Author: CA Meet Dhrangadhariya

Missed the Proof Submission Deadline? How to Claim HRA and Deductions in Your Return (2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 17 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Your employer asks for evidence of HRA, LTA, home loan interest and Chapter VIII deductions in Form 124 (Rule 205) so that it deducts the right TDS; there is no legal cut-off date, only the employer’s payroll cut-off.
  • If you miss it, TDS is deducted without those claims, but you can still claim HRA exemption and section 123 deductions in your income-tax return and get the excess back as a refund.
  • Both HRA and section 123 deductions are available only in the old regime; the new regime allows neither.
  • Do not send the proofs with the return; keep them ready in case of a notice.

Every year, employers ask for rent receipts, investment proofs and loan certificates in the last months of the tax year. If you miss the date, your payslip shows more TDS than you expected. That money is not lost. Most claims can be made again, and the excess tax recovered, when you file your return.

Why the employer asks for proofs

Under section 392 of the Income-tax Act, 2025 the employer must deduct tax on salary at the average rate on your estimated income. To estimate your income, it gets evidence of your claims under section 392(5)(b), in Form 124 (Rule 205). The Rule lists what is needed:

Claim Evidence the employer asks for
House rent allowance Landlord’s name, address and PAN where yearly rent is above ₹1,00,000, and any relationship with the landlord
Leave travel concession or assistance Evidence of the expenditure
Interest on a house loan Lender’s name, address and PAN
Chapter VIII deductions Evidence of investment or expenditure

The date set by the employer is a payroll cut-off, not a date in the law. The employer may also adjust later deductions to correct any excess or deficiency in the year (section 392(5)(c)).

What happens if you miss it

The employer deducts tax as if you had no claims. Your TDS certificate (Form 130, due by 15 June after the year, Rule 215) shows that tax. You have paid more than you owe, but the excess is yours to recover, as a refund, when the return is processed.

What you can still claim in the return

Only in the old regime. Section 202(2) bars the HRA exemption (Schedule III, serial 11) and Chapter VIII deductions (other than a few such as the employer’s NPS contribution) in the new regime. If your claims are large, compare both regimes before you choose one when you file.

1. HRA exemption

You need the rent paid and, if yearly rent is above ₹1,00,000, the landlord’s PAN. The exempt amount is the least of the HRA received, rent paid less 10% of salary, and 50% of salary in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru (40% elsewhere), with “salary” as defined in Rule 279. See our post on HRA. If you pay rent but do not get HRA, a separate Chapter VIII deduction for rent may apply (see our post on section 80GG).

2. Section 123 deductions (formerly 80C), up to ₹1,50,000

Schedule XV lists what qualifies. Several need no new investment, so you can claim them from expenses you already incurred:

  • your provident fund contribution (recognised provident fund) and contribution to an approved superannuation fund;
  • tuition fees for full-time education of any two children at an Indian institution, but not development fees or donations;
  • payments for buying or constructing a residential house, such as loan principal, subject to the conditions in paragraph 3 of Schedule XV;
  • life insurance premium, five-year term deposits with a scheduled bank or the post office, the Senior Citizen Savings Scheme and other listed items.

Investments made up to 31 March of the tax year count, even if you made them after your employer’s cut-off.

3. Interest on a housing loan

Where the property qualifies, the interest is claimed in the return under Income from house property. Keep the lender’s interest certificate.

What to do about leave travel concession

The exemption depends on actual travel and the block rules. Employers collect the evidence through Form 124 and apply it in payroll. Whether a claim can be made later in the return depends on the return form and the proof you hold, so if you missed the employer date, ask a professional before you rely on claiming it in the return.

Practical steps

  1. Collect rent receipts, the lender’s certificate, premium and fee receipts and PF statements.
  2. Read your Form 130 and the AIS and compare the salary and TDS with your own records.
  3. Choose the regime that gives the lower tax with your real claims.
  4. File the return and enter the claims in the relevant schedules. The refund is paid after processing.
  5. Do not upload the proofs. Keep them safe in case a notice asks for them.

Next year

Give your employer the Form 124 particulars early in the year and update them as soon as you pay fees or invest. The tax deducted each month then matches your real liability, and you do not have to wait for a refund.

Frequently asked questions

Is there a legal last date for submitting investment proofs to the employer?

No. The employer asks for evidence under section 392(5)(b) in Form 124 (Rule 205) so that it can estimate your income and deduct the right TDS. The date is set by your employer’s payroll, usually in the last quarter of the year.

What happens if I miss it?

The employer deducts TDS on your salary without those claims, so more tax is deducted than your actual liability. Your TDS certificate (Form 130) shows that higher tax.

Can I still get the benefit?

Yes, for most items. Claim the HRA exemption and section 123 deductions when you file the return. The excess TDS comes back as a refund.

Do the claims work in the new tax regime?

No. The new regime does not allow the HRA exemption or Chapter VIII deductions such as section 123 (section 202(2)). They are available only if you choose the old regime.

Do I attach proofs to the return?

No, but keep them. You may be asked for them if the department sends a notice.

When must the TDS certificate be issued?

Form 130 for salary is to be furnished by 15 June after the end of the tax year (Rule 215).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Home Loan Tax Benefits: Interest, Principal, Stamp Duty and Joint Loans (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 02 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A home loan can give four tax benefits: interest under section 22, principal repayment and stamp duty under section 123 (up to ₹1,50,000 with other qualifying items), and the closed first-time buyer schemes in sections 130 and 131.
  • In the old regime a self-occupied house gets up to ₹2,00,000 of interest and ₹1,50,000 under section 123; in the new regime only interest on a let-out house is allowed.
  • Section 123 benefits are reversed if the house is sold within five years from the end of the tax year of possession.
  • Co-owners who are also co-borrowers can each claim their own limits.

A home loan can reduce your tax in several ways, but each benefit has its own section, limit and regime. The Income-tax Act, 2025 has renumbered them (section 24(b) is now section 22, 80C is now section 123, and 80EE and 80EEA are now sections 130 and 131). This post puts them together.

The four benefits

Benefit Section (2025 Act) Limit Old regime New regime
Interest, self-occupied house 22(1)(b), 22(2) ₹2,00,000 (₹30,000 if conditions are not met) Yes No
Interest, let-out house 22(1)(b) No limit Yes Yes
Principal repayment, stamp duty, registration 123, Schedule XV ₹1,50,000 with other qualifying items Yes No
Extra interest for first-time buyers 130 (loan sanctioned 2016-17), 131 (loan sanctioned 2019-22) ₹50,000 and ₹1,50,000 Only for qualifying old loans No

1. Interest (section 22)

Interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct a house is deducted from its annual value. Our post on the home loan interest deduction explains the ₹2,00,000 and ₹30,000 limits, the five year completion condition, the lender’s certificate and pre-construction interest, which is claimed in five equal instalments.

2. Principal repayment and stamp duty (section 123)

Section 123 allows a deduction, within ₹1,50,000 for all items together, for the amount spent on purchase or construction of a residential house. Schedule XV, paragraphs 1(r) and 3, say this includes:

  • instalments or part payments to a development authority, housing board or other authority selling houses on ownership basis;
  • instalments to a company or co-operative society of which you are a shareholder or member, for a house allotted to you;
  • repayment of a loan from the Central or a State Government, a bank (including a co-operative bank), LIC, the National Housing Bank, a housing finance company, a company or co-operative society engaged in house financing, or your employer if it is a public body or a company, university, local authority or co-operative society; and
  • stamp duty, registration fee and other expenses of transferring the house to you.

It does not include the admission fee, cost of shares and initial deposit paid to become a member of a society or company, the cost of additions, alterations, renovation or repairs after the completion certificate was issued or after the house was occupied or let, or any expenditure that is deductible under section 22 (the interest).

Five year rule. If you transfer the house before five years from the end of the tax year in which you took possession, or you receive back any such sum, the deductions already allowed are added to your income of the year of transfer (Schedule XV, paragraph 4).

