Category: Salaried Persons

Gratuity: Rules, Formula and Income Tax Exemption (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

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

Quick summary

  • Gratuity is payable on five years of continuous service (one year for fixed-term employees) at 15 days’ wages for each completed year, worked out as last monthly wages ÷ 26 × 15 × years.
  • The Code on Social Security, 2020 has been in force since 21/11/2025 and now governs gratuity; the ₹20 lakh ceiling is a notified amount, so check it before you rely on it.
  • Under the Income-tax Act, 2025 the exemption is in section 19(1): government employees get it in full, others get the least of the gratuity received, the notified limit (₹20 lakh) and the statutory formula.
  • The gratuity exemption is also available in the new tax regime.

Gratuity is a lump sum an employer pays for long service. Two questions come up every time: how much is payable, and how much of it escapes tax. This post answers both under the Code on Social Security, 2020 and the Income-tax Act, 2025.

Which law governs gratuity now

The Code on Social Security, 2020 repealed the Payment of Gratuity Act, 1972 (section 164(1)). The four labour codes were made effective from 21 November 2025 (PIB press release), and the Ministry of Labour has said gratuity under the Code applies from that date. Notifications made under the old Act, such as the ceiling, are deemed to continue under the corresponding provisions of the Code (section 164(2)(a)). Gratuity is now in sections 53 to 56 of the Code. Older articles that quote the 1972 Act describe the same scheme, but the section numbers have changed.

Eligibility and formula under section 53

  • Five years of continuous service is needed on superannuation, retirement, resignation, death or disablement. The five years are not needed on death or disablement.
  • Fixed-term employees are paid gratuity pro rata and do not need five years. The Ministry of Labour has clarified (FAQs of 16/03/2026) that a fixed-term employee is eligible after rendering one year of service under the contract. This covers employees engaged directly by the employer, not contract labour supplied by a contractor.
  • Rate: 15 days’ wages for every completed year of service or part of a year in excess of six months, on the wages last drawn.
  • Monthly-rated employees: the 15 days’ wages are the monthly wages last drawn ÷ 26 × 15.
  • Ceiling: the Central Government notifies the maximum (section 53(3)). The Ministry of Labour’s FAQs say it is currently ₹20 lakh.
  • Time to pay: within 30 days from the date gratuity becomes payable, with simple interest for delay (section 56(3) and (4)). The employer must work out the amount and give written notice even if you have not applied.
  • Nomination: if the employee dies, gratuity goes to the nominee or heirs.
  • Forfeiture: wholly or partly, only for wilful damage to property, riotous or violent conduct, or an offence involving moral turpitude committed during employment.

Gratuity = Last drawn monthly wages ÷ 26 × 15 × completed years

Example: monthly wages ₹40,000, service 8 years: 40,000 ÷ 26 × 15 × 8 = ₹1,84,615.

Under section 2(88) of the Code, “wages” are basic pay, dearness allowance and retaining allowance, and if the excluded allowances (house rent allowance, conveyance and others) are more than half of total remuneration, the excess is added back to wages. The Ministry of Labour’s FAQs say performance incentives, ESOPs and reimbursements are not wages, and that gratuity and retrenchment compensation are left out of the 50% test. If your pay structure keeps basic pay low, the gratuity base may now be higher than under the old 1972 Act, from 21/11/2025. Ask your employer how the base is worked out.

Is gratuity taxable?

Gratuity is part of salary (section 16(c) of the Income-tax Act, 2025). Section 19(1) then allows these deductions from it, in the order of the Table:

Who receives it Exempt amount
Death-cum-retirement gratuity under the Central Government pension rules or a similar government scheme (serial 3) The entire amount
Retiring gratuity under the defence services pension code (serial 4) The entire amount
Gratuity under the Payment of Gratuity Act, 1972, now the Code (serial 5) The amount received, limited to the amount worked out under section 4(2) and (3) of that Act, which gives the 15/26 formula and the ₹20 lakh ceiling
Any other gratuity on retirement, incapacity before retirement or termination (serial 6) The least of the actual gratuity, the notified amount (₹20 lakh) and half a month’s salary for each completed year

“Salary” for these purposes is basic pay plus dearness allowance, if the terms of employment provide for it. All other allowances and perquisites are left out (section 19(2)(b)).

Employees covered by the gratuity law (serial 5)

The exempt amount is the least of three figures:

  1. the gratuity actually received,
  2. the formula amount: last drawn salary ÷ 26 × 15 × completed years (a part year of more than six months counts as a year), and
  3. ₹20 lakh.

Example: last drawn basic plus DA is ₹1,00,000 a month, service is 19 years and 7 months, so 20 years are counted. Gratuity paid is ₹15,00,000.

  • Formula amount: 1,00,000 ÷ 26 × 15 × 20 = ₹11,53,846
  • Ceiling: ₹20,00,000
  • Received: ₹15,00,000
  • Exempt: ₹11,53,846. Taxable: ₹3,46,154, added to salary income.

Employees not covered (serial 6)

The exempt amount is the least of the gratuity received, ₹20 lakh and half a month’s salary for each completed year of service, where the salary is the average of the ten months before the month of the event (retirement, incapacity or termination). Only completed years count.

Example: average salary of the last ten months is ₹90,000, service is 25 years and 2 months, gratuity received is ₹14,00,000.

  • Half month’s salary: 90,000 × 1/2 × 25 = ₹11,25,000
  • Exempt: ₹11,25,000. Taxable: ₹2,75,000.

Gratuity from more than one employer

For serial 6, if you receive gratuity from more than one employer in a tax year, or received exempt gratuity in earlier years, the total exemption cannot exceed the notified limit reduced by what was already exempted (section 19(2)(a)). Keep a record of gratuity exempted in earlier jobs.

New tax regime

Of the section 19(1) Table, section 202(2) bars only serial number 1 (professional tax) in the new regime. The gratuity entries are not barred, so the gratuity exemption is available in both regimes.

Employer side

  • Contributions to an approved gratuity fund created under an irrevocable trust are deductible (section 29(1)(c)).
  • A provision for gratuity that has become payable during the tax year is deductible (section 29(1)(d)).
  • Gratuity paid during the employee’s lifetime is treated as salary (Schedule XI, Part B, paragraph 5). The income of an approved gratuity fund is itself exempt (Schedule VII).
  • TDS on the taxable part is deducted with other salary under section 392.

