)(a) and Rs. 12,500 under Section 156(1), while deductions have no single ceiling across the heads and Chapter VIII, so the comparison turns on the amounts in play.

Is the standard deduction an exemption or a deduction?

The standard deduction is a deduction, and it is a head-level one rather than a Chapter VIII one. It sits at serial 2 of the Table in Section 19(1) of the Income-tax Act 2025, and the amount is Rs. 75,000 or the salary, whichever is less, where income-tax is computed under Section 202(1), and Rs. 50,000 or the salary, whichever is less, in any other case. Because it is a deduction it reduces the salary income brought to tax, unlike an exemption under Section 11(1), which keeps a category of income out of total income in the first place.

Is the Section 87A rebate a deduction?

Section 87A of the repealed Income-tax Act 1961 is now Section 156 of the Income-tax Act 2025, and the Act does describe it as a deduction, but a deduction from the income-tax and not from income. Section 156(1) allows 100% of the income-tax payable or Rs. 12,500, whichever is less, where total income does not exceed Rs. 5,00,000. Section 156(2)(a) allows 100% of the income-tax payable or Rs. 60,000, whichever is less, where the income does not exceed Rs. 12,00,000 and tax is computed under Section 202(1). Both sit in Chapter IX, headed Rebates and reliefs, not in Chapter VIII, headed Deductions to be made in computing total income.

Is retirement gratuity an exemption or a deduction?

A deduction, since 1 April 2026. Under the repealed Income-tax Act 1961 the death-cum-retirement gratuity of a government servant was an exemption under Section 10(10)(i). Under the Income-tax Act 2025 it is serial 3 of the Table in Section 19(1), read with Section 19(2)(g), which names the CCS (Pension) Rules 2021, and the amount of deduction is the entire amount. Commuted pension moved the same way, to serial 7, and leave encashment to serial 13. The rupees a retiring government servant receives are unchanged; the mechanism and the citation are not.

Does the Section 156 rebate apply to tax on capital gains?

The new-regime rebate does not reach special-rate income. Section 156(2) is framed against income-tax chargeable under Section 202(1), which is the slab Table, and Section 156(3) caps the deduction at the income-tax payable at Section 202(1) rates. Tax charged under Section 196 on short-term capital gains on securities transaction tax paid equity, or under Section 198 on long-term capital gains, is not charged at Section 202(1) rates, so the Rs. 60,000 rebate cannot be set against it. That is a consequence of how Section 156(2) is drafted, not a separate exclusion clause.

Is there marginal relief on the rebate in the old regime?

No. Marginal relief on the rebate exists only in the default regime. Section 156(2)(b) of the Income-tax Act 2025 gives a taper where total income exceeds Rs. 12,00,000 and the income-tax payable exceeds the excess over Rs. 12,00,000. Section 156(1), the old-regime rebate of Rs. 12,500 up to a total income of Rs. 5,00,000, carries no equivalent limb, so the old-regime rebate falls away completely at Rs. 5,00,001. Marginal relief on surcharge is a different provision again, at Section 3(5) of the Finance Act 2026.

Do exemptions and deductions reduce the health and education cess?

Only through the tax. Section 3(15) of the Finance Act 2026 charges the health and education cess at 4% on the income-tax as increased by surcharge, and that computation runs after the Section 156 rebate. An exemption or a deduction lowers the income, which lowers the slab tax, which lowers the cess, but none of the three touches the cess directly. A taxpayer whose income-tax is reduced to nil by the Section 156 rebate pays no cess, because 4% of nil is nil.

Can a deduction or a rebate produce a refund larger than the tax?

No, and both chapters say so expressly. Section 122(2) of the Income-tax Act 2025 provides that the aggregate of Chapter VIII deductions shall not in any case exceed the gross total income, so deductions can reduce total income to nil but cannot create a loss. Section 155(2) provides that the deduction under Section 156 shall not exceed the income-tax chargeable, and Section 156(3) caps it again at the tax payable at Section 202(1) rates. Neither lever runs past zero. A refund arises from tax already deducted at source, not from an unused rebate.

Which deductions and exemptions survive in the default regime?

