tax exemption all you need to know

Tax Exemption Rules in India: Types, Eligibility & Benefits

Learn tax exemption rules in India, key income exemptions, Old vs New regime differences, and how term insurance can help reduce tax liability

Written by : Knowledge Centre Team

2026-02-10

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5 minutes read

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All earning individuals know what tax is and how it works. With several types of taxes out there, a lot of your hard-earned money goes towards them. This is where tax exemption comes into play. Tax exemption is the legal reduction or removal of the amount of money that must be paid to the Government. This process is vital in boosting long-term investments and providing the financial scope for life insurance planning. It allows you to optimise your taxable income legally by using exemptions provided under the Income Tax Act.

Many exemptions apply to specific types of income, allowances, or benefits, and understanding them can help you plan your finances more efficiently. Whether you are a salaried employee, a self-employed professional, or a senior citizen, knowing the right tax exemption rules can make a noticeable difference to your annual tax liability.

Key Takeaways

What are Tax Exemptions?

While tax exemptions are related to tax deductions, the former refers to income that is excluded from taxation, subject to specified conditions, given that the necessary conditions are met. This can also be done by reducing the gross total income of the taxpayer. Exemptions help taxpayers reducetheir taxable income on which tax is computed.

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Navigating the Current Tax Regimes: Old versus New:

Before delving into exemptions, it's important to know about India's dual tax regime. Taxpayers may opt for the Old Tax Regime (OTR) or the New Tax Regime (NTR). To help you choose between the Old and New Tax Regimes, here are the key updates applicable for FY 2025–26 (AY 2026–27):

  • From FY 2025-26 (AY 2026-27), the New Tax Regime continues to be the default 

  • The tax rebate has gone up from ₹25,000 to ₹60,000 for the financial year 2025-26

  • Thanks to this update in the tax system, anyone earning up to ₹12 lakh won’t have to pay any income tax. And if you're a salaried employee, you’re even better off 

  • After factoring in the standard deduction of ₹75,000, there’s no tax to be paid on income up to ₹12.75 lakh 

New Tax Regime Income Tax Slabs and Rates:

The table below outlines the applicable income tax slabs and corresponding rates based on your annual taxable income.

Income Tax SlabsIncome Tax Rates

₹4 lakh and below

0

₹4 lakh to ₹8 lakh

5%

₹8 lakh to ₹12 lakh

10%

₹12 lakh to ₹16 lakh

15%

₹16 lakh to ₹20 lakh

20%

₹20 lakh to ₹24 lakh

25%

More than ₹24 lakh

30%

Old Tax Regime Income Tax Slabs and Rates:

The table below outlines the applicable income tax slabs and corresponding rates under the old tax regime based on your annual taxable income.

Up to ₹2.5 lakh

0%

₹2.5 lakh to ₹5 lakh

5%

₹5 lakh to ₹10 lakh

20%

Above ₹10 lakh

30%

Yet, a major difference is that all widely used deductions and exemptions described below (such as HRA, LTA, Section 80C, Section 80D, etc.) are available only if you specifically choose the Old Tax Regime. Meanwhile, the older regime remains largely unchanged, except for the increase in the TDS (Tax Deducted at Source) threshold on interest income for senior citizens from ₹50,000 to ₹1,00,000. So, people have to go through a careful assessment each year to determine which regime best suits their individual financial profile.

Tax Exemption Earning: What Counts as Tax-Free Income?

While tax exemptions are related to tax deductions, they apply when a specific income is excluded from taxation, given that the necessary conditions are met. This can also be done by reducing the gross income of the taxpayer. Tax deductions, on the other hand, reduce your taxable income by allowing certain eligible expenses or investments.

Tax-exempt earnings are excluded from the compulsory tax criteria set by the government. These incomes are not included in the taxable income for the particular financial year and so remain completely free of tax. 

Some common tax-exempt earnings include income from a partnership firm, gratuity income, voluntary retirement funds, capital gains, and particular exemptions, such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA). Also, deductions under Section 80C (like investments in PPF, ELSS, and life insurance) and Section 80D (premiums paid for health insurance) also contribute significantly to lowering the overall taxable income.

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Did You Know?

Under the New Tax Regime, you can still claim a deduction on the employer’s NPS contribution under Section 80CCD(2), subject to limits.
 