Gratuity and pension compared

Point Gratuity Pension
Payment One time, on leaving Monthly, for life
Paid by Employer Employer, a pension fund or the government
Condition Five years of continuous service (one for fixed-term) As per the scheme
Tax Exempt up to the limits above Taxable as salary when received (commuted lump sum has separate rules)

Things to check before you rely on this

  • The Income-tax Act, 2025 still names the Payment of Gratuity Act, 1972 in serial 5 and its section 4(2) and (3). Those sub-sections (15 days’ wages and the ceiling) are now section 53(2) and (3) of the Code, and section 164(2)(a) of the Code carries the old notifications forward, so the exemption works as described. A future amendment of the Income-tax Act may update the wording.
  • The ₹20 lakh ceiling is a notified amount, not a number in the Act. The labour ceiling dates from 29/03/2018 and the income-tax limit from S.O. 1213(E) of 08/03/2019. The Ministry of Labour still calls ₹20 lakh the current ceiling, and we found no newer notification. Check before you advise on a very large gratuity.

Frequently asked questions

Who is eligible for gratuity?

An employee who has completed continuous service of five years, on superannuation, retirement, resignation, death or disablement. Death and disablement do not need five years. A fixed-term employee is eligible after one year of service under the contract, with pro-rata gratuity.

What is the gratuity formula?

Last drawn monthly wages ÷ 26 × 15 × completed years of service. A part year of more than six months counts as a full year.

How much gratuity is tax free?

For a government employee, the whole amount. For an employee covered by the gratuity law, the least of the gratuity received, the amount worked out by the statutory formula and the notified ceiling (₹20 lakh). For others, the least of the gratuity received, the notified ceiling and half a month’s average salary for each completed year.

Is gratuity exempt in the new tax regime?

Yes. Section 202(2) bars section 19(1) serial number 1 (professional tax) in the new regime, but not the gratuity entries at serial numbers 3 to 6.

Is gratuity taxable at all?

Yes, to the extent it exceeds the exempt amount. It is part of salary (section 16), so the excess is taxed at your slab rate and TDS applies.

Can the employer forfeit gratuity?

Only in the cases the law allows: wilful damage to the employer’s property, riotous or violent conduct, or an offence involving moral turpitude committed during employment. Forfeiture can be whole or partial.

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.

Dearness Allowance (DA): Meaning, Tax Treatment and the 60% Rate from January 2026

Posted on by CA Meet Dhrangadhariya

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

Quick summary

  • Dearness allowance (DA) is paid on top of basic pay to offset inflation. It is fully taxable as salary.
  • DA counts as “salary” for HRA, gratuity and leave encashment limits only if the terms of employment provide for it.
  • For Central Government employees and pensioners the Cabinet approved a 2% rise from 58% to 60% with effect from 01/01/2026, with arrears for January to March 2026.
  • Arrears of DA taxed in a later year can qualify for relief under section 157 by filing Form 39.

Dearness allowance (DA) is the part of pay that moves with the price level. It is paid by the Central and State Governments, public sector bodies and some private employers, as a percentage of basic pay, so that the real value of pay is not eaten away by inflation. Pensioners receive the same relief as dearness relief (DR).

The current rate for Central Government employees

The Union Cabinet approved an additional 2% DA and DR with effect from 01/01/2026, taking the rate from 58% to 60% of basic pay and pension. Employees and pensioners get arrears for January, February and March 2026 (SCC Online, 20/04/2026). The Centre revises DA twice a year, with effect from 1 January and 1 July, based on the All-India Consumer Price Index for industrial workers. State governments announce their own rates and dates.

For central employees the DA is paid on basic pay: a basic pay of ₹56,100 at 60% gives DA of ₹33,660 a month.

Tax treatment of DA

  • Taxable in full as salary. Under section 16 of the Income-tax Act, 2025, “salary” includes wages, and DA is part of wages. It has no exemption of its own. DR on pension is taxed as pension, which is also salary.
  • Report it as salary. It forms part of the salary shown in your TDS certificate (Form 130) and in the return, and should match your payslip.
  • Arrears. DA revised with retrospective effect is paid as arrears, for example the January to March 2026 arrears above. Taxed in the year of receipt, it can push you into a higher slab. If so, relief under section 157 is available by furnishing Form 39 (see our post on relief for arrears of salary).

Where DA counts as “salary” for other limits

Several limits are worked out on “salary” rather than on pay as a whole. The Act and Rules say that salary includes dearness allowance if the terms of employment so provide, and excludes all other allowances and perquisites:

Use Where
HRA exemption (old regime): 50% or 40% of salary, and rent paid less 10% of salary Rule 279
Gratuity: half a month’s salary for each completed year (employees not covered by the gratuity law) Section 19(2)(b)
Leave encashment: ten months’ average salary Section 19(2)(b)

If your terms of employment do not provide for DA to count, it is left out of these calculations. For a government employee the pay rules usually do count it. Check the appointment letter or the service rules rather than assume.

Example: basic pay ₹60,000 and DA ₹36,000 (60%), HRA received ₹30,000 a month, rent paid ₹35,000 a month, Mumbai, old regime. Salary for HRA is ₹96,000 (the terms of service include DA). The exempt HRA is the least of the HRA received (₹30,000), rent paid less 10% of salary (35,000 - 9,600 = ₹25,400) and 50% of salary (₹48,000), so ₹25,400 a month.

DA and HRA are different

Point Dearness allowance House rent allowance
Purpose Offsets rising prices Helps with rent
Paid to Government and public sector employees mainly, some private employers Most employers
Tax Fully taxable Exempt in part under the old regime, limited by Rule 279
Based on Basic pay Basic pay (and DA where the terms provide)

DA for pensioners

Pensioners get DR on the pension at the same rate as the Central DA, and the DR is taxed with the pension as salary.

Before you rely on this

  • The Cabinet decision is the source for the 60% rate. Confirm the rate from the Department of Expenditure order that applies to you, and from your State government’s order if you are a State employee.
  • The revision due from 01/07/2026 is expected to be announced later in the year, so the rate shown here may change with retrospective effect and arrears.