Section 123 shares its ₹1,50,000 with provident fund contributions, life insurance premiums, tuition fees and other items, so a salaried person with an employee PF contribution may use up much of it before the home loan principal.

3. First-time buyer schemes (sections 130 and 131)

These are the old sections 80EE and 80EEA. They remain in the Act for loans that met their conditions and are old regime only:

Point Section 130 (earlier 80EE) Section 131 (earlier 80EEA)
Extra interest deduction Up to ₹50,000 a year Up to ₹1,50,000 a year
Loan sanctioned 01/04/2016 to 31/03/2017 01/04/2019 to 31/03/2022
Loan or property limit Loan up to ₹35 lakh; house value up to ₹50 lakh Stamp duty value up to ₹45 lakh
Other conditions You own no house on the date of sanction; loan from a bank or housing finance company Same, and you are not eligible under section 130
Overlap The same interest cannot be claimed under any other provision The same

A loan sanctioned today cannot claim either section.

4. Old and new regime

In the new regime, the interest deduction on a self-occupied house, the section 123 deduction and sections 130 and 131 are not allowed (section 202(2)). Only the interest on a let-out house is, and any loss from house property cannot be set off against other income or carried forward. If a home loan is your main deduction, compare both regimes before you choose (our post on saving tax by salary level gives the break-even).

Joint loans

Co-owners with definite shares are taxed separately on their shares, and the relief for a self-occupied house is available to each of them (section 24). Co-owners who are also co-borrowers and pay their share of the EMI can each claim:

  • interest up to ₹2,00,000 on their share, and
  • section 123 for the principal and stamp duty they paid, within their own ₹1,50,000 limit.

A joint loan where only one person pays does not give the other any benefit. Keep the repayment record in each person’s bank account.

Worked example (old regime)

You buy a flat for self-occupation, with the loan sanctioned in 2026. In the first year you pay ₹2,40,000 of interest, ₹1,20,000 of principal and ₹1,00,000 stamp duty and registration. You have no other section 123 items.

  • Interest: limited to ₹2,00,000, giving a loss from house property of ₹2,00,000, set off against salary.
  • Section 123: principal 1,20,000 + stamp duty 1,00,000 = 2,20,000, limited to ₹1,50,000.
  • Total deductions: ₹3,50,000.
  • At a 30% slab, plus 4% cess, the tax saved is 3,50,000 × 30% × 1.04 = ₹1,09,200.

Documents to keep

  • Lender’s interest and principal certificate for each year.
  • Sale deed and the possession or completion certificate.
  • Stamp duty and registration receipts.
  • Bank statements showing the EMIs paid from your account.
  • For a co-owned property, the share of each owner in the deed.

Frequently asked questions

What are the tax benefits on a home loan?

Interest under section 22 (up to ₹2,00,000 for a self-occupied house, the whole amount for a let-out house), principal repayment and stamp duty and registration charges under section 123 within ₹1,50,000, and for some older loans an extra deduction under section 130 or 131.

Are home loan benefits available in the new tax regime?

Only interest on a let-out house. Interest on a self-occupied house and the section 123, 130 and 131 deductions are old regime items (section 202(2)).

Is stamp duty deductible?

Yes. Stamp duty, registration fee and other transfer expenses are part of the amount spent on purchasing a house that qualifies under section 123, in the year you pay them, within the ₹1,50,000 limit shared with the other items.

What if I sell the house early?

If you transfer the house within five years from the end of the tax year in which you got possession, the section 123 deductions already allowed for it are added back to your income in the year of transfer (Schedule XV, paragraph 4).

Can I still claim the extra ₹50,000 or ₹1,50,000 interest?

Only if the loan was sanctioned in the window the section requires: 01/04/2016 to 31/03/2017 for section 130 (₹50,000) and 01/04/2019 to 31/03/2022 for section 131 (₹1,50,000), with the other conditions. A loan taken now does not qualify.

Can both spouses claim on a joint loan?

Yes, if each is a co-owner and a co-borrower and pays his or her share of the instalments. Each can claim the interest and section 123 limits for the share he or she owns and pays.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Deemed Let-Out Property: Third House, Vacant House and Tax Rules (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 05 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Only two houses of an owner can have a nil annual value as self-occupied; every other house is taxed on the rent it could reasonably fetch, even if it is vacant (section 21(6) and (7) of the Income-tax Act, 2025).
  • The phrase “deemed let-out” is commentary; the Act does not use it. It describes a third or further house that is not actually let.
  • Municipal taxes paid, the 30% deduction and the whole interest are allowed against that notional rent, so the result is often a small income or a loss.
  • The owner chooses which two houses are treated as self-occupied.

If you own more than two houses, tax may be due on a house that earns you nothing. Commentators call it a “deemed let-out” property. This post explains the rule in the Income-tax Act, 2025 and shows how the tax is worked out.

What the Act says

Section 21(6): the annual value of a house or part of it is nil if the owner occupies it for his own residence or cannot actually occupy it due to any reason.

Section 21(7): this applies only to two houses that you specify, and does not apply if the house is actually let at any time in the year or you derive any other benefit from it.

The Act does not use the words “deemed let-out”. They describe the result: a house beyond your two specified houses is taxed on its annual value, which under section 21(1) is the higher of the rent it could reasonably be expected to fetch and the actual rent. If it is not let, the notional rent is the annual value.

What is not a deemed let-out property

  • A house you live in, up to two houses in total.
  • A second house that is vacant because you work or live elsewhere. It qualifies as one of your two, and the reason does not matter.
  • A house held as stock-in-trade by a builder or dealer and not let at any time in the year: its annual value is nil up to two years from the end of the financial year in which the completion certificate is obtained (section 21(5)).
  • A house that you occupy for your own business or profession (section 20(2)): it is outside this head, and the profits are business income.

How the income is worked out

  1. Annual value is the rent the house could reasonably be expected to fetch (nothing is actually received).
  2. Less local taxes actually paid by you during the year.
  3. Less 30% of the annual value.
  4. Less the whole interest on any loan for the house. The ₹2,00,000 limit for self-occupied houses does not apply here.

Example. Mr A owns three houses. He lives in one and the other two are vacant. He specifies the house he lives in and one vacant house as his two self-occupied houses. The third house could fetch ₹40,000 a month. He paid ₹10,000 of municipal tax and has ₹3,00,000 of interest on its loan.

Step Amount (₹)
Annual value (40,000 × 12) 4,80,000
Less: municipal tax paid 10,000
Net annual value 4,70,000
Less: 30% of annual value 1,41,000
Less: interest on the loan 3,00,000
Income from house property 29,000

Many articles show this result as a loss of ₹29,000. It is income of ₹29,000: 4,70,000 - 1,41,000 - 3,00,000 = ₹29,000.

If the interest were ₹4,00,000, the result would be a loss of ₹71,000. In the old regime that could be set off against other income, up to ₹2,00,000, and any balance carried forward for eight tax years. In the new regime it cannot be set off against other heads or carried forward (sections 109, 110 and 202).

Choosing your two houses

The choice is yours and you make it in the return. A house you specify has a nil annual value, so no tax on notional rent, but its interest is capped (₹2,00,000 in total across such houses, and only in the old regime). A house that is not specified is taxed on its notional rent, with a 30% deduction and the whole interest.

As a rule, specify as self-occupied the houses whose notional rent (after the 30% deduction) is largest compared with their interest, because that removes the most income from tax. Leave as taxed houses the ones with large interest, where the interest reduces the tax, subject to the loss rules above. Check the result for each combination before you file.

Old and new regime

  • Old regime: interest on a self-occupied house is capped (₹2,00,000 in total); on a deemed let-out house it is not, and loss set-off is up to ₹2,00,000.
  • New regime: interest on a self-occupied house is not allowed at all; the deemed let-out house keeps the full interest deduction but any loss cannot be set off or carried forward.

Common mistakes

  • Not reporting the notional rent of a vacant third house. It is income even though nothing is received.
  • Treating a house that is let for part of the year as self-occupied. Letting at any time in the year takes it out of section 21(6).
  • Taking the municipal valuation or the rent of a different house as the expected rent. Use what the house could reasonably fetch, and keep evidence such as local rents or a broker’s note.
  • Forgetting the interest certificate for the house.

