Deductions from Gross Total Income

Chapter VIII is the incentive engine of the Income-tax Act. While Chapter IV computes income under the five heads, and Chapters V-VII aggregate and adjust for losses, Chapter VIII then allows certain deductions from the resulting ‘gross total income’ to arrive at ‘total income.’ These deductions serve two policy purposes: (a) encouraging socially desirable behaviour (savings, insurance, donations, education, healthcare), and (b) promoting specific economic activities (start-ups, infrastructure, SEZs, cooperative societies, North-Eastern development).

The five-part architecture: The chapter is divided into five parts: Part A (S.122) — General rules governing all deductions. Part B (S.123-137) — Deductions for certain payments (where the assessee incurs expenditure or makes investments). Part C (S.138-152) — Deductions for certain incomes (profit-linked deductions for specified businesses). Part D (S.153) — Deduction for interest on deposits. Part E (S.154) — Deduction for persons with disability. The Part B deductions are available to individuals and HUFs broadly; Part C deductions are business-specific and available to entities operating eligible undertakings.

The new tax regime impact: Under S.202 (the new tax regime), most Chapter VIII deductions are NOT available. Only S.124 (NPS employer contribution), S.125 (Agnipath), S.140 (start-up), S.146 (additional employees), and S.147 (IFSC) survive in the new regime. The old regime (S.203) allows all deductions. Since the new regime is the DEFAULT regime from TY 2024-25, the practical utility of most Part B deductions has diminished significantly for individuals who have not opted for the old regime.

8.4.1 Section 123 — The Rs.1.5 Lakh Basket (Old S.80C)

The most widely used deduction. Individuals and HUFs can deduct up to Rs.1,50,000 per year for the aggregate of specified investments/payments listed in Schedule XV. The key items include: life insurance premiums (max 10% of sum assured), contributions to PPF, RPF, and approved superannuation fund, ELSS mutual fund investments (3-year lock-in), NSC deposits, principal repayment on housing loan, tuition fees for children (max 2 children), sukanya samriddhi account deposits, fixed deposits with banks (5-year lock-in), and senior citizen savings scheme deposits. All items in Schedule XV are subject to conditions including minimum holding periods and withdrawal restrictions.

8.4.2 Section 124 — NPS Deduction (Employer + Self)

Three-layer deduction: (a) S.124(1): Employer’s contribution to NPS deductible up to 14% of salary (for Central/State Government employees) or 10% of salary (others). Under the new tax regime (S.202), the 10% is also enhanced to 14% (S.124(2)). This is AVAILABLE in the new regime. (b) S.124(3): Self-contribution up to Rs.50,000 — additional deduction over and above S.123. (c) S.124(4): Contribution for minor child’s NPS account — within the Rs.50,000 limit. Self-contribution under S.124(3) is NOT available in the new regime, but employer contribution under S.124(1) IS available.

Withdrawal taxation (S.124(6)-(9)): If the assessee closes or opts out of NPS, the entire amount (including accrued income) received is taxable as income of the year of receipt. Exception: amount received by nominee on death is NOT taxable. If the lump sum received on closure is used to purchase an annuity in the same year, it is not deemed to be received (S.124(9)). S.124(11)-(12): Unified Pension Scheme — amounts received on superannuation/voluntary retirement are taxable; but transfer from individual corpus to pool corpus is not deemed receipt.

8.4.3 Section 126 — Health Insurance Premium (Old S.80D)

Available to individuals and HUFs. Deduction for medical insurance premiums and medical expenditure:

Maximum aggregate: Self/family category: Rs.50,000 (insurance + medical expenditure combined). Parents category: Rs.50,000 (insurance + medical expenditure combined). Grand total maximum: Rs.1,00,000. Payment must be non-cash (except preventive health check-up which allows cash). Multi-year lump sum premiums are apportioned across relevant years.

8.4.4 Sections 127-128 — Disability and Specified Diseases

S.127 — Disabled dependant: Resident individual/HUF maintaining a disabled dependant (spouse, children, parents, siblings, or HUF member): flat deduction of Rs.75,000 (or Rs.1,25,000 for severe disability with 80%+ disability). Covers medical treatment, training, rehabilitation, or LIC/insurance schemes for maintenance. Requires medical authority certificate.

S.128 — Specified diseases: Resident individual/HUF: actual medical expenditure or Rs.40,000 (Rs.1,00,000 for senior citizens), whichever is less. For prescribed diseases (neurological, cancer, AIDS, renal failure, etc.). Requires specialist’s prescription. Reduced by insurance/employer reimbursement.

8.4.5 Section 129 — Higher Education Loan Interest

Individual only. Deduction for interest paid on loan taken from a financial institution or approved charitable institution for higher education (post-senior secondary) of self, spouse, children, or student under legal guardianship. No monetary cap — the entire interest is deductible. Available for the initial year and 7 succeeding years, or until interest is fully paid. ‘Higher education’ includes any course after 12th standard from a recognised institution. This deduction is NOT available in the new regime.

8.4.6 Sections 130-132 — Interest on Housing Loan and EV Loan

S.130 (old S.80EE) — First home, 2016-17 loan: Rs.50,000 deduction on housing loan interest. Conditions: loan sanctioned in FY 2016-17; loan ≤Rs.35 lakh; property value ≤Rs.50 lakh; assessee owns no other residential property on date of sanction.

S.131 (old S.80EEA) — Affordable housing, 2019-22 loan: Rs.1,50,000 deduction on housing loan interest. Conditions: loan sanctioned between 01.04.2019 and 31.03.2022; stamp duty value ≤Rs.45 lakh; assessee owns no other residential property on date of sanction. Not available if S.130 is claimed.