Frequently asked questions

What is dearness allowance?

An allowance paid on top of basic pay to compensate for rising prices. It is calculated as a percentage of basic pay and revised from time to time.

Is dearness allowance taxable?

Yes. It is wages, and so part of salary under section 16 of the Income-tax Act, 2025, and is fully taxable in the year it is due or received, subject to the usual deductions.

Is DA part of salary for HRA and gratuity?

Yes, if the terms of employment so provide. Rule 279 (HRA) and section 19(2)(b) (gratuity and leave encashment) both say “salary” includes dearness allowance if the terms of employment so provide, but excludes other allowances and perquisites.

What is the DA rate for Central Government employees now?

60% of basic pay from 01/01/2026, up from 58%, as approved by the Union Cabinet in April 2026. The revision due from 01/07/2026 had not been announced when this was checked on 06/10/2026.

Do private employees get DA?

Not as a rule. Government and public sector employees receive it. Some private employers and wage settlements also pay a dearness allowance or variable DA, and the same tax rules apply.

What is dearness relief?

The equivalent of DA for pensioners. It is paid on pension and is taxable as pension, which is part of salary.

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.

Sign-On Bonus Repaid to the Old Employer: Can You Deduct It From Salary? (ITAT Chennai)

Posted on by CA Meet Dhrangadhariya

Last updated: 03 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A sign-on bonus is salary and is taxed when you receive it.
  • In S.S.N. Ravi v ACIT (ITAT Chennai, 06/05/2016), an employee who repaid a ₹25 lakh sign-on bonus to his old employer on leaving early was not allowed to reduce his taxable salary by that amount.
  • The Tribunal held that the bonus was a revenue receipt, he left voluntarily, and the Act has no provision to deduct such a repayment from salary.
  • Section 19 of the Income-tax Act, 2025 lists the deductions from salary, and a repaid bonus is not one of them.

A sign-on bonus is a payment to attract you to a job. Most contracts add a clawback: if you leave within a year, you repay it. The tax question that follows is a hard one. You were taxed on the bonus when you got it. Can you reduce your taxable salary when you pay it back?

The tax position on receipt

A sign-on bonus is paid by the employer because of the employment. That makes it salary. Section 16 of the Income-tax Act, 2025 says salary includes wages, fees or commission, perquisites and profits in lieu of salary, and a joining bonus falls in these. The employer deducts TDS under section 392 when it pays the bonus.

The case: S.S.N. Ravi v ACIT

Forum and date: Income Tax Appellate Tribunal, Chennai, order dated 06/05/2016, I.T.A. No. 933/Mds/2015, assessment year 2008-09.

Facts

  • The taxpayer joined Barclays in November 2006 and received a sign-on bonus of ₹25 lakh in FY 2006-07, which he included in his income of that year.
  • The bonus was repayable if he left within one year.
  • He left on 31/10/2007, before the year was complete, and moved to Deutsche Bank. Deutsche Bank paid him ₹25 lakh, which he used to repay Barclays.
  • In his return for FY 2007-08 he reduced his salary by ₹25 lakh. The Assessing Officer added it back.

Decision. The Tribunal dismissed the appeal. In short:

  • The sign-on bonus is a revenue receipt of the nature of employment income.
  • The employee left voluntarily; he was not terminated.
  • Section 17(1) of the 1961 Act made no provision for reducing salary by a refund of the bonus.
  • The amount that the new employer paid to cover the repayment could not be treated as compensation for the lost bonus.
  • The ₹25 lakh could not be reduced from taxable income.

The position under the Income-tax Act, 2025

The 2025 Act has the same structure. Section 19(1) lists the deductions from salary: professional tax, the standard deduction, the retirement exemptions (gratuity, commutation of pension, leave encashment and similar) and compensation items. A repayment of a bonus is not in that list.

The ruling is a Tribunal order on its facts, in a case where the employee left voluntarily and a new employer paid the sum. Do not treat it as settling every repayment: a different fact pattern could be argued differently.

Practical points

  1. Read the clawback clause before you sign. Check the repayment period and whether the repayment is of the gross amount or of the amount net of tax.
  2. If your new employer reimburses the repayment, remember that the reimbursement is a payment from an employer, so expect it to be taxed as salary, with no deduction for the amount you repay.
  3. Take advice before claiming a deduction for a repaid bonus. If you claim it, keep the contract, the repayment proof and the old employer’s acknowledgement.

Frequently asked questions

Is a sign-on bonus taxable?

Yes. It is a payment from the employer in connection with employment, so it is salary under section 16 of the Income-tax Act, 2025 and taxed in the year you receive it, with TDS.

Can I deduct a sign-on bonus that I repay to my old employer?

The Chennai Tribunal held that you cannot reduce your taxable salary by a repaid sign-on bonus when the employee left voluntarily. The Act does not provide a deduction for the repayment.

Does it matter that my new employer reimbursed the repayment?

In S.S.N. Ravi the new employer paid the employee the amount to repay. The Tribunal treated it as a revenue receipt, not a capital receipt, and the employee was taxed on it as well.

Which case is this?

S.S.N. Ravi, Chennai v ACIT, ITAT Chennai, order dated 06/05/2016, I.T.A. No. 933/Mds/2015, assessment year 2008-09.

What should I do before signing a sign-on bonus clause?

Read the clawback terms and ask who bears the tax if you have to repay. If a new employer will reimburse the repayment, ask for advice on how that payment will be taxed in your hands.

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 Interest Deduction: Section 22 Rules, Limits and How to Claim (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 08 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Interest on a loan taken to buy, build, repair or renew a house is deductible under section 22(1)(b) of the Income-tax Act, 2025 (earlier section 24(b)); on a let-out house the whole interest is allowed.
  • For a self-occupied house the limit is ₹2,00,000 a year if the house is completed within five years from the end of the tax year in which the loan was taken and the lender gives a certificate; otherwise it is ₹30,000.
  • Interest paid before the year of completion (pre-construction interest) is claimed in five equal instalments from the year of completion, inside the same cap.
  • Under the new regime, interest on a self-occupied house is not allowed, but interest on a let-out house is.