Where to report it

In the house property schedule of the return, mark the house as self-occupied or as let out or deemed let out, and give the annual value, taxes paid and interest. If you own more than one house, the simplest return form cannot be used; check which form you need.

Frequently asked questions

What is a deemed let-out property?

A house, beyond the two that you specify as self-occupied, that is not actually let. The annual value of such a house is the rent it could reasonably be expected to fetch, so tax is charged on that notional rent even though you receive nothing.

How many houses can I treat as self-occupied?

Two, as specified by you (section 21(7)(a)). The annual value of those houses is nil if you occupy them for your own residence or cannot actually occupy them for any reason.

Do I pay tax on a vacant third house?

Yes, on the annual value, which is the rent it could reasonably be expected to fetch, less the taxes paid, 30% of the annual value and interest on the loan.

Can I choose which houses are the two self-occupied ones?

Yes. You specify them in the return. Work out the tax for each combination and pick the one that gives the lower tax.

Is any vacant house exempt from this?

A house held as stock-in-trade by a builder or dealer and not let at any time in the year has a nil annual value up to two years from the end of the financial year in which the completion certificate is obtained (section 21(5)).

Is interest on a deemed let-out house fully deductible?

Yes. There is no ₹2,00,000 cap because the cap in section 22(2) applies only to houses covered by section 21(6). A resulting loss is subject to the set-off rules.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Rental Income: House Property or Business Income? Supreme Court Tests (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 22 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Rent from a building you own is taxed as income from house property (section 20 of the Income-tax Act, 2025), with only taxes, a flat 30% and interest as deductions.
  • If letting is itself your business, the same rent can be business income, with actual expenses and depreciation allowed. This depends on facts, not on your choice.
  • The Supreme Court decided this in Chennai Properties (2015), Rayala Corporation (2016) and Raj Dadarkar (2017): look at what the owner actually does, from a businessman’s point of view.
  • A person with long-term rights in a building, such as a lease of 12 years or more, is a deemed owner under section 25, and the rent from sub-letting can be house property income.

Rent from a property can be taxed under two heads, and they are taxed very differently. House property income allows only a flat 30% deduction, local taxes and loan interest. Business income allows the real costs of running the activity. The choice is not yours. It follows from what you actually do.

The two heads

House property (section 20). The annual value of a building and its appurtenant land that you own is chargeable to tax as income from house property, except for the part you occupy for your own business or profession. The deductions are the local taxes you paid, 30% of the annual value and interest on borrowed capital (sections 21 and 22).

Business income (section 26). Profits of a business carried on at any time in the year. If letting out property is itself a business, its profits are computed under the business provisions, with deductions such as salaries of staff, repairs, insurance, depreciation and interest, and the usual books of account.

What the Supreme Court has said

The Court looks at the activity, not just the ownership or the wording of a document.

Case Facts in brief Result
Chennai Properties and Investments Ltd v CIT (09/04/2015) A company whose main object was to acquire properties and let them out; its only income was rent Business income. The object clause alone is not decisive. It depends on the circumstances whether letting is the business
Rayala Corporation Pvt Ltd v ACIT (11/08/2016) A company whose only business was leasing its property and earning rent Business income, following Chennai Properties
Raj Dadarkar and Associates v ACIT (09/05/2017) A partnership firm held a long-term licence over market space, built 95 shops and 30 stalls and sub-licensed them, collecting licence fees and service charges House property income. The firm was a deemed owner; the service charges were inseparable from the rent, and it did not provide organised, systematic services

The test the Court applied in Raj Dadarkar was whether, from a businessman’s point of view, the letting was the doing of a business or the exploitation of property by an owner. In Chennai Properties, where the entire income was from letting properties owned by the company, letting was the business. In Raj Dadarkar, ownership of the property characterised the activity.

A reading to avoid: some articles say Raj Dadarkar held that sub-letting as an activity makes the income business income. On its facts the Court held it was house property income.

Signs that point to business

  • The object and the main activity of the person are letting properties, and that is the only or main source of income.
  • The activity is organised: staff, systematic management, a range of services (not only the use of space), and books of account.
  • Several properties are let continuously, and letting is exploited commercially rather than as a way of holding an asset.
  • The income comes from services (a hotel, a hostel, a co-working space, a hall with caterers), not just the right to occupy.

Signs that point to house property

  • You own one or a few properties and let them as an investment.
  • The rent is for occupation of the building. Any service charge is a minor, inseparable part of the rent.
  • The owner does no organised business activity around the letting.
  • You have acquired rights in the building of the kind listed in section 25(e), such as a lease of 12 years or more, and you sub-let it: you are a deemed owner, so the rent is house property income. That was the basis of Raj Dadarkar, where the firm held long-term rights under a licence.

Worked comparison

A property is let at ₹35,000 a month. Local taxes paid ₹20,000, loan interest ₹60,000.

As house property

Step Amount (₹)
Annual value (35,000 × 12) 4,20,000
Less: local taxes 20,000
Net 4,00,000
Less: 30% 1,20,000
Less: interest 60,000
Income 2,20,000

As business income, if letting is genuinely a business, with actual running costs of ₹1,10,000 (staff ₹60,000, repairs ₹30,000, insurance ₹10,000, depreciation ₹10,000) in addition to taxes and interest:

Step Amount (₹)
Rent 4,20,000
Less: taxes 20,000
Less: interest 60,000
Less: running costs 1,10,000
Profit 2,30,000

The business head is not always lower: in this case the flat 30% deduction under house property is larger than the real costs. A business also brings the burden of books of account and, above the limits, audit. Do not claim a head only for the tax result.

Other points

  • Loss: a house property loss can be set off against other income only up to ₹2,00,000 in the old regime, and not at all in the new regime. A business loss is treated differently (section 109), though it cannot be set off against salary.
  • Basic exemption: if rent is your only income, tax is nil up to the basic exemption limit of your regime, after the deductions for the head.
  • Documentation: keep the agreement, rent receipts, and for a business, evidence of services provided and of the staff and records.

Before you rely on this

The rulings are on their own facts and later cases apply them to different set-ups, so a case-specific opinion is worth having if the amount is large or the Assessing Officer questions your head. The sub-letting position of a deemed owner follows section 25(e) of the 2025 Act (earlier section 27(iiib)).

Frequently asked questions

Is rental income house property income or business income?

Usually house property income. It is business income only when letting is itself the business, as the Supreme Court found in Chennai Properties and Rayala Corporation, where the company’s main business was letting its properties.

Does the object clause of the company decide it?

No. In Chennai Properties the Court said that an entry in the objects is not decisive; the question depends on the circumstances of each case, from a businessman’s point of view.

Who decides which head applies?

The facts decide, and in a return you must report under the head the facts support. The Assessing Officer can differ. You cannot pick the more favourable head.

What deductions are allowed under each head?

House property: local taxes paid, 30% of the annual value and interest on borrowed capital. Business: expenses allowed under the business provisions of the Act (such as staff, repairs, insurance, depreciation and interest), which usually need books of account.

What did Raj Dadarkar decide?

That a partnership firm which held a long-term licence and sub-licensed shops, earning rent and service charges that were inseparable from the rent, was a deemed owner and its income was house property income, not business income.

Is sub-letting income house property or other income?

If you are a deemed owner under section 25 (for example, you hold a lease of 12 years or more), it is house property income. Otherwise it is business income or income from other sources depending on the facts.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

PF and ESIC Compliance for Employers under the Code on Social Security: Registration, Deduction, Interest, Damages and Penalties

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The Code on Social Security, 2020 (in force from 21/11/2025) replaced the EPF Act, 1952 and the ESI Act, 1948. PF applies to establishments with 20 or more employees and ESI to establishments with 10 or more persons.
  • An establishment already registered under an earlier labour law need not register again; that registration is treated as registration under the Code.
  • An employer who deducts the employee share from wages and does not deposit it faces imprisonment of at least one year (up to three years) and a fine of Rs 1 lakh. Other defaults carry two months to six months and Rs 50,000.
  • Delay attracts simple interest at the notified rate and damages up to the amount of arrears, after a hearing.