Source: India Today

Cut Tax Stress 46,800

Tax Savings Insurance Plan

Financial security is one of the most talked-about topics today. While it might be unrealistic to always be financially secure, being prepared for financial hurdles is surely possible. There are many tax benefits available through life insurance that allow you to consider your current and future expenses, ensuring you are never off the road. While there are many kinds of insurance plans that can save you on rainy days, life insurance becomes one of the most crucial of them.

Life insurance plans offer the family members of an insurance holder a degree of financial freedom after the insurance holder’s death. This policy becomes increasingly crucial for families where a single member is the sole breadwinner. This places a heavy burden on a single family member. A specifically curated life insurance plan can help a family's sole earner better manage such responsibilities

Can a Term Insurance Plan help you Save Tax?

Yes. Term insurance plans are among the most popular. Their role in term insurance tax exemption is vital for tax planning, as they offer affordable premiums specific to your requirements.

These plans provide financial benefits and help protect your family in the event of the policyholder’s death. Some term plans may also offer optional riders for critical illness or disability, subject to the policy terms. The death-related benefits of term plans can be utilised by the nominee if the policyholder dies during the policy term, and such payout is generally tax-exempt under Section 10(10D), subject to applicable conditions. This is one of the key term life insurance tax exemptions available for policyholders. 

Additionally, a term insurance deduction in income tax is provided in the premium amount paid by the late investor to support their coping.

Term plans also allow beneficiaries to utilise tax-saving benefits under sections 80C, 80D, and 10(D). The ideal approach to choosing the best insurance plan includes thorough research on these allowances and benefits to find the one that best matches your needs.

If you are looking for a term insurance plan that provides ample coverage at a reasonable rate, you should consider the iSelect Smart360 Term Plan by Canara HSBC Life Insurance.

Conclusion

Understanding tax exemption rules can help you make smarter financial decisions and reduce your tax burden legally. From salary allowances to investment-linked exemptions, the right mix of planning can help you keep more of what you earn while building long-term security. Life insurance, especially term plans, plays an important role in this strategy by offering protection along with potential tax advantages.

If you are wondering, “Is term insurance premium tax exempt?” the premium paid may qualify for a deduction under the term insurance exemption in income tax provisions, such as Section 80C, subject to limits and applicable conditions. Similarly, the death benefit received by nominees is generally covered under the term insurance income tax exemption under Section 10(10D), provided the policy meets the required criteria. By understanding these provisions and choosing the right tax regime, you can optimise your tax savings while securing your family’s financial future.

Glossary

  1. Tax Exemption: Income thatis legally excluded from tax, reducing your taxable income as per the Income Tax Act rules
  2. Tax Deduction: A claim that lowers taxable income through eligible investments or expenses under the Act
  3. Old Tax Regime: Tax system allowing most exemptions and deductions like HRA, LTA, 80C, and 80D
  4. New Tax Regime: Default tax regime with lower slab rates but fewer deductions and exemptions
  5. Section 80C: Deduction of up to ₹1.5 lakh for eligible investments like life insurance premiums, PPF, and ELSS
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Uncertain About Insurance?

FAQs Related to Tax Exemption

Yes. Tax exemption on term insurance premiums is available under Section 80C, within the overall limit of ₹1.5 lakh.

Term insurance premiums are eligible for deduction under Section 80C of the Income Tax Act, 1961 (within the overall ₹1.5 lakh limit).

Term insurance usually does not have a maturity amount. It pays a death benefit if the policyholder dies during the policy term. The payout is usually tax-free under section 10(10D).

Term insurance offers tax benefits under Section 80C and tax-free death benefits under Section 10(10D), while other life insurance policies may also provide maturity benefits, but those payouts are tax-free only if specific conditions are met.

Yes. Term insurance is tax-free in the sense that premiums qualify for deduction under Section 80C (up to ₹1.5 lakh limit), and you may also get a rebate under Section 87A if your taxable income is eligible.

Term insurance deductions under Section 80C are available only in the old tax regime, while the new tax regime generally does not allow this deduction (except in limited cases).

You can claim up to ₹1.5 lakh as a tax benefit on term insurance premiums under Section 80C (within the overall 80C limit) under the old tax regime.

No. Term insurance premiums qualify for deduction under Section 80C, and the death benefit is generally exempt under Section 10(10D), subject to conditions.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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