For most people, interest on a home loan is the biggest tax deduction they have. Under the Income-tax Act, 2025 the rule sits in section 22 (it was section 24(b) in the 1961 Act). This post covers who can claim how much, how pre-construction interest works, and what to give your employer and put in your return.

What qualifies

Under section 22(1)(b), interest payable on capital borrowed for acquiring, constructing, repairing, renewing or reconstructing a property is deducted from the property’s annual value. The deduction is for interest payable, whether or not you have paid it. Interest payable outside India is not allowed if tax has not been paid or deducted on it and there is no agent in India (section 22(6)).

Principal repayment is not part of this deduction. It is a separate old regime deduction (see our post on home loan tax benefits).

The limits

Property Limit on interest in a year
Let-out house No limit; the whole interest payable
Self-occupied house (section 21(6)), acquired or constructed with a loan and completed within five years from the end of the tax year in which the loan was taken, with the lender’s certificate ₹2,00,000
Self-occupied house in any other case (for example, delayed completion, or a loan for repairs, renewal or reconstruction) ₹30,000
Total for all self-occupied houses ₹2,00,000 (section 22(5))

The five years: count from the end of the tax year in which you borrowed. A loan taken on 30/04/2026 falls in tax year 2026-27, which ends on 31/03/2027, so the house must be completed by 31/03/2032. Some articles count only four years, so check your own dates.

Certificate: to claim ₹2,00,000 you must furnish a certificate from the lender (section 22(2)(a)(ii)). It must show the interest payable on the capital borrowed and the interest on any new loan taken to repay the whole or part of the original loan (section 22(4)).

Pre-construction interest

While the house is under construction you cannot claim the interest. Interest payable for the period before the tax year in which the property is acquired or completed is claimed later (section 22(1)(c)):

  • in five equal instalments, one in the tax year of acquisition or completion and one in each of the next four tax years;
  • after reducing it by any amount already allowed under another provision of the Act (section 22(3)).

For a self-occupied house, the interest under clauses (b) and (c) together is subject to the ₹2,00,000 cap (section 22(2), as amended by the Finance Act, 2026).

Example. You take a loan to build a house you will let out. The interest payable is ₹90,000 in the first year and ₹1,20,000 in the second year. The house is completed in the third year, when the interest is ₹1,20,000.

  • Pre-construction interest: 90,000 + 1,20,000 = ₹2,10,000, so ₹42,000 a year for five years.
  • Deduction in the third year: 1,20,000 + 42,000 = ₹1,62,000.
  • In the fourth to seventh years: the interest of that year plus ₹42,000.

If the house is self-occupied and the interest of the year is ₹2,10,000, plus ₹42,000 of pre-construction interest, the total of ₹2,52,000 is capped at ₹2,00,000.

Let-out house: no limit, but a loss may arise

On a let-out house the whole interest is deducted after the 30% deduction. If the interest is large, the result is a loss from house property. In the old regime up to ₹2,00,000 of that loss can be set off against income such as salary; the rest carries forward for eight years against house property income. In the new regime the loss cannot be set off against other heads and is not carried forward (sections 109, 110 and 202). See our post on income from house property.

Old and new regime

Point Old regime New regime
Self-occupied house, interest under section 22(1)(b) Up to ₹2,00,000 Not allowed (section 202(2)(a)(v))
Let-out house Whole interest Whole interest
Loss set off against other heads Up to ₹2,00,000 Not allowed
Pre-construction instalment on a self-occupied house Allowed, within the ₹2,00,000 cap Unclear; see below

Section 202(2)(a)(v) names only section 22(1)(b), not the pre-construction clause 22(1)(c). The prudent position is that the self-occupied interest claim is closed in the new regime, but the text does not say so for clause (c). Take advice before claiming pre-construction interest on a self-occupied house in the new regime.

Joint loans and co-owners

Co-owners with definite shares are taxed separately on their own shares of the property, and the relief for a self-occupied house is available to each of them individually (section 24). So each co-owner who is also a borrower and pays interest can claim up to ₹2,00,000 on his or her share, which can give a larger total deduction than a single owner would get. You must be an owner, and the interest you claim should be what you are liable to pay.

How to claim

  1. Get the lender’s interest certificate for the year, showing interest and principal, the loan sanction details and each borrower.
  2. Tell your employer. Give Form 124 with the lender’s name, address and PAN (Rule 205) so TDS is calculated correctly. The employer may reduce TDS only for a loss from house property (section 392(4)(b)), not for other claims.
  3. Keep the possession or completion certificate, to show the date the house was acquired or completed.
  4. Report in the return: in the house property schedule, enter the property details, rent if any, taxes paid, 30% deduction and interest. Enter the pre-construction instalment together with the interest of the year.

Frequently asked questions

How much home loan interest can I claim?

On a let-out house, all the interest payable in the year. On a self-occupied house, up to ₹2,00,000 in a year if the house is acquired or constructed with borrowed capital and completed within five years from the end of the tax year in which the loan was taken, and you hold the lender’s certificate; in any other case, ₹30,000.

When does the five year period start?

From the end of the tax year in which the loan was taken. For a loan taken on 30/04/2026 (tax year 2026-27), the house must be completed by 31/03/2032.

What is pre-construction interest?

Interest payable for the period before the tax year in which the house was acquired or completed. It is claimed in five equal instalments, one in the tax year of completion and one in each of the next four years (section 22(1)(c)).

Is the pre-construction interest over and above the ₹2,00,000?

No. For a self-occupied house the total of the current interest and the pre-construction instalment in a year is capped at ₹2,00,000 (section 22(2), as amended by the Finance Act, 2026).

Can I claim interest on a self-occupied house in the new regime?

No. Section 202(2) disallows the section 22(1)(b) interest on houses covered by section 21(6) in the new regime. Interest on a let-out house is allowed.

What if the loan is refinanced?

Interest on a new loan taken to repay the earlier loan is also deductible, and the lender’s certificate should show it separately (section 22(4)).

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.