Since 21/11/2025 an employer’s PF and ESI duties come from the Code on Social Security, 2020. The Code repealed the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ State Insurance Act, 1948 (and seven other laws). The schemes, rates and wage ceilings continue as notified, but the penalty and procedure rules below are now from the Code itself.

When does each scheme apply?

The First Schedule to the Code says:

Scheme Applies to
Employees’ Provident Fund (Chapter III) Every establishment in which twenty or more employees are employed
Employees’ State Insurance (Chapter IV) Every establishment in which ten or more persons are employed, other than a seasonal factory. A notified hazardous or life threatening occupation is covered even with a single employee

For the head count, employees earning above the notified wage ceiling are also counted. An employer and the majority of employees can agree to bring a smaller establishment under the PF chapter by applying to the Central Provident Fund Commissioner, and the Government can extend the Code to establishments above a notified size.

Registration

Every establishment to which the Code applies registers electronically or otherwise, within the time and in the manner prescribed (section 3). An establishment already registered under any other Central labour law does not have to register again, and that registration is treated as registration under the Code. An establishment that is closing down can apply to cancel the registration.

Wages: what the contribution is calculated on

The Code defines “wages” in section 2(88) as basic pay, dearness allowance and retaining allowance, with listed exclusions (statutory bonus, house rent allowance, conveyance allowance, overtime, commission, the employer’s PF contribution, gratuity and retirement payments). If the exclusions add up to more than one-half of total remuneration (or the percentage notified), the excess is added back to wages. Check your pay structure against this cap, because it can raise both PF and ESI contributions.

Who pays what

  • The employer pays both the employer’s and the employee’s contribution for every employee, whether employed directly or through a contractor.
  • The employer may recover the employee’s contribution only by deduction from wages, only for the period it relates to and not more than the employee’s share.
  • The employer’s contribution cannot be deducted from wages or recovered from the employee in any way.
  • Sums deducted from wages are deemed to be entrusted to the employer for the purpose of paying the contribution.
  • For contract workers, the principal employer pays and recovers the amount from the contractor, who in turn may recover only the employee’s share from the worker’s wages.
  • Employees must establish identity through Aadhaar for registration and for claiming benefits or withdrawing funds (section 142).

If you pay late or do not pay

Consequence What the Code says
Interest (section 127) Simple interest at the rate notified by the Central Government, from the date the amount became due till actual payment
Damages (section 128) Up to the amount of arrears, levied by the PF Commissioner or ESIC Director General (or authorised officer), after giving the employer an opportunity of being heard
Failure to pay employee share that was deducted (section 133(i)(a)) Imprisonment of at least one year, up to three years, and a fine of Rs 1 lakh
Failure to pay any other contribution (section 133(i)(b)) Imprisonment of at least two months, up to six months, and a fine of Rs 50,000
Deducting the employer’s share from wages, or failing to file a return Fine up to Rs 50,000
Obstructing an inspector, or failing to produce records Imprisonment up to six months or fine up to Rs 50,000, or both
Repeat offence (section 134) Imprisonment up to two years and fine of Rs 2 lakh; for repeat non-payment of contributions, at least two years, up to three, and fine of Rs 3 lakh

In the case of a company, every person directly in charge of the conduct of its business, as well as the company, is deemed guilty (section 135). The court can impose a lesser jail term for adequate and special reasons recorded in the judgment, and offences can be compounded as the Code provides.

A practical checklist

  1. Count employees, including those above the wage ceiling, to see whether PF (20) and ESI (10) apply.
  2. Keep the registration number from the old law in your records; it carries over.
  3. Recalculate wages under the Code definition and check the one-half rule.
  4. Deposit both shares on time, every month, for contract workers too.
  5. File returns and keep registers ready for the inspector.

Points to check

  • This post follows the Code as published on India Code. Rates, the wage ceiling, interest rate and filing dates are fixed by rules, regulations and notifications issued under the Code, so check those before relying on a figure.
  • Penalty amounts and imprisonment terms are the maximums and minimums written in the Code; the actual order depends on the court.

Frequently asked questions

When does PF apply to an establishment?

Chapter III (Employees’ Provident Fund) applies to every establishment in which twenty or more employees are employed. Employees earning above the wage ceiling are counted for this head count.

When does ESI apply?

Chapter IV applies to every establishment in which ten or more persons are employed, other than a seasonal factory, and to a notified hazardous establishment even with one employee.

Do I have to register again under the Code?

An establishment already registered under any other Central labour law is not required to register again; its registration is deemed to be registration under the Code. A new establishment registers electronically as prescribed.

Can I deduct the employer share from wages?

No. The employer can recover only the employee’s contribution, by deduction from wages for the period it relates to, and the employer’s contribution cannot be recovered from the employee in any way.

What if the deducted employee contribution is not deposited?

The sum deducted is treated as entrusted to the employer. Failure to pay it is punishable with imprisonment of at least one year, up to three years, and a fine of Rs 1 lakh.

What are the interest and damages for late payment?

Simple interest at the rate notified by the Central Government from the due date to the date of payment, and damages up to the amount of arrears, levied after the employer has been heard.

Can the employer use a contractor to pay PF and ESI?

The principal employer pays the employer’s and employee’s share for contract workers and then recovers the amount from the contractor.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Section 10(26): Tax Exemption for Scheduled Tribes in the North East and Ladakh, and Sikkimese Exemption

Posted on by CA Meet Dhrangadhariya

Last updated: 14 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Income of a Scheduled Tribe member who lives in the notified tribal areas is exempt if it arises from a source in those areas, or is dividend or interest on securities.
  • The areas are the Sixth Schedule hill areas in Part I or II of the table in paragraph 20, Arunachal Pradesh, Manipur, Mizoram, Nagaland, Tripura, certain areas notified in 1951, and Ladakh.
  • Sikkimese individuals have a similar exemption for income from a source in Sikkim and for dividend or interest on securities.
  • From Tax Year 2026-27 these are Sl. No. 19 and 20 of Schedule III of the Income-tax Act, 2025, and they stay available in the new tax regime.

Income of members of certain Scheduled Tribes who live in the tribal areas of the North East and Ladakh is exempt from income tax. Sikkimese individuals have a similar exemption. These were sections 10(26) and 10(26AAA) of the 1961 Act. From Tax Year 2026-27 they are Sl. No. 19 and 20 of Schedule III of the Income-tax Act, 2025.

Scheduled Tribe members: Sl. No. 19 (section 10(26))

Who: a member of a Scheduled Tribe as defined in article 366(25) of the Constitution, who resides in:

  • any area specified in Part I or II of the table appended to paragraph 20 of the Sixth Schedule to the Constitution,
  • the States of Arunachal Pradesh, Manipur, Mizoram, Nagaland and Tripura,
  • the areas covered by the 1951 notification of the Governor of Assam under paragraph 20(3) of the Sixth Schedule, as it stood before the North-Eastern Areas (Reorganisation) Act, 1971, or
  • the Union territory of Ladakh.

What is exempt: any income that accrues or arises from any source in those areas or States, and income by way of dividend or interest on securities. The Act attaches no further condition and no limit.

What is not covered: business income, rent, or other income from a source outside the specified areas. Dividend and interest on securities are the exception, and are exempt wherever the security is held.

Assam as a whole is not covered. Only the hill areas specified in the Sixth Schedule table and the 1951 notification qualify, so a Scheduled Tribe member in another part of Assam does not get the exemption.

Sikkimese individuals: Sl. No. 20 (section 10(26AAA))

An individual who is a Sikkimese has no tax on income that accrues or arises from any source in the State of Sikkim, or on dividend or interest on securities. The Notes to Schedule III define a Sikkimese broadly as a person domiciled in Sikkim on or before 26 April 1975 and certain close relatives of such a person. Check the definition before claiming.

New tax regime

The new regime (section 202 of the 2025 Act) removes the Schedule III exemptions at serial numbers 5, 6, 7, 8, 11 and 17, and 12 and 13 (except those prescribed). Serial numbers 19 and 20 are not on that list, so both exemptions remain available in the new regime.

