Income Tax 2026: 3 Deduction & Exemption Changes Every Taxpayer Must Know

Every Budget quietly rewrites a few rules that only matter to a few thousand people — until you are one of them. The Finance Act, 2026 does exactly that. Three changes to deductions and exemptions take effect from Tax Year 2026-27, and each one fixes an ambiguity that has cost real taxpayers real money: an NRI who comes to India to work on a government project and gets taxed on income earned abroad, a disabled veteran whose pension treatment depended on which desk it landed on, and a farmer whose land was compulsorily acquired and who discovered the compensation might be taxable after all. Here is what changed, who it helps, and what to check before you rely on it.

All three changes sit inside the new Income-tax Act, 2025, which has applied from 1 April 2026 — if you are still thinking in 1961-Act section numbers, start with the plain-English guide to ITR and the new tax framework, and keep the Income Tax hub open for the slabs, regime comparison and filing guides these changes sit alongside.

1. NRIs on notified Government schemes: five years of foreign-income exemption

Non-resident individuals who visit India to provide services under a notified Government scheme will get an exemption on their foreign-source income. The exemption lasts for five consecutive tax years, provided they were non-residents for the previous five years and meet the scheme’s conditions.

Why this matters: India has been recruiting global experts for government programmes, and the old position was murky — a non-resident who spent enough time in India could find foreign income dragged into the Indian tax net, or at least into a dispute about it. The Finance Act, 2026 settles it for the notified-scheme route: five tax years of exemption on income that arises outside India, so long as the person was a non-resident for the five preceding years. In practice, this is aimed at specialists, consultants and returning experts on defined government schemes — not at every NRI who visits. The key test is the notification: your engagement must be under a scheme the Government has notified for this purpose. If it is not, the exemption does not apply, and your residential status is tested under the ordinary rules. If you are an NRI weighing an India assignment, ask for the scheme notification in writing before you accept — it is the document your exemption depends on.

2. Disability pension: exempt only when service ended the career

Disability pension will be exempt from income tax only if the individual was invalided out of service due to a service-related disability. Pensions received on superannuation or retirement will not qualify for the exemption. The clarified exemption applies equally to Armed Forces and paramilitary personnel.

This is a narrowing, and it is worth reading carefully. Under the earlier, looser understanding, disability pension enjoyed a broad exemption and the line between a disability pension and an ordinary service pension was often blurred in practice. The Finance Act, 2026 draws it sharply: the exemption follows the reason service ended. If a service-related disability forced you out — you were invalided out — the pension is exempt. If you served your full term and retired on superannuation, even with a disability element in the pension, the exemption does not apply. For Armed Forces and paramilitary personnel the rule is the same, which ends the inconsistent treatment between the two. If you or a family member draws a disability pension, the document that matters now is the invalidment record: the medical board proceedings and the discharge order that show service ended because of the disability. Keep them with the return papers — this is exactly the kind of exemption an assessing officer will ask to see, and the difference between exempt and taxable can be the entire pension.

3. Compulsory land acquisition: compensation now expressly exempt

The Income-tax Act, 2025 will expressly exempt any income arising from compulsory acquisition of land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act), except for cases covered by Section 46 of that Act. This removes the ambiguity and aligns the tax law with Section 96 of the RFCTLARR Act, which already provides that such compensation is not taxable.

Farmers and landowners have lived with this uncertainty for years: the land acquisition law said compensation is not taxable, while the income-tax law did not say so in terms, and the gap produced notices and litigation. The 2026 change writes the exemption into the tax law itself, so a person whose land is compulsorily acquired under the 2013 Act does not pay tax on the compensation — unless the case falls under Section 46 of the RFCTLARR Act, which deals with acquisition of land for private companies and public-private partnerships in certain circumstances. If your land was acquired, check which provision the acquisition was made under before assuming exemption; the Section 46 carve-out is the one exception, and it is the first thing a notice will turn on.

The company and co-operative changes, briefly

The Finance Act, 2026 also carries changes that matter to companies and co-operative societies rather than individuals. Foreign companies get a tax holiday on income from procuring data centre services from specified data centres in India, up to 31 March 2047, provided services to Indian customers are routed through an Indian reseller. From Tax Year 2026-27, foreign companies also get an exemption on income from supplying capital goods, equipment or tooling to Indian contract manufacturers of electronic goods operating in customs bonded warehouses, up to Tax Year 2030-31. Co-operative societies opting for the new regime can claim a deduction for dividends received from another co-operative society, to the extent the dividends are further distributed to members; notified federal co-operative societies can claim a deduction for dividends from companies for three years (up to Tax Year 2028-29) on investments made up to 31 January 2026, where dividends are distributed to members at least one month before the return filing due date. And the deduction under Section 149(2)(b) of the Income-tax Act, 2025 — the successor to Section 80P(2)(b) of the 1961 Act — is expanded to cover ancillary activities of primary co-operative societies, so profits from supplying cattle feed and cotton seeds grown or produced by members also qualify.

What to do before Tax Year 2026-27 closes

• NRIs on government assignments: get the scheme notification and confirm you were a non-resident for the previous five years — both conditions must hold.
• Disability pensioners: keep the invalidment and discharge records with your tax papers; if your pension is a superannuation pension, plan for it as taxable income.
• Landowners facing acquisition: confirm the acquisition is under the RFCTLARR Act, 2013 and not a Section 46 case before treating compensation as exempt.
• Everyone: remember the new Act’s vocabulary — “tax year” has replaced “assessment year” in the 2025 Act, and the old section numbers now sit in mapping tables, not in the law itself. For the deductions that most salaried taxpayers actually use, the mid-year tax moves checklist is the practical companion to this article, and the senior and super senior citizen benefits guide covers the age-based exemptions that still apply alongside these changes.

FAQs

Do NRIs get a five-year tax exemption on all foreign income now?
No. The exemption covers foreign-source income for non-resident individuals visiting India to provide services under a notified Government scheme, for five consecutive tax years, provided they were non-residents for the previous five years.

Is disability pension fully tax-exempt from 2026-27?
Only if the person was invalided out of service due to a service-related disability. Pensions on superannuation or retirement do not qualify, for Armed Forces and paramilitary personnel alike.

Is compensation for compulsory land acquisition taxable?
Not from Tax Year 2026-27, if the acquisition is under the RFCTLARR Act, 2013 — except for cases covered by Section 46 of that Act.

Which law do these changes sit in?
The Finance Act, 2026, amending the Income-tax Act, 2025, which has applied from 1 April 2026. The old 1961 Act’s section numbers (like 80P) now appear as their 2025-Act successors (Section 149, in that example).

Sources

Finance Act, 2026 (deduction and exemption changes for Tax Year 2026-27). Income-tax Act, 2025 (in force from 1 April 2026). The Economic Times, “Income Tax 2026: 3 key changes in deductions & exemptions every taxpayer must know”, 2 November 2026, reporting Taxmann research on the Finance Act, 2026. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, Section 96 (compensation not taxable) and Section 46 (exception).