Senior Citizens Aged 75 or More: When No Income Tax Return Is Needed (Form 125, Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 19 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A resident aged 75 or more whose only income is pension and interest from the same specified bank, and who gives the bank a declaration in Form 125, need not file a return for a year in which the bank deducts tax (section 263(8)(b), earlier section 194P).
  • The bank works out the tax on the total income after Chapter VIII deductions and the section 156 rebate, and deducts it at the rates in force (Rule 208).
  • The relief is lost if there is any other income, such as rent or interest from another bank, or if the bank does not deduct tax under the provision.
  • Higher TDS and TCS for non-filers (old sections 206AB and 206CCA) were omitted from 1 April 2025 and are not in the 2025 Act.

A retired person whose income is only a pension and the interest on the account into which the pension is paid can be spared the trouble of a return. The rule was section 194P of the 1961 Act; in the Income-tax Act, 2025 it is split between the definition of a “specified senior citizen” (section 402(39)), the relief from filing a return (section 263(8)(b)) and the bank’s duty to deduct tax (section 393(1), Table serial 8(iii)).

Who is a “specified senior citizen”

An individual who is:

  1. a resident in India;
  2. aged 75 years or more at any time during the tax year;
  3. having pension income and no other income except interest received or receivable from an account kept in the same specified bank in which the pension is received; and
  4. someone who has furnished a declaration to that specified bank, in the prescribed form and manner.

A specified bank is a banking company that the Central Government has notified for the purpose (section 402(35)).

What the relief is

Section 263 is the section that requires a return. Section 263(8)(b) says it does not apply to a specified senior citizen for the tax year in which tax has been deducted at source by the specified bank under section 393(1), Table serial 8(iii). So no return is needed for that year. The section on updated returns (section 263(6)) also does not apply to such a person for that year.

How the bank deducts tax (Rule 208)

  • You give the bank a declaration in Form 125. It asks for your PAN, date of birth, the pension payer and pension payment order number, your accounts with the bank, and whether you opt out of the new regime under section 202. In the declaration you state that you have no income other than pension and interest in the accounts with that bank.
  • The bank computes your total income for the year after giving effect to the deductions under Chapter VIII, on the evidence you furnish during the year, and the rebate under section 156.
  • It deducts income-tax at the rates in force on that total income (Rule 208(2)).
  • The bank keeps the declaration and the evidence and must make them available to the Chief Commissioner when required (Rule 208(4)).

This means the bank, not you, finishes the tax computation for the year.

When the relief does not apply

  • You have other income, for example rent, interest from a deposit with another bank, capital gains or dividends. You are then not a specified senior citizen and must file a return if your income exceeds the exemption limit.
  • You did not give the declaration to the bank or it is not a specified bank.
  • Your age is below 75 in the whole tax year.
  • You are a non-resident.

If any of these happens, file the return, using the TDS deducted by the bank as credit.

Example

A resident aged 78 receives a pension of ₹6,00,000 a year through a specified bank and gets ₹1,20,000 interest on his savings and fixed deposit accounts in the same bank. He has no other income. He gives Form 125 to the bank at the start of the year, and the bank works out his total income after the deductions and the rebate that apply and deducts tax if any is due. He need not file a return for that year.

If he also had ₹30,000 of rent, he would not qualify, and he would have to file a return, with credit for the tax the bank deducted.

Higher TDS for non-filers is gone

Sections 206AB and 206CCA of the 1961 Act required higher TDS and TCS from a person who had not filed returns. The Finance Act, 2025 omitted them from 1 April 2025, and the Income-tax Act, 2025 has no such provision. Deductors no longer need to check whether a person has filed before deducting tax. The late fee and interest for a missed return still apply.

Practical advice for pensioners

  1. Give Form 125 to the bank at the beginning of the year, not the end.
  2. Keep all savings and deposits in the one specified bank if you rely on this relief.
  3. If your income changes, for example a rent receipt starts, tell the bank and file a return.
  4. Check your Form 130 and the pension TDS for the year, and the annual information statement, for any other income reported against your PAN.

Frequently asked questions

Who need not file an ITR at age 75?

A resident individual aged 75 or more at any time in the tax year whose only income is pension, plus interest from an account in the same specified bank that pays the pension, who has furnished the declaration in Form 125 to that bank, and from whose income the bank has deducted tax (section 402(39) and section 263(8)(b)).

What if I have rent or interest from another bank?

Then you are not a specified senior citizen for that year. You must file a return if your income exceeds the exemption limit, and the bank cannot give you the benefit of this provision.

Who calculates the tax?

The specified bank. It computes your total income after the deductions under Chapter VIII (on the evidence you give during the year) and the rebate under section 156, and deducts tax at the rates in force (section 393(1), Table serial 8(iii), and Rule 208).

Which tax regime applies?

The new regime is the default. Form 125 asks whether you opt out of the new regime under section 202.

Is any bank allowed to do this?

Only a banking company notified by the Central Government as a specified bank (section 402(35)).

Are higher TDS rates for non-filers still there?

No. Sections 206AB and 206CCA of the 1961 Act were omitted from 1 April 2025 and the 2025 Act has no such provision.

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.

Old or New Tax Regime: How and When to Choose It in Your Return (Section 202, Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 16 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The new regime in section 202(1) applies to individuals and HUFs by default. To use the old regime you must exercise an option under section 202(4).
  • A person with no business or professional income exercises the option with the return furnished under section 263(1) for that tax year, so the choice can be made afresh each year.
  • A person with business or professional income must exercise it on or before the due date; once exercised it continues, and it can be withdrawn only once.
  • The option rides on the return filed by the due date; do not assume a belated return can opt out of the new regime.
  • Your employer’s TDS follows the regime you tell it, but the return decides the final regime.

For tax year 2026-27, an individual is taxed under the new regime unless he chooses otherwise. The choice is made in the return, and the rules on how and when depend on whether you have business income. This post sets out section 202 of the Income-tax Act, 2025.

The default and the option

  • Section 202(1) states the slabs of the new regime: nil up to ₹4,00,000, then 5%, 10%, 15%, 20%, 25% and 30% above ₹24,00,000, and it applies to an individual, a HUF, an association of persons (other than a co-operative society), a body of individuals and an artificial juridical person, unless the person exercises the option in section 202(4).
  • Section 202(4) says that section 202(1) does not apply to a person who has exercised an option, in the prescribed manner, for the tax year. That person is taxed under the old slabs, with the old regime deductions and exemptions. Form 125 uses the same words: “opting out of the new tax regime under section 202”.