Do these members file a return?

Exempt income does not reduce the duty to file. A person whose total income, before the exemption, is above the basic exemption limit, or who meets any other condition for filing, must file a return and report the exempt income in the exempt income schedule. Keep a Scheduled Tribe certificate from the competent authority and proof of residence and the source of income.

Example

Lalsang is a member of a Scheduled Tribe living in Aizawl, Mizoram. He earns a salary from a Mizoram employer and receives interest on bonds. Both are income from a source in Mizoram or interest on securities, so both are exempt. If he also lets out a flat in Guwahati, the rent is not from a specified area, and it is taxable.

Frequently asked questions

Who gets the section 10(26) exemption?

A member of a Scheduled Tribe (as defined in article 366(25) of the Constitution) who lives in the specified areas: Part I or II of the Sixth Schedule table, Arunachal Pradesh, Manipur, Mizoram, Nagaland, Tripura, the 1951 notified areas, or Ladakh.

Which income is exempt?

Income that accrues or arises from any source in those areas, and dividend or interest on securities.

Is income earned outside the area exempt?

Not under this provision, except dividend and interest on securities. Business income or rent from outside the specified areas is not covered.

Is the whole of Assam covered?

No. Only the hill areas specified in the Sixth Schedule table and the areas covered by the 1951 notification, not Assam as a State.

Is it available in the new tax regime?

Yes. Section 202 of the 2025 Act removes other Schedule III exemptions but not Sl. No. 19 and 20.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

ESOP Taxation in India: Perquisite on Exercise and Capital Gains on Sale (2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 23 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • An employee stock option (ESOP) is a right, not an obligation, to buy shares at a fixed price. Granting and vesting are not taxed; if you never exercise, there is no tax.
  • On exercise, the fair market value (FMV) of the share on that date less the price you paid is a perquisite taxed as salary (section 17(1)(d)), and TDS applies.
  • FMV is set by Rule 15(6): the average of the opening and closing price for a listed share, and a merchant banker’s value for an unlisted one.
  • On sale, capital gains are worked out with that FMV as your cost, and the holding period runs from the date of allotment.
  • Employees of an eligible start-up pay the perquisite tax later: within 14 days of the earliest of 60 months from the end of the tax year, sale of the shares, or leaving the job.

An employee stock option plan (ESOP) lets an employee buy the employer’s shares at a fixed price in the future. The Companies Act, 2013 calls it an employee stock option: a right, but not an obligation. ESOPs are taxed twice, at two different points, under two different heads. This post follows the Income-tax Act, 2025 and the Income-tax Rules, 2026, which apply from 01/04/2026.

The key dates

Term Meaning
Grant date The employer offers you the option
Vesting period The time, or the milestones, before you may exercise
Vesting date The date the option becomes exercisable
Exercise date The date you tell the employer you will buy the shares
Exercise price The price you pay per share, usually below the market price
Allotment The shares are issued or transferred to you

Nothing is taxed on grant or vesting. If the option lapses unexercised, there is no tax either.

Stage 1: tax on exercise (salary)

Under section 17(1)(d), the value of any specified security or sweat equity share allotted or transferred by your current or former employer, free of cost or at a concessional rate, is a perquisite. The value is the fair market value on the date the option is exercised, less the amount you actually paid or that was recovered from you (section 17(4)(h)).

It is added to your salary and taxed at your slab rate. The employer deducts TDS on it under section 392 and shows it in your TDS certificate (Form 130).

How fair market value is fixed (Rule 15(6) and (7))

Situation on the exercise date FMV
Share listed on one recognised stock exchange Average of the opening and closing price on that exchange
Listed on more than one exchange The same average, on the exchange with the highest trading volume
Listed but no trading that day Closing price on the nearest earlier date (on the exchange with the highest volume if more than one)
Not listed Value fixed by a Category I merchant banker registered with SEBI, as on the “specified date”
Specified security that is not an equity share Merchant banker’s value on the specified date

The “specified date” is the exercise date or any earlier date not more than 180 days before it. “Opening” and “closing” price mean the price of the first and the last settlement on the day, and where the exchange quotes buy and sell prices, the sell price.

Employees of an eligible start-up

If the employer is an eligible start-up under section 140 (the section that replaced section 80-IAC), the tax on this perquisite is not payable at exercise. The notice of demand makes it payable within 14 days of the earliest of:

  • the end of 60 months from the end of the tax year in which the shares were allotted;
  • the date you sell the shares; or
  • the date you cease to be an employee of that employer (section 289(3)).

The tax is worked out at the rates in force for the tax year of allotment, and the employer deducts or pays it within the same time (section 392(3)). The older rule used 48 months; the 2025 Act says 60.

Stage 2: tax on sale (capital gains)

When you later sell the shares, the gain after exercise is a capital gain.

  • Cost of acquisition: the FMV that was taken as the perquisite (section 73, Table serial 4). Your own exercise price does not matter again, because the perquisite already taxed the difference.
  • Holding period: counted from the date of allotment (section 2(101)(c)).
Shares Short-term if held for Short-term gain taxed at Long-term gain taxed at
Listed in India, sale on a stock exchange with STT paid 12 months or less 20% (section 196) 12.5% on the gain above ₹1,25,000 a year (section 198)
Listed in India, no STT paid 12 months or less Slab rates 12.5% without indexation (section 197)
Unlisted Indian company 24 months or less Slab rates 12.5% without indexation (section 197)
Foreign company’s shares 24 months or less Slab rates 12.5% without indexation (section 197)

Shares of a foreign company are not “listed on a recognised stock exchange in India”, so the 24 month period applies even if they are listed abroad.

Worked example (listed company)

You hold 2,000 options at an exercise price of ₹80. On the exercise date, 10/06/2026, the FMV is ₹150.

  • Perquisite: (150 - 80) × 2,000 = ₹1,40,000, added to salary. At a 30% slab that is ₹42,000 of tax before cess, mostly collected as TDS.
  • Sale within 12 months, on 15/12/2026 at ₹175: gain = (175 - 150) × 2,000 = ₹50,000, short-term, taxed at 20% = ₹10,000 plus cess.
  • Sale after 12 months, on 20/07/2027 at ₹190: gain = (190 - 150) × 2,000 = ₹80,000, long-term. It is below ₹1,25,000, so no tax on it, provided your other long-term gains from listed equity in that year do not use up the limit.

Other situations

Sell to cover

When shares are allotted, the employer must deduct TDS on a perquisite that you did not receive in cash. Many employers therefore sell part of the allotted shares on your behalf to pay the tax. That sale is itself a transfer, so it can give a small capital gain or loss (usually nil, because the price is close to the FMV used) that belongs in your return.

Buyback of options

An employer, often an unlisted company, may buy back vested options before they are exercised so that employees get cash. Employers generally treat the payment as salary and deduct TDS. We could not find a specific provision for this in the Act, so treat the position as one to confirm for a large amount.

Residence and foreign employers

A resident is taxed in India on income from anywhere in the world. A non-resident is taxed only on income that is received in India or accrues or arises here, and salary for services rendered in India accrues in India. Stock options of a foreign parent can therefore be taxed in India even if the shares are bought and sold abroad. Foreign shares also have to be reported in the foreign assets schedule of the income-tax return.

Advance tax

Gains on sale are income of the year, so include them in your advance tax instalments once the sale has happened. Delay can attract interest, so pay the tax on a sale as soon as you know the gain.

What to check before you exercise

  1. Ask your employer for the FMV method and the FMV it will use on the exercise date.
  2. Check whether the company is a recognised eligible start-up under section 140. If not, you owe tax at exercise even if the shares cannot yet be sold.
  3. Keep the allotment letter and the FMV working. They are your cost of acquisition and holding period when you sell.
  4. Keep cash aside for the tax on the perquisite, because it arises before you receive any money.

Frequently asked questions

Is tax payable when ESOPs are granted or vest?