S.132 (old S.80EEB) — Electric vehicle, 2019-23 loan: Rs.1,50,000 deduction on interest for EV purchase loan. Conditions: loan sanctioned between 01.04.2019 and 31.03.2023. ‘Electric vehicle’ means exclusively electric-motor-powered with regenerative braking. Hybrid vehicles do NOT qualify.

8.4.7 Section 133 — Donations (Old S.80G)

The donation deduction is the most complex in Part B. It operates at two tiers:

Tier 1 — 100% deduction (S.133(1)(a)): Donations to 24 specified government and national funds — National Defence Fund, PM’s National Relief Fund, PM CARES Fund, National Children’s Fund, Army/Navy/Air Force welfare funds, Swachh Bharat Kosh, Clean Ganga Fund, National Drug Abuse Fund, family planning promotion, Olympic/sports associations (companies only), and specified disaster relief funds. These are deductible in FULL without any income-based cap.

Tier 2 — 50% deduction (S.133(1)(b)): Donations to: PM’s Drought Relief Fund; registered non-profit organisations or S.354-approved institutions established for charitable purposes; government/local authority for charitable purposes (other than family planning); housing authorities; minority community corporations; and notified historic religious places for renovation. These attract 50% deduction, subject to the 10% of adjusted GTI cap.

The 10% cap (S.133(2)): The aggregate of donations under Tier 1 items (xxiii) and (xxiv) and ALL Tier 2 items cannot exceed 10% of adjusted GTI (GTI minus exempt income and other Chapter VIII deductions). Excess is ignored. Tier 1 items (i) to (xxii) are OUTSIDE this cap and deductible without limit.

Cash limit (S.133(5)): Donations exceeding Rs.2,000 must be made by non-cash mode. Donations up to Rs.2,000 can be in cash. This replaced the old Rs.10,000 cash limit.

8.4.8 Section 134 — Rent Paid (Old S.80GG)

For individuals who pay rent but do NOT receive HRA. Deduction = least of: (a) rent paid minus 10% of total income; (b) Rs.5,000 per month (Rs.60,000 per year); or (c) 25% of total income. Conditions: assessee (or spouse/minor child/HUF) does not own a residential house at the place of residence or employment; and assessee does not receive HRA under Schedule III.

8.4.9 Sections 136-137 — Political Party Donations

S.136 — Companies: Indian companies can deduct contributions (non-cash) to registered political parties or electoral trusts. No monetary limit.

S.137 — Other persons: Any assessee (except local authorities and government-funded artificial juridical persons) can deduct contributions (non-cash) to registered political parties or electoral trusts. No monetary limit. Both sections require non-cash payment.

Part C contains the most significant revenue-impact deductions. These are profit-linked: they allow deduction of a percentage (usually 100%) of profits from specified eligible businesses for a specified number of years. They are the primary incentive mechanism for infrastructure development, start-ups, regional development, and cooperative societies.

8.5.1 Section 140 — Start-up Deduction (Key Provision)

This is the most significant Part C deduction for new businesses. Eligible start-ups get 100% deduction of profits for 3 consecutive years (chosen by the assessee) out of 10 years from incorporation. The start-up must be incorporated between 01.04.2016 and 31.03.2030, have turnover not exceeding Rs.100 crore in the year of claim, and hold an Inter-Ministerial Board certificate. The business must involve innovation, development, or improvement of products/processes/services or a scalable model with high employment/wealth creation potential. It must not be formed by splitting up, reconstruction, or transfer of existing business (with exceptions for natural disaster/war reconstruction). Anti-avoidance: if related-party transactions inflate profits, the AO can recompute at arm’s length. This deduction is available EVEN in the new tax regime.

8.5.2 Section 146 — Additional Employee Cost (Key Provision)

Available to ALL employers subject to tax audit (S.63). 30% deduction of ‘additional employee cost’ for 3 years. ‘Additional employee’ = new employee whose addition increases total headcount, with emoluments ≤Rs.25,000/month, employed for ≥240 days (150 days for apparel/footwear/leather), participates in RPF, and paid through banking channels. This is a powerful employment generation incentive available in BOTH old and new regimes.

8.5.3 ‘As If Not Repealed’ Provisions (S.138, 139, 141, 142, 144)

Five sections (S.138, 139, 141, 142, 144) operate on the principle: if an assessee was eligible for a deduction under the 1961 Act (S.80-IA, 80-IAB, 80-IB, 80-IBA, or 10AA), the deduction continues to be available under the 2025 Act for the remaining unexpired period, computed as if the 1961 Act had not been repealed. This is a transitional provision ensuring that taxpayers who began their deduction window under the old Act do not lose it upon the new Act’s commencement. No NEW claims can be initiated under these sections for businesses that did not already qualify under the 1961 Act.

8.6.1 Section 153 — Interest on Deposits

General taxpayers (S.153(2)(a)): Individuals (non-senior) and HUFs: deduction up to Rs.10,000 on interest from savings bank accounts only (NOT fixed deposits).

Senior citizens (S.153(2)(b)): Deduction up to Rs.50,000 on interest from ALL bank/post office deposits (savings AND fixed deposits). This is significantly more generous and recognises that senior citizens often depend on deposit interest for income.

Exclusion: No deduction if the deposit is held by/on behalf of a firm, AOP, or BOI — partners/members cannot claim for firm deposits.

8.6.2 Section 154 — Person with Disability

Resident individual who is HIMSELF certified as having a disability: flat deduction of Rs.75,000 (or Rs.1,25,000 for severe disability with 80%+ impairment). Requires medical authority certificate. Distinguished from S.127 (which is for a DEPENDANT with disability — the assessee is the caregiver). Both cannot be claimed by the same person for the same disability.

[End of Chapter VIII (Deductions from Gross Total Income). Chapter IX: Rebates and Reliefs follows.]