When to exercise the option (section 202(4))

Your income When and how
No income from business or profession (for example a salaried person, pensioner or investor) Along with the return of income furnished under section 263(1) for the tax year. The option applies to that year, so you can choose again next year
Income from business or profession On or before the due date for furnishing the return under section 263(1). Once exercised it applies to later tax years. It may be withdrawn only once for a tax year other than the year of the first exercise; after that you can never exercise it again, unless you cease to have business or professional income, in which case the option for persons without such income is open

What the new regime does not allow (section 202(2))

If you stay in the new regime, your total income is computed without:

  • Exemptions in Schedule III at serial numbers 5, 6, 7, 8, 11 and 17 (this includes the HRA exemption at serial 11), and serial numbers 12 and 13 other than those prescribed;
  • Professional tax under section 19(1) Table serial 1;
  • Interest under section 22(1)(b) on self-occupied houses (section 21(6));
  • Chapter VIII deductions, except the employer’s contribution to the notified pension scheme (section 124(1) and (2)), section 125(2) and section 146;
  • certain business deductions (sections 33(8), 45(3), 46, 47(1)(a), 48 and 49);
  • set-off of house property loss against other heads, and set-off of carried-forward losses or depreciation attributable to these deductions; and
  • any exemption or deduction for allowances or perquisites provided under any other law.

The standard deduction of ₹75,000 under section 19(1) and the retirement exemptions such as gratuity and leave encashment remain available.

The late return trap

The option is exercised “along with the return of income to be furnished under section 263(1)”. A belated return is furnished under section 263(4). Advisers read this to mean that a person who files after the due date cannot opt out of the new regime for that year. We have not found a ruling or circular that says otherwise, so file on time if you want the old regime.

Your employer and the regime

At the start of the year, tell your employer which regime to use for TDS. You may change your mind before the return; the employer’s deduction is only an estimate. At filing, you choose the regime that gives you the lower tax, on the evidence of your HRA, home loan, section 123 and other claims (Form 124 evidence, Rule 205). Any excess TDS comes back as refund.

How to decide

  1. Add up your actual old regime deductions: standard deduction ₹50,000, HRA exemption, section 123, own NPS, health insurance, home loan interest and others.
  2. Compare with the break-even for your salary in our post on saving tax by salary level. For example, at a salary of ₹20 lakh the old regime needs roughly ₹7.6 lakh of total deductions to match the new regime.
  3. If the old regime is better, exercise the option in the return and file by the due date.
  4. If you have business income, remember that the choice can be changed only once, and plan with a professional.

Frequently asked questions

Which regime applies if I do nothing?

The new regime in section 202(1) applies by default to an individual, HUF, AOP, BOI or artificial juridical person. To be taxed under the old regime you must exercise the option under section 202(4).

When must a salaried person choose the regime?

A person who has no income from business or profession exercises the option along with the return furnished under section 263(1) for that tax year (section 202(4)(b)). The choice is for the tax year, so it can differ from year to year.

What if I have business or professional income?

The option must be exercised on or before the due date for the return. Once exercised it applies to later tax years. It can be withdrawn only once, for a year other than the year it was exercised, and after that you can never opt out of the new regime again, unless you stop having business or professional income, when the salaried-type option becomes available (section 202(4)(a)).

Can I change the regime in a revised return?

The option is tied to the return furnished under section 263(1) for the year. The Act does not say that it can be exercised or changed through a revised or belated return. If you filed on time and made a different choice, take advice before relying on a revised return to change it.

What if I file late?

The section ties the option to the return under section 263(1). A belated return is furnished under section 263(4), so you should assume the new regime applies. Check with a professional before you claim old regime deductions in a belated return.

Does my employer’s choice bind me?

No. The employer deducts TDS on the regime you declare to it, but you decide the final regime when you file the return, and any excess TDS comes back as a refund.

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.

How to Calculate Income From Salary: Step by Step With Example (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

  • Income from salary is worked out in four steps: add everything that counts as salary (section 16), subtract the exempt allowances, add taxable perquisites, then subtract the section 19 deductions.
  • Section 19 allows the standard deduction (₹75,000 new regime, ₹50,000 old), professional tax (old regime) and retirement items such as gratuity and leave encashment within their limits.
  • Chapter VIII deductions (section 123 and others) are subtracted afterwards, in the old regime only.
  • Employers deduct TDS on salary under section 392 and issue Form 130 by 15 June; check it against your AIS before filing.

Income from salary is the first and usually the largest head of income for an employee. This post shows how it is worked out under the Income-tax Act, 2025 and then how tax is calculated on it, with a full example under both regimes.

Step 1: add up what counts as salary

Section 16 of the Act says salary includes:

  • wages (basic pay, dearness allowance, allowances, bonus),
  • any annuity or pension,
  • any gratuity,
  • any fees or commission,
  • perquisites (rent-free accommodation, a car for personal use, free shares and others in section 17),
  • profits in lieu of salary (section 18), such as compensation on termination,
  • any advance of salary,
  • any payment for leave not availed of (leave encashment),
  • the taxable annual accretion to a recognised provident fund, and
  • the employer’s contribution to the notified pension scheme (NPS).

Under section 15, salary due to you in the tax year is chargeable whether paid or not, salary paid in advance is chargeable in the year it is paid, and arrears paid in the year are chargeable if not taxed earlier. So salary that is due but unpaid at year end is still income of that year.

Step 2: take out exempt allowances

Some allowances are exempt in part or full, within limits, under Schedule III and Rule 279. The best known is house rent allowance (old regime only). It is exempt to the extent of 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), where salary is basic pay plus dearness allowance if the terms provide. Leave travel concession and some others are also old regime items. See our posts on allowances for each.

Step 3: add the taxable perquisites

Free or concessional accommodation, a car, free meals above the limit, loans at a low rate, gifts above the limit, and shares allotted under an ESOP or RSU are valued under Rule 15 and added. See our posts on perquisites and ESOP taxation.