No. The tax arises when the option is exercised and shares are allotted. If you let the options lapse without exercising them, there is no tax.

How is the ESOP perquisite worked out?

Fair market value of the share on the date you exercise the option, less the amount you paid or that was recovered from you (section 17(4)(h)). It is added to your salary and taxed at your slab rate, and the employer deducts TDS under section 392.

How is FMV decided?

For a listed share, the average of the opening and closing price on the stock exchange on the exercise date (the exchange with the highest trading volume if listed on more than one). If there was no trade that day, the closing price on the nearest earlier day. For an unlisted share, the value fixed by a Category I merchant banker as on the exercise date or any date up to 180 days before it.

What is my cost when I sell the shares?

The FMV that was taken as the perquisite (section 73, Table serial 4). The holding period starts on the date of allotment.

What happens to tax on ESOPs of a start-up?

If your employer is an eligible start-up under section 140, the tax on the perquisite becomes payable within 14 days of the earliest of three events: 60 months from the end of the tax year of allotment, sale of the shares, or your ceasing to be an employee.

Is the sale of shares taxed twice?

No. The perquisite taxes the gain up to the exercise date, and the FMV on that date becomes your cost, so only the increase in value after exercise is taxed as a capital gain.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Who Must File an Income Tax Return and Due Dates (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 05 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 263 of the Income-tax Act, 2025 requires a return from companies, firms and certain institutions regardless of income, from other persons whose total income before specified deductions exceeds the basic exemption limit, and from anyone with a business or capital gains loss to carry forward or foreign assets.
  • Rule 163 adds conditions that force a return even below the exemption limit: current account deposits above ₹1 crore, foreign travel above ₹2 lakh, electricity above ₹1 lakh, business turnover above ₹60 lakh and others.
  • Due dates for tax year 2026-27 are 31 July 2027 for most individuals, 31 August for business owners without audit, 31 October for audit cases and companies, and 30 November where a transfer pricing report is needed.
  • A return can be filed late within nine months of the end of the tax year, with a fee.

Whether you must file a return depends on who you are, how much you earned and, since the law now has several non-income triggers, what you did during the year. This post follows section 263 of the Income-tax Act, 2025 and Rules 163 and 164 of the Income-tax Rules, 2026, which apply to tax year 2026-27 (income of FY 2026-27, filed in 2027).

Who must file under section 263(1)

Category Must file a return
Company Always, whether there is income or loss
Firm (including LLP) Always
A university, college or other institution of the kind in section 45(3)(a) Always
Business trust and investment fund Always
A resident (other than a not ordinarily resident) with foreign assets Always, if at any time in the tax year he holds any asset (including a financial interest in an entity) located outside India, has signing authority in an account abroad, or is a beneficiary of such an asset
Any other person (individual, HUF, AOP, BOI and so on) If total income, before the deductions and exemptions named in section 263(1)(a)(iii), exceeds the basic exemption limit
A specified entity (such as a trust) If its total income without applying section 11 exceeds the basic exemption limit
Anyone with a loss If he has a loss under “Profits and gains of business or profession” or “Capital gains” and wants to carry it forward
Persons meeting a prescribed condition See Rule 163 below

The persons in the first five rows and the foreign asset category must file on or before the due date regardless of income or loss (section 263(1)(b)).

The basic exemption limit

The limit is tested on total income before Chapter VIII deductions (such as section 123) and certain capital gains exemptions. A salary of ₹6 lakh with a ₹1.5 lakh section 123 deduction therefore still crosses the limit, and a return is compulsory.

Taxpayer Limit
New regime (section 202) ₹4,00,000
Old regime, below 60 ₹2,50,000
Old regime, resident aged 60 to under 80 ₹3,00,000
Old regime, resident aged 80 or more ₹5,00,000

Rule 163: conditions that make a return compulsory

For a person other than a company or a firm, a return is also required if, in the tax year, he:

  1. deposited more than ₹1 crore in one or more current accounts with a bank or co-operative bank; or
  2. spent more than ₹2 lakh on foreign travel for himself or anyone else (travel to neighbouring countries and notified pilgrimage places is not counted); or
  3. spent more than ₹1 lakh on electricity; or
  4. had business sales, turnover or gross receipts above ₹60 lakh; or
  5. had gross receipts in a profession above ₹10 lakh; or
  6. suffered TDS and TCS of ₹25,000 or more (₹50,000 or more for a resident individual aged 60 or above); or
  7. deposited ₹50 lakh or more in total in savings bank accounts.

Due dates for tax year 2026-27

Section 263(1)(c), as amended by the Finance Act, 2026:

Who Due date
An assessee, including a partner of a firm or the partner’s spouse (where section 10 applies), who must furnish a transfer pricing report under section 172 30 November 2027
A company; any person other than a company whose accounts are required to be audited; a partner of a firm whose accounts are audited, or the spouse of such a partner (not requiring a section 172 report) 31 October 2027
A person with business or professional income whose accounts are not required to be audited, and a partner of a non-audited firm or the spouse of such a partner 31 August 2027
Any other assessee, including salaried individuals 31 July 2027

The 31 August date for non-audited business and professional income was introduced by the Finance Act, 2026 and applies to returns of income of FY 2025-26 as well (due 31/08/2026). A person whose income is mainly from salary, interest and house property still files by 31 July.

Who need not file

  • A person whose total income is below the limit, and who meets none of the conditions above.
  • A class of persons exempted by notification of the Central Government (section 263(3)). For example, certain senior citizens are exempt under a separate rule (see our post on the section 194P exemption).

Filing even when not required

You may want to file voluntarily to:

  • claim a refund of TDS or advance tax;
  • carry forward a loss. Under section 121 a loss that is not determined in a return filed under section 263(1), that is by the due date, cannot be carried forward;
  • keep an income proof for visa, loan or tender purposes.

What happens if you do not file

  • A fee under section 428 (₹1,000 if total income is ₹5 lakh or less, ₹5,000 otherwise) if you file after the due date.
  • Interest under section 423 at 1% a month on the tax unpaid (after advance tax and TDS), from the due date.
  • Loss of the right to carry forward losses (section 121).
  • Difficulty with loans, visas and tenders, where a return is asked for.
  • Possible notice and penalty or prosecution where income was concealed.

See our post on late, revised and updated returns for the time limits and the fee and interest rules.

Which return form

The form depends on your income:

  • SAHAJ (ITR-1): resident individuals (other than not ordinarily resident) with income from salary or family pension, up to two house properties with no loss to carry forward, other sources (not lottery or race horses), and long-term capital gains under section 198 of up to ₹1,25,000, with no brought forward loss. Total income must not exceed ₹50 lakh and there must be no foreign asset, income from abroad, unlisted equity share held at any time, directorship in a company and so on.
  • ITR-2: individuals and HUFs with no business or profession income who are not eligible for ITR-1.
  • SUGAM (ITR-4): residents with business or professional income computed under the presumptive provisions, and who also meet the ITR-1-type limits.
  • ITR-3: individuals and HUFs with business or professional income who cannot use ITR-1, ITR-2 or ITR-4.
  • ITR-5, ITR-6 and ITR-7: other persons, companies, and persons required to file under the provisions for trusts and institutions.

This is a summary of Rule 164. Check the form notified for your year before filing.

Frequently asked questions

Who must file an income tax return?

A company or a firm in every case; any other person whose total income, before specified deductions and exemptions, exceeds the basic exemption limit; anyone who has a business or capital gains loss to carry forward; a resident (other than not ordinarily resident) with an asset or signing authority outside India; and anyone who meets a condition in Rule 163 (section 263(1)).

What is the basic exemption limit for tax year 2026-27?

Under the new regime ₹4,00,000. Under the old regime ₹2,50,000, or ₹3,00,000 for a resident aged 60 to under 80, or ₹5,00,000 for a resident aged 80 or more.

Do I have to file a return if my income is below the limit?

Not necessarily, but you must if any Rule 163 condition applies: deposits of more than ₹1 crore in current accounts, foreign travel spending above ₹2 lakh, electricity bills above ₹1 lakh, business turnover above ₹60 lakh, professional receipts above ₹10 lakh, TDS and TCS of ₹25,000 or more (₹50,000 for a resident senior citizen), or savings account deposits of ₹50 lakh or more.

