With the government’s constant revisions to the tax code, taxpayers are always looking for ways to reduce their liabilities. One such change is the introduction of the New Income Tax Regime which was first implemented in FY 2020-21 and continues to evolve. In this post, we’ll explore how to maximize tax savings under the new tax regime, understanding the new tax slabs for FY 2024-25, and specific strategies to lower your tax bill.
Understanding the New Tax Regime
The New Income Tax Regime is designed to provide a simpler tax framework with lower tax rates but fewer deductions and exemptions. It allows taxpayers to choose between the old and new regimes, depending on their financial situation. Under this regime, you do not have to claim exemptions like House Rent Allowance (HRA), Home Loan Interest, or deductions like Section 80C, Section 80D, and others.
Tax Slabs Under the New Tax Regime (FY 2025-26)
The tax slabs under the new tax regime for FY 2026-27 are as follows:
- Up to ₹4 lakh: No tax
- ₹4 lakh to ₹8 lakh: 5% tax
- ₹8 lakh to ₹12 lakh: 10% tax
- ₹12 lakh to ₹16 lakh: 15% tax
- ₹16 lakh to ₹20 lakh: 20% tax
- ₹20 lakh to ₹24 lakh: 25% tax
- Above ₹24 lakh: 30% tax
The higher exemption limit and lower tax rates make this regime more attractive to middle-income taxpayers, especially those who do not have many tax-saving investments.
Key Differences Between the Old and New Tax Regimes
When deciding whether to opt for the New Tax Regime or the Old Tax Regime, understanding the key differences can help you make an informed decision:
| Feature | Old Tax Regime | New Tax Regime |
| Tax Slabs | Higher tax rates but with deductions | Lower tax rates, no deductions |
| Deductions | Multiple deductions (e.g., 80C, 80D, HRA) | Most deductions (e.g., 80C, HRA) not available |
| Rebate under Section 87A | Available for income up to ₹5 lakh | Available for income up to ₹7 lakh (₹25,000) |
| Standard Deduction | ₹50,000 for salaried individuals | ₹75,000 for salaried individuals |
| Tax Filing Complexity | More complex due to multiple deductions | Simplified, no need to track deductions |
The New Tax Regime is ideal for individuals who prefer simplicity and don’t rely on deductions. On the other hand, if you have significant tax-saving investments and expenses, the Old Tax Regime might be more beneficial.
How to Reduce Tax Liability Under the New Regime?
Under the New Tax Regime, you cannot claim deductions like the old regime, but here are some ways to minimize your tax liability:
- Claim Standard Deduction: The ₹75,000 standard deduction is available for salaried individuals and pensioners. This is automatically deducted from your taxable income, reducing the amount on which tax is calculated.
- Opt for Section 87A Rebate: If your taxable income is below ₹7 lakh, you are eligible for a rebate of ₹25,000 under Section 87A. This rebate effectively reduces your tax liability to zero.
- Invest in National Pension Scheme (NPS): While deductions under Section 80C are not available in the new regime, you can still invest in NPS (National Pension Scheme) and claim a deduction of up to ₹50,000 under Section 80CCD(1B), which is an additional benefit available.
Maximizing Tax Savings With Employer Benefits
Many employers provide benefits that can help you save taxes, even under the New Tax Regime:
- Leave Travel Allowance (LTA): You can still claim LTA for trips taken within India, which can be exempt from tax (based on certain conditions).
- Employer Contributions to Provident Fund (PF): Contributions made by your employer towards EPF or Pension Fund are still tax-free, and these contributions