Step 4: subtract the deductions from salary (section 19)

Deduction Amount Regime
Professional tax The whole amount Old only
Standard deduction ₹75,000, or the salary if less New
Standard deduction ₹50,000, or the salary if less Old
Death-cum-retirement gratuity of government employees The whole amount Both
Gratuity of other employees Within the limits in our gratuity post Both
Leave encashment on retirement Government employees: the whole amount. Others: the least of the cash equivalent of leave at credit (up to 30 days for each year of service), ten times the average monthly salary of the last ten months, the notified limit and the amount received Both
Voluntary retirement payment The least of the amount received and ₹5,00,000, subject to the conditions in section 19(2)(e) Both
Retrenchment compensation to a workman The least of three amounts in the Table Both

The result is income from salary. If you received arrears or advance salary that pushes you into a higher slab, claim relief under section 157 with Form 39.

Step 5: from income from salary to taxable income

Add income from other heads (house property, other sources and so on), set off losses and then, in the old regime only, subtract the Chapter VIII deductions: section 123 (up to ₹1,50,000), your own NPS contribution up to ₹50,000, health insurance, education loan interest, donations and others. The new regime allows only a few of these, mainly the employer’s NPS contribution. The balance is total income.

Step 6: apply the rates

New regime (section 202), tax year 2026-27: up to ₹4,00,000 nil; 5% to ₹8,00,000; 10% to ₹12,00,000; 15% to ₹16,00,000; 20% to ₹20,00,000; 25% to ₹24,00,000; 30% above. Rebate under section 156(2) of up to ₹60,000 if total income is up to ₹12,00,000.

Old regime: up to ₹2,50,000 nil; 5% to ₹5,00,000; 20% to ₹10,00,000; 30% above. Rebate of up to ₹12,500 if total income is up to ₹5,00,000. Higher basic exemption limits apply for resident senior citizens.

Then add surcharge if income is above ₹50 lakh, and 4% health and education cess.

Worked example

Basic ₹6,00,000, HRA ₹3,00,000, special allowance ₹4,50,000, bonus ₹1,50,000. Employee’s PF ₹72,000. Rent paid ₹3,30,000 a year in Pune. Professional tax ₹2,400. Other qualifying investments ₹78,000.

Item Old regime (₹) New regime (₹)
Gross salary 15,00,000 15,00,000
Less: HRA exemption (least of 3,00,000; 3,30,000 - 60,000 = 2,70,000; 50% of 6,00,000 = 3,00,000) 2,70,000 Not available
Less: professional tax 2,400 Not available
Less: standard deduction 50,000 75,000
Income from salary 11,77,600 14,25,000
Less: section 123 (PF 72,000 + others 78,000) 1,50,000 Not available
Total income 10,27,600 14,25,000
Tax on slabs 1,20,780 93,750
Add: cess at 4% 4,831 3,750
Tax payable 1,25,611 97,500

The new regime costs ₹28,111 less for this employee because the deductions (₹4,72,400 in all: HRA, professional tax, standard deduction and section 123) are below the break-even for a ₹15 lakh salary. See our post on saving tax by salary level.

TDS on salary

The employer deducts tax on salary under section 392(1) at the average rate on your estimated income for the year, after taking into account the evidence you give in Form 124 (Rule 205) and details of other income and previous employment (Form 122). It can adjust later months for any excess or shortfall (section 392(5)(c)). The employer pays the tax to the government and issues Form 130 by 15 June after the end of the year (Rule 215).

Documents you need to file the return

  1. Form 130, the TDS certificate for salary.
  2. AIS and the TDS statement on the e-filing portal, to reconcile TDS and any interest or other income.
  3. Rent receipts, landlord’s PAN, investment and loan statements for the old regime claims.
  4. Form 123, if the employer gives perquisite details separately.

If Form 130 and your AIS differ, ask your employer to correct the TDS return before you file, or report the figures you are able to support.

Frequently asked questions

What is included in salary for income tax?

Wages, any annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary, advance salary, payment for leave not availed of, and certain provident fund and pension scheme items (section 16 of the Income-tax Act, 2025).

What deductions are allowed from salary?

Under section 19(1): professional tax (old regime only), the standard deduction (₹75,000 new regime, ₹50,000 old regime), and retirement items such as gratuity, leave encashment and commutation of pension within their limits.

Is the standard deduction available in both regimes?

Yes. It is ₹75,000 or the salary, whichever is less, in the new regime, and ₹50,000 or the salary, whichever is less, in the old regime.

Which form shows my salary and TDS?

Form 130, the TDS certificate for salary under section 395. The employer must furnish it by 15 June after the end of the tax year (Rule 215).

Do I need Form 124?

Give your employer Form 124 with evidence of HRA, LTA, home loan interest and Chapter VIII claims so that TDS is deducted on the right income (section 392(5)(b), Rule 205).

Where do I report salary in the return?

In the salary schedule of the return, using Form 130 and the figures in your AIS. Reconcile any difference before filing.

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.

RSU vs ESOP vs Sweat Equity Shares: Differences and Tax Treatment (2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 18 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • An ESOP is a right to buy shares at a fixed price; an RSU is a promise of shares for no payment once vesting conditions are met; sweat equity shares are issued at a discount or for know-how or similar value.
  • All three are taxed the same way under section 17(1)(d): fair market value on allotment less what you paid is a perquisite taxed as salary.
  • After that, the FMV becomes your cost of acquisition and the holding period runs from allotment; long-term gains on unlisted and foreign shares are taxed at 12.5% without indexation.
  • Company law differs: sweat equity is locked in for three years and capped, while ESOPs need a minimum one year between grant and vesting.

Companies share their ownership with employees in three common ways: employee stock options (ESOPs), restricted stock units (RSUs) and sweat equity shares. They look similar in an offer letter, but they differ in what you pay, when you get the shares and the company law rules behind them. The tax follows one pattern for all three.

What each one is

ESOP. The company grants you an option, a right but not an obligation, to apply for shares at a fixed price after the vesting period. You decide whether to exercise. Market price matters: if it is below the exercise price on the exercise date, you simply let the option lapse.

RSU. The company promises a number of shares, free of cost, once conditions are met. The conditions can be time-based (stay for a period), milestone-based (a target is reached) or both. If you leave before vesting, the RSUs are normally cancelled. RSUs are common with listed and foreign parent companies.

