Tax planning is no longer about investing at the last minute. Instead, taxpayers should understand the deductions available under the Income Tax Act, 2025 and use them strategically throughout the year. Moreover, proper tax planning can reduce taxable income, improve savings, and help individuals achieve their financial goals simultaneously.
The Income Tax Act, 2025 reorganises and renumbers several provisions of the erstwhile Income Tax Act, 1961. However, most deduction benefits remain substantially unchanged, although taxpayers must now refer to the new section numbers and schedules. The Act aims to simplify tax laws while preserving legitimate tax-saving opportunities.
Understanding Tax Deductions Under the Income Tax Act, 2025
A tax deduction reduces your taxable income. Consequently, a lower taxable income results in lower tax liability. Furthermore, deductions are available only if the taxpayer fulfils prescribed conditions and maintains supporting documents.
It is important to note that most deductions are available only under the Old Tax Regime. In contrast, taxpayers opting for the New Tax Regime can claim only a limited number of deductions, such as employer contribution to NPS in specified cases.
Section 123: Investment-Linked Deductions (Earlier Section 80C)
Section 123 is one of the most popular tax-saving provisions under the Income Tax Act, 2025. It consolidates deductions previously covered under Sections 80C, 80CCC, and related provisions. The maximum deduction available remains ₹1,50,000 per financial year.
Eligible Investments and Payments
Taxpayers can claim deductions for:
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- Equity Linked Savings Scheme (ELSS)
- National Savings Certificate (NSC)
- Sukanya Samriddhi Yojana
- Life Insurance Premium
- Five-Year Tax Saving Fixed Deposits
- Principal Repayment of Housing Loan
- Children's Tuition Fees
- Approved Pension Funds
Therefore, taxpayers should choose investments that align with both tax savings and long-term wealth creation goals.
Section 125: Additional Deduction for NPS Contributions
Besides Section 123 benefits, taxpayers can claim an additional deduction of ₹50,000 for contributions to the National Pension System (NPS). This provision corresponds to the earlier Section 80CCD(1B).
Key Benefits
- Additional deduction over and above the ₹1.5 lakh limit.
- Total deduction can reach ₹2,00,000.
- Encourages retirement planning.
- Suitable for salaried as well as self-employed taxpayers.
As a result, NPS remains one of the most tax-efficient investment options available today.
Section 126: Deduction for Health Insurance Premium
Healthcare expenses continue to rise. Therefore, health insurance has become essential for every family. Section 126, corresponding to Section 80D of the earlier Act, provides tax benefits for medical insurance premiums.
Deduction Limits
Category | Maximum Deduction |
Self, spouse and dependent children | ₹25,000 |
Parents below 60 years | ₹25,000 |
Senior citizen parents | ₹50,000 |
Self and parents both senior citizens | Up to ₹1,00,000 |
Additionally, preventive health check-up expenses are also eligible within prescribed limits.
Consequently, taxpayers can protect both their health and their finances simultaneously.
Deduction for Education Loan Interest
Interest paid on an education loan remains eligible for deduction. This benefit helps students and parents manage higher education expenses more effectively.
Key Features
- No upper monetary limit.
- Available on actual interest paid.
- Applicable for higher education.
- Available for a prescribed period.
Therefore, borrowers should preserve loan statements and interest certificates carefully.
Deduction for Donations
Taxpayers who contribute to approved charitable institutions can claim deductions for eligible donations. Earlier covered under Section 80G, this benefit continues under the reorganised framework of the Income Tax Act, 2025.
Important Points
- Donations should be made to approved institutions.
- Cash donations may have restrictions.
- Proper receipts must be maintained.
- Deduction percentage depends on the notified category.
Hence, charitable giving can provide both social and tax benefits.
Deduction on Savings Bank Interest
Interest earned from savings accounts remains eligible for deduction under the applicable provisions corresponding to earlier Sections 80TTA and 80TTB.
Key Benefits
For Individuals:
- Deduction on savings bank interest up to prescribed limits.
For Senior Citizens:
- Higher benefits on interest income.
- Suitable for retirees relying on interest earnings.
Thus, senior citizens should particularly review these provisions while filing their returns.
Deduction for Persons with Disabilities
The Income Tax Act, 2025 continues to provide relief for taxpayers with disabilities and for those supporting dependent family members with disabilities. These provisions correspond to the earlier Sections 80DD and 80U.
Benefits Include
- Fixed deductions based on disability level.
- Higher deductions for severe disabilities.
- Support for medical treatment and rehabilitation expenses.
Therefore, eligible taxpayers should obtain the required medical certificates before claiming benefits.
Employer Contribution to NPS
One significant deduction available even under the New Tax Regime is the employer's contribution to the National Pension System. The deduction continues under the corresponding provision of the Income Tax Act, 2025.
Advantages
- Available under both tax regimes.
- Encourages retirement corpus creation.
- Reduces taxable salary income.
Accordingly, salaried employees should examine their salary structure to maximise this benefit.
Old Regime vs New Regime: Which Is Better?
Choosing the right tax regime is crucial. While the New Tax Regime offers lower tax rates and higher rebate limits, it restricts most deductions. On the other hand, the Old Tax Regime allows taxpayers to utilise deductions and exemptions extensively.
The Old Regime may be beneficial if you:
- Invest under Section 123.
- Pay health insurance premiums.
- Contribute to NPS.
- Claim housing loan benefits.
- Make charitable donations.
However, the New Regime may be suitable for individuals with limited deductions.
Key Tax Planning Tips for FY 2026-27
To maximise tax savings under the Income Tax Act, 2025:
- Start tax planning at the beginning of the financial year.
- Fully utilise the ₹1.5 lakh deduction under Section 123.
- Invest an additional ₹50,000 in NPS.
- Purchase adequate health insurance cover.
- Maintain records of all investments and payments.
- Verify deduction eligibility before filing returns.
- Compare both tax regimes before making a final choice.
Furthermore, periodic reviews of investments can help taxpayers avoid last-minute mistakes.
Conclusion
The Income Tax Act, 2025 simplifies the structure of tax laws while retaining most major deduction benefits available under the previous legislation. Although section numbers have changed, taxpayers can still claim deductions for investments, health insurance, NPS contributions, education loans, donations, interest income, and disability-related expenses.
Therefore, understanding the revised provisions and planning investments accordingly can significantly reduce tax liability. Most importantly, taxpayers should evaluate both tax regimes carefully and select the option that offers the maximum overall benefit. By taking a proactive approach, individuals can save tax legally while building long-term financial security.