What is the due date?

31 July after the end of the tax year for most individuals; 31 August for a business owner whose accounts are not audited; 31 October for a company or a person whose accounts are audited; 30 November where a transfer pricing report is required (section 263(1)(c)).

Do I have to file if I have foreign assets but no income?

Yes. A resident who is not a not ordinarily resident and who held any asset, including a financial interest in an entity, located outside India, or has signing authority in a foreign account, at any time in the tax year, must file whatever the income or loss.

Can I file after the due date?

Yes, within nine months from the end of the tax year, or before the assessment is completed if earlier (section 263(4)), with a fee under section 428 and interest under section 423.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

How to Save Tax on Salary from ₹7 Lakh to ₹1 Crore: Old vs New Regime (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 13 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Under the new regime a salaried individual pays no tax on salary up to ₹12,75,000: the ₹75,000 standard deduction takes income to ₹12,00,000, and the section 156 rebate of up to ₹60,000 clears the tax.
  • Above that, the old regime wins only if your total deductions (including the ₹50,000 standard deduction) cross a break-even figure, about ₹5.9 lakh at a ₹15 lakh salary and about ₹8.5 lakh from ₹30 lakh upward.
  • In the new regime the useful levers are the employer’s NPS contribution (up to 14% of salary), tax-free perquisite limits and a correct salary structure.
  • Surcharge starts above ₹50 lakh of income and is capped at 25% in the new regime but goes to 37% above ₹5 crore in the old regime.

A salary of ₹7 lakh, ₹12 lakh, ₹20 lakh or ₹50 lakh calls for different advice. Below ₹12.75 lakh the question is whether any tax is payable at all. Above it, the question is whether your deductions are large enough to beat the new regime. This post gives the rules, the tax at each level and the break-even point, for tax year 2026-27 (income earned in FY 2026-27).

The figures are for a resident individual below 60 whose only income is salary, with 4% health and education cess, unless stated.

The two regimes in one table

Point New regime (section 202, default) Old regime
Slabs Up to ₹4,00,000 nil; ₹4,00,001 to ₹8,00,000 5%; ₹8,00,001 to ₹12,00,000 10%; ₹12,00,001 to ₹16,00,000 15%; ₹16,00,001 to ₹20,00,000 20%; ₹20,00,001 to ₹24,00,000 25%; above 30% Up to ₹2,50,000 nil; ₹2,50,001 to ₹5,00,000 5%; ₹5,00,001 to ₹10,00,000 20%; above ₹10,00,000 30%
Standard deduction ₹75,000 ₹50,000
Rebate (section 156) Tax or ₹60,000, whichever is less, if income is up to ₹12,00,000 (marginal relief above) Tax or ₹12,500, whichever is less, if income is up to ₹5,00,000
Chapter VIII deductions (section 123 and others) Not allowed, except employer’s NPS contribution (section 124(1) and (2)) and a few others Allowed
HRA exemption, LTA, interest on a self-occupied home loan Not allowed Allowed
Gratuity, leave encashment and similar exemptions Allowed Allowed
Surcharge 10% above ₹50 lakh, 15% above ₹1 crore, 25% above ₹2 crore 10%, 15%, 25% on the same slabs, and 37% above ₹5 crore

Slabs and the surcharge are from the Finance Act, 2026; the standard deduction, rebate and what is barred in the new regime are from sections 19, 156 and 202 of the Income-tax Act, 2025.

Salary up to ₹12.75 lakh: no tax in the new regime

A salary of ₹12,75,000 less the ₹75,000 standard deduction is ₹12,00,000. The slab tax on that is ₹60,000, and the section 156(2) rebate of ₹60,000 cancels it. No investment is needed to save tax on these salaries.

Marginal relief covers the next slice. The tax on income above ₹12,00,000 cannot exceed the excess over ₹12,00,000. On a salary of ₹12,85,000 the income is ₹12,10,000; slab tax is ₹61,500 but tax is limited to ₹10,000, plus 4% cess, so ₹10,400.

The rebate applies against slab-rate tax only; it does not reduce tax on special-rate income such as capital gains.

What the tax is at each level

Tax with cess. “Old regime” columns assume total deductions as shown, including the ₹50,000 standard deduction.

Salary New regime Old regime, deductions ₹2,00,000 Old regime, deductions ₹4,50,000 Total deductions needed for old regime to equal new
₹7,00,000 0 0 0 Not needed
₹10,00,000 0 ₹75,400 ₹23,400 New regime tax is nil
₹12,75,000 0 ₹1,40,400 ₹80,600 New regime tax is nil
₹15,00,000 ₹97,500 ₹2,10,600 ₹1,32,600 About ₹5.9 lakh
₹20,00,000 ₹1,92,400 ₹3,66,600 ₹2,88,600 About ₹7.6 lakh
₹30,00,000 ₹4,75,800 ₹6,78,600 ₹6,00,600 About ₹8.5 lakh
₹50,00,000 ₹10,99,800 ₹13,02,600 ₹12,24,600 About ₹8.5 lakh
₹1,00,00,000 ₹29,25,780 ₹31,48,860 ₹30,63,060 About ₹8.5 lakh

Reading the table: at ₹20 lakh you need roughly ₹7.6 lakh of total deductions and exemptions in the old regime before it beats the new regime. A typical set (standard deduction ₹50,000, ₹1,50,000 under section 123, ₹50,000 own NPS, ₹25,000 health insurance, some HRA and home loan interest) can reach it only if rent or loan interest is high. Above ₹30 lakh the break-even settles at about ₹8.5 lakh because both regimes reach the top 30% slab.

What works in the new regime

  1. Employer’s NPS contribution. The employer’s contribution to the notified pension scheme is deductible up to 14% of salary (basic plus dearness allowance) in the new regime (section 124(1) and (2)). It also counts toward the ₹7.5 lakh combined limit for employer contributions to PF, NPS and superannuation. This is the single most useful structuring lever, and it has to be set up with the employer before the contribution is made.
  2. Exempt items that are not barred. Gratuity and leave encashment on retirement, and many perquisites within the Rule 15 limits, stay tax free in both regimes.
  3. Do not restructure pay into HRA or LTA for tax. In the new regime the HRA exemption and similar allowance exemptions are not available, so these allowances are taxed like the rest of salary. Look at the employer-side components (NPS, tax-free perquisites) instead.
  4. Plan for the rebate edge. Between ₹12,75,000 and about ₹13.45 lakh of salary, each extra ₹1 of salary costs ₹1 of tax at the margin because of the marginal relief. An NPS contribution that brings income back under ₹12 lakh removes the tax entirely.

What works in the old regime

If you choose the old regime, build up these in this order:

  • Section 123 (earlier 80C), up to ₹1,50,000 in total: employee PF, tuition fees for two children, home loan principal, five-year bank or post office deposits, life insurance premiums and others listed in Schedule XV.
  • HRA exemption if you pay rent and receive HRA, or the rent deduction if you receive none.
  • Interest on a home loan on a self-occupied house.
  • Own NPS contribution up to ₹50,000 (section 124(3)), above the section 123 limit.
  • Health insurance premium, education loan interest and donations to eligible funds.

See our posts on these deductions for the limits. Do not invest only to save tax: a lock-in product bought for a deduction is only worth it if you need the product.

High salaries: ₹50 lakh to ₹1 crore

  • Surcharge starts when income is above ₹50 lakh, at 10% of the tax. Marginal relief means the tax and surcharge together cannot exceed the tax at ₹50 lakh plus the income above it.
  • At ₹1 crore of salary the new regime has taxable income of ₹99,25,000, so the 10% surcharge applies; from ₹1 crore the rate rises to 15%.
  • The old regime’s top surcharge is 37% above ₹5 crore, but for most salaried people the gap is the ₹8.5 lakh break-even above, not the surcharge.
  • Income other than salary (capital gains, interest, business) adds to total income and can push you across a surcharge line.