Sweat equity shares. Shares issued by a company to its employees or directors at a discount or for consideration other than cash, for providing know-how, intellectual property rights or value additions. They are allotted directly, not through an option.

Comparison

Point ESOP RSU Sweat equity shares
Nature Right to buy at a fixed price Promise of shares for no payment Shares issued at a discount or for non-cash value
Payment by employee Exercise price in cash Nothing Discounted price, or none
Employee’s choice Can choose not to exercise Receives the shares on vesting Receives the shares on allotment
Companies Act definition Section 2(37) and Rule 12 Not defined separately; Indian companies usually run RSUs under the employee stock option framework, so check the plan document Section 2(88) and section 54, Rule 8
Statutory lock-in None, company decides None, company decides Three years from allotment (Rule 8)
Statutory cap Not set by the Rules Not set by the Rules 15% of existing paid-up equity capital or ₹5 crore of issue value, whichever is higher, in a year, and 25% of paid-up equity capital in total (Rule 8(4)); relaxed for start-ups recognised by DPIIT for up to ten years from incorporation
Minimum vesting One year between grant and first vesting (Rule 12) As per plan Not applicable

The Companies Act points are from Rules 8 and 12 of the Companies (Share Capital and Debentures) Rules, 2014, checked against the text as amended up to 2020. They apply to a company other than a listed company that is not required to follow the SEBI regulations; a listed company follows the SEBI regulations on employee benefits and sweat equity instead. Both Rules require a special resolution. Rule 12 also excludes promoters, the promoter group and directors holding more than 10% from ESOPs, a restriction that does not apply to DPIIT-recognised start-ups for up to ten years from incorporation. Sweat equity is valued by a registered valuer (Rule 8(6)). The Rules are amended from time to time, so confirm the current text.

Income tax: one pattern for all three

Section 17(1)(d) of the Income-tax Act, 2025 taxes the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the current or a former employer, free of cost or at a concessional rate. The value is the fair market value less the amount you paid or that was recovered from you (section 17(4)(h)).

Point ESOP RSU Sweat equity
Taxed at Exercise of the option Allotment of the shares on vesting Allotment
Perquisite FMV less exercise price The whole FMV (you paid nothing) FMV less the price you paid
Head Salaries, TDS under section 392 Salaries, TDS under section 392 Salaries, TDS under section 392

For the valuation rules (listed and unlisted shares, merchant banker, the 180 day window) and the eligible start-up deferral, see our post on ESOP taxation.

Foreign parent company shares

Rule 15(6) values a listed share as the average of the opening and closing price on a recognised stock exchange, and that term means a recognised Indian exchange. A share listed only abroad is, on the wording, “not listed on a recognised stock exchange”, which points to a merchant banker’s valuation under Rule 15(6)(d). The Rules do not say that the foreign market price can be used. In practice, employers and advisers commonly use the closing price on the foreign exchange on the vesting date, because a public quote exists. That is a convention, not a rule, so ask your employer which method it applies and keep the working. A merchant banker’s certificate is the safest support if the amount is large.

A value in a foreign currency is converted at the telegraphic transfer buying rate of the State Bank of India (Rules 206 and 207). For salary, the rate is that of the last day of the month before the month in which the salary is due, and for the sale of the shares (capital gains), the last day of the month before the month of transfer. The conversion dates are therefore different for the perquisite and for the sale.

On sale: capital gains

  • Cost of acquisition: the FMV taken as the perquisite (section 73, Table serial 4).
  • Holding period: from the date of allotment.
Shares Short-term if held for Short-term gain Long-term gain
Listed in India, sold on an exchange with STT paid 12 months or less 20% 12.5% on the gain above ₹1,25,000 in the year
Unlisted Indian shares 24 months or less Slab rates 12.5% without indexation
Foreign shares 24 months or less Slab rates 12.5% without indexation

Some articles show a 20% long-term rate for unlisted shares. For tax year 2026-27 the Act says 12.5% (section 197).

Example (RSU of a foreign parent): 100 RSUs vest and are allotted on 10/06/2026 when each share has an FMV of ₹2,000. Perquisite = ₹2,00,000 (nothing was paid), taxed as salary. You sell all 100 shares after 25 months at ₹2,600 each. Gain = (2,600 - 2,000) × 100 = ₹60,000, long-term, taxed at 12.5% without indexation = ₹7,500 plus cess (the ₹1,25,000 exemption applies only to listed Indian equity sold with STT).

Which is better

It depends on the company and your risk appetite.

  • An RSU is simpler: you pay nothing and have value whenever the shares have value, but you pay income tax on the whole value at vesting.
  • An ESOP needs your cash to exercise and may expire worthless, but the exercise price is fixed, so a large rise in the share price benefits you, and you choose when to trigger the tax.
  • Sweat equity is usually for founders and key people who bring know-how or intellectual property; the three year lock-in matters.

Employers rarely give you a choice, so the practical task is to know the tax at the moment the shares reach you and to keep money ready for it.

Frequently asked questions

What is the difference between RSU and ESOP?

An ESOP gives you the right, not the obligation, to buy shares at a fixed price after vesting. An RSU is a promise of shares at no cost once the vesting conditions are met, so you do not pay to receive them.

How are RSUs taxed in India?

When the shares are allotted to you, their fair market value less any amount you paid (usually nil) is a perquisite taxed as salary under section 17(1)(d), with TDS. Later, the gain over that value is a capital gain.

Are sweat equity shares taxed differently?

No. Section 17(1)(d) covers any specified security or sweat equity shares allotted free of cost or at a concessional rate. The tax on sale follows the same capital gains rules.

Is there any tax if I never exercise my ESOP?

No. A right that is not exercised is not taxed.

What is the lock-in for sweat equity shares?

Three years from allotment under Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014. ESOP shares have no statutory lock-in; the company decides.

Which is better, an RSU or an ESOP?

Neither is better for every employee. An RSU always has value if the shares have value, because you pay nothing. An ESOP can give a bigger gain if the share price rises well above the exercise price, but you must pay to exercise and the options are worthless if the price stays below the exercise price.

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.

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.