Section 202(2)(a) of the Income-tax Act 2025 is a closed list of what is withdrawn, so anything it does not name survives. It removes Schedule III Table serials 5, 6, 7, 8, 11 and 17, which carries away the House Rent Allowance exemption at serial 11 and the leave travel concession at serial 8; serials 12 and 13 other than as prescribed by rule 280 of the Income-tax Rules 2026; serial 1 only of the Section 19(1) Table, the employment tax; Section 22(1)(b) for properties in Section 21(6); and the whole of Chapter VIII other than Sections 124(1), 124(2), 125(2) and 146. It does not touch Section 19(1) Table serial 2 onwards, so the standard deduction, gratuity, commutation and leave encashment all survive, nor Section 93(1)(d), the family-pension deduction, nor any part of Chapter IX.

What is relief under Section 157, and how does it differ from a rebate?

Relief under Section 157 of the Income-tax Act 2025 is a fourth lever, and it corrects a rate distortion rather than granting a concession. It applies where total income is assessed at a higher rate because salary, family pension or compensation was received in arrears or in advance, and it recomputes the tax as though the money had fallen in the years it related to. Section 89 of the repealed Income-tax Act 1961 is its predecessor, and the claim is made on Form 39 under rule 73 of the Income-tax Rules 2026. A rebate under Section 156 is a flat cancellation of tax up to a cap; Section 157 relief is the difference between two computations.

Why is Rs. 12 lakh described as tax-free when a salary of Rs. 12.75 lakh pays nothing?

Because the two figures measure different things, one step apart in the order of computation. Section 156(2)(a) of the Income-tax Act 2025 works on total income, which is what remains after the deduction has been taken. A salary of Rs. 12,75,000 less the Rs. 75,000 standard deduction at Section 19(1) Table serial 2 gives a total income of Rs. 12,00,000. The tax on that under the Section 202(1) Table is Rs. 60,000, being 5% of Rs. 4,00,000 plus 10% of Rs. 4,00,000, and the Section 156(2)(a) rebate of Rs. 60,000 cancels it exactly. The deduction runs first and the rebate runs on the result.

External references

References

Income-tax Act, 2025 (Act No. 30 of 2025), Chapter III, Section 11(1) and 11(2), and Schedules II to VI: incomes which do not form part of total income, and the consequence where a Schedule condition is not satisfied.
Income-tax Act, 2025, Chapter VIII, Sections 122(1), 122(2) and 122(10), and Section 123 read with Schedule XV: deductions from gross total income, the cap at gross total income, and the Rs. 1,50,000 aggregate.
Income-tax Act, 2025, Section 19(1) Table (serial 1 employment tax, serial 2 standard deduction at Rs. 75,000 or Rs. 50,000, serial 3 gratuity read with Section 19(2)(g), serial 7 commuted pension, serial 13 leave encashment) and Section 93(1)(d) (family-pension deduction of Rs. 25,000 or Rs. 15,000).
Income-tax Act, 2025, Chapter IX, Sections 155(1), 155(2), 156(1), 156(2)(a), 156(2)(b) and 156(3): the rebate against income-tax, its cap at the tax chargeable, and the marginal-relief limb in the default regime.
Income-tax Act, 2025, Section 202(1) Table and Section 202(2)(a), limbs (i) to (xii), with limb (iii) omitted by the Finance Act, 2026 with effect from 1 April 2026: the default rate Table and the closed list of exemptions and deductions withdrawn.
Income-tax Act, 2025, Section 157, and rule 73 of the Income-tax Rules, 2026 with Form 39: relief where salary or family pension is paid in arrears or in advance, succeeding Section 89 of the Income-tax Act, 1961 and Form 10E.
Income-tax Act, 2025, Section 536(1): repeal of the Income-tax Act, 1961 with effect from 1 April 2026.
Income-tax Rules, 2026, notified by CBDT Notification No. 22/2026, G.S.R. 198(E), dated 20 March 2026: rule 279 (House Rent Allowance exemption) and rule 280 (prescribed allowances).
Finance Act, 2026 (Act No. 4 of 2026), Section 3(4)(b) (surcharge Table), Section 3(5) (marginal relief on surcharge), Section 3(15) (health and education cess at 4%), and Paragraph A of Part I-B of the First Schedule (old-regime rates).