A quick way to decide

  1. List your actual deductions: employee PF, section 123 investments, rent paid and HRA received, home loan interest, own NPS, health insurance.
  2. Add ₹50,000 standard deduction. If the total is below the break-even for your salary in the table, choose the new regime.
  3. If above, compute both exactly. The break-even is a guide; the surcharge, other income and the age of the taxpayer change it.
  4. Read the option rules in section 202 before you file, and tell your employer early which regime to use for TDS so that the tax deducted during the year is close to your final tax.

Frequently asked questions

How much salary is tax free in the new regime?

Up to ₹12,75,000 for a salaried person, for tax year 2026-27. The ₹75,000 standard deduction reduces it to ₹12,00,000 of income, and section 156(2) gives a rebate of the tax or ₹60,000, whichever is less.

What if my income is a little above ₹12 lakh?

Marginal relief applies. The tax cannot exceed the amount by which income is above ₹12,00,000. At an income of ₹12,10,000 the tax is limited to ₹10,000 plus cess.

Which regime is better for a ₹20 lakh salary?

For most people the new regime, unless total deductions (standard deduction, section 123 investments, HRA, home loan interest, own NPS and others) are above about ₹7.6 lakh. Compute both with your own figures.

Is the old regime ever better?

Yes, when deductions and exemptions are large, for example HRA with a high rent, home loan interest and the full section 123 limit together.

What still works in the new regime?

The ₹75,000 standard deduction, the employer’s contribution to NPS (up to 14% of salary under section 124), exemptions such as gratuity and leave encashment, and the perquisite limits.

When does surcharge apply?

When income is above ₹50 lakh: 10% up to ₹1 crore, 15% up to ₹2 crore and 25% above that. In the old regime it is 37% above ₹5 crore. Marginal relief applies at each threshold.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

CTC, Gross Salary, Basic Salary and Take-Home Pay Explained (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 23 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • CTC (cost to company) is what the employer spends on you in a year; gross salary is the pay before deductions; basic salary is the fixed core of it; take-home is what reaches your bank.
  • “Salary” for income tax is wider than the payroll word: section 16 includes wages, pension, gratuity, commission, perquisites, leave encashment and more.
  • Basic plus dearness allowance (if the terms provide) is the base for gratuity and the HRA exemption, so a low basic changes more than the payslip.
  • Employer’s PF, NPS and superannuation contributions are tax free up to ₹7.5 lakh a year in total; the new regime gives a ₹75,000 standard deduction.

A job offer quotes a CTC, the payslip shows a gross salary, and the bank credit is much smaller. These terms are payroll language, not tax law, and employers use them a little differently. This post fixes the meaning of each, shows how they fit together, and explains what the Income-tax Act, 2025 calls salary.

The four numbers

Term Meaning
CTC (Cost to Company) The total yearly cost of you to the employer: pay, allowances, variable pay, the employer’s PF contribution, the gratuity provision, insurance and other benefits
Gross salary The pay credited or due to you before any deduction: basic, HRA, allowances, variable pay
Basic salary The fixed core of gross salary, without allowances, bonus or perquisites
Take-home (net) pay Gross salary less your PF contribution, professional tax, TDS and other deductions

Gross salary is roughly CTC less the employer’s PF and the gratuity provision, because those are costs to the employer that you do not receive as monthly pay. Check your offer letter, since some employers show variable pay and benefits differently.

What “salary” means for income tax

Under section 16 of the Income-tax Act, 2025, “salary” includes:

  • wages,
  • any annuity or pension,
  • any gratuity,
  • any fees or commission,
  • perquisites,
  • profits in lieu of, or in addition to, salary or wages,
  • any advance of salary,
  • any payment for leave not availed of (leave encashment),
  • the taxable annual accretion to a recognised provident fund and certain transferred balances,
  • the employer’s contribution to the notified pension scheme (NPS).

Tax is then charged on the net salary after the deductions in section 19: the standard deduction (₹75,000, or the salary if less, under the new regime; ₹50,000 under the old regime), professional tax (old regime only) and the retirement and exempt items such as gratuity.

Some payments in the CTC are not in your taxable salary at all. The employer’s contribution to a recognised provident fund, the notified pension scheme and an approved superannuation fund is a perquisite only to the extent the total is above ₹7,50,000 in a year (section 17(1)(h)).

Why basic salary matters more than it looks

Basic salary, together with dearness allowance if the terms of employment provide for it, is the base used for several things:

  • Provident fund: the usual contribution is a percentage of basic plus dearness allowance.
  • Gratuity: worked out on the last drawn monthly wages, which include basic and dearness allowance (see our post on gratuity).
  • HRA exemption (old regime only): the least of the HRA received, the rent paid less 10% of salary, and 50% of salary in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru (40% elsewhere). Here “salary” means basic pay plus dearness allowance if the terms provide, and excludes all other allowances and perquisites (Rule 279).

A low basic with a large special allowance cuts the PF and gratuity base and the HRA exemption, while a high basic increases all three but also raises your PF deduction and reduces your monthly take-home. Neither is right for everyone; there is no legal percentage of CTC.

Worked example (tax year 2026-27, new regime)

CTC is ₹21,00,000 a year.

Component Amount (₹)
Basic 8,40,000
HRA 3,36,000
Special allowance 6,32,800
Variable pay 1,50,000
Gross salary 19,58,800
Employer’s PF (12% of basic) 1,00,800
Gratuity provision 40,400
CTC 21,00,000

Tax under the new regime (section 202):

  • Gross salary 19,58,800 less standard deduction 75,000 = taxable income ₹18,83,800. (Professional tax is not deductible in the new regime, and the employer’s PF is within the ₹7.5 lakh limit.)
  • Tax: 5% on ₹4,00,000 to ₹8,00,000 = 20,000; 10% on ₹8,00,000 to ₹12,00,000 = 40,000; 15% on ₹12,00,000 to ₹16,00,000 = 60,000; 20% on ₹16,00,000 to ₹18,83,800 = 56,760. Total ₹1,76,760.
  • Add 4% cess of ₹7,070 = ₹1,83,830. No rebate applies as income is above ₹12 lakh.

Take-home pay:

Item Amount (₹)
Gross salary 19,58,800
Less: employee’s PF (12% of basic) 1,00,800
Less: professional tax (assumed) 2,400
Less: income tax with cess 1,83,830
Take-home for the year 16,71,770
Per month about 1,39,314

The employer’s PF and gratuity are outside gross salary but inside CTC, which is why take-home looks far below the headline figure.

Practical points

  • Ask for the break-up of CTC in writing, including what is fixed, what is variable and what is a benefit that may never be paid out in cash.
  • Variable pay shown in CTC is paid only when targets are met. Count only the fixed part when you plan your monthly budget.
  • Reimbursements and perquisites should be checked against Rule 15 and the new limits (meals ₹200 a meal, gifts ₹15,000). See our post on perquisites.
  • If you can choose between regimes, compare both with your actual HRA, 80C and similar deductions.

Frequently asked questions

What is the full form of CTC?

Cost to Company. It is the total yearly cost of an employee to the employer: pay, allowances, bonus, employer’s PF, gratuity and any benefits.

What is the difference between CTC and gross salary?

CTC includes costs that are not paid to you as salary, such as the employer’s PF and the gratuity provision. Gross salary is what is paid to you before deductions, so it is CTC less those items.

How do I get from gross salary to take-home pay?

Deduct your own PF contribution, professional tax, TDS and any other deductions such as insurance or NPS that your employer recovers.

What percentage of CTC is basic salary?

There is no legal percentage. Employers commonly keep it around 40% to 50% of CTC. A higher basic raises PF, gratuity and the HRA exemption base, but also increases the pay that is fully taxable.

What does “salary” include for income tax?

Under section 16 of the Income-tax Act, 2025: wages, any annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary, advance salary and leave encashment, along with certain provident fund and pension scheme items.

Is the standard deduction available in the new regime?

Yes, ₹75,000 or the salary, whichever is less, under the new regime. In the old regime it is ₹50,000 (section 19(1), serial 2).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.