Budget 2026: What deductions, exemptions and capital gains rules under the new Income-tax Act mean for taxpayers

All eyes are on Union Budget 2026, to be presented by Finance Minister Nirmala Sitharaman on Sunday, February 1, as taxpayers and businesses look for clarity on how the new Income-tax Act, 2025 will be operationalised and fine-tuned. A key focus area is the sweeping reorganisation of tax deductions, exemptions and capital gains provisions, which replaces decades-old section numbers with a restructured, schedule-based framework.

From April 1, the Income Tax Act, 2025, will come into effect, replacing the six-decade-old 1961 law, with all tax changes announced in the 2026–27 Budget set to be incorporated into the new framework.

The new legislation is revenue neutral, with no changes to tax rates, and focuses on simplifying direct tax laws by removing ambiguities and reducing the scope for litigation. It cuts the volume of provisions and sections by nearly 50% compared with the 1961 Act, introduces a single “tax year” in place of the earlier assessment year–previous year structure, and allows taxpayers to claim TDS refunds even if returns are filed after the deadline, without attracting penalties.

Under the new Income-tax Act, 2025, several familiar deductions that earlier fell under Sections 80C to 80U of the Income-tax Act, 1961 have been consolidated, renumbered and grouped more logically. While the underlying benefits remain largely unchanged for now, experts say Budget 2026 could determine how many of these deductions continue under the old tax regime and whether select incentives may be extended to the new regime.

Deductions and exemptions

One of the most tracked provisions is Section 123 (read with Schedule XV) of the new Act, which subsumes the popular Section 80C basket. Investments of up to Rs 1.5 lakh per year in instruments such as provident fund (PPF and EPF), ELSS mutual funds, life insurance premia, National Savings Certificates, Senior Citizens Savings Scheme, Sukanya Samriddhi Yojana, five-year tax-saving fixed deposits, principal repayment of home loans and children’s tuition fees remain eligible for deduction—currently only under the old tax regime.

National Pension System

Similarly, Section 124 consolidates deductions related to the National Pension System (NPS), earlier spread across Sections 80CCD(1), 80CCD(1B) and 80CCD(2). This includes the additional ₹50,000 deduction for individual NPS contributions and the deduction for employer contributions, which remains over and above the ₹1.5 lakh limit.

Health insurance

Other key deductions have also been renumbered. Health insurance premium deductions now fall under Section 126 (earlier Section 80D), while benefits for dependants with disabilities and specified medical treatments are covered under Sections 127 and 128, replacing Sections 80DD and 80DDB. Education loan interest, affordable housing loan interest and electric vehicle loan interest are now housed under Sections 129, 130, 131 and 132.

Donations and contributions

Charitable donations, political contributions and rent paid—all widely used deductions—have also been realigned under Sections 133 to 137. Savings bank interest deductions, previously split between Sections 80TTA and 80TTB, are now grouped under Section 153, while disability-related personal deductions move to Section 154.

Beyond deductions, the new law has reorganised exemptions and income classifications. Income not included in total income—earlier governed by Section 10—now falls under Section 11, supported by multiple schedules. Salary-related deductions, including the standard deduction for salaried employees and pensioners, are consolidated under Section 19, simplifying scattered provisions from the earlier Act.

Capital gains tax

Capital gains provisions have also been recast. Exemptions on reinvestment of gains from residential property, agricultural land, compulsory acquisition and specified bonds now appear under Sections 82 to 86, replacing the familiar Sections 54, 54B, 54D, 54EC and 54F. Taxation of short-term and long-term capital gains is governed by Sections 196 and 198, aligning with recent rate changes.

New Tax Regime

The new tax regime, which continues to offer lower rates with fewer exemptions, is codified under Section 202, while rebates for lower-income individuals are addressed under Section 156.

Although the overhaul is designed to simplify the law, taxpayers are closely tracking Budget 2026 for cues on the future of widely used deductions, whether they will be phased out, preserved, or selectively carried into the new tax regime. As FM Nirmala Sitharaman presents her ninth consecutive Budget today, expectations are high that the announcements will finally bridge the gap between the old and new income-tax frameworks, offering clearer guidance on how tax planning will evolve from FY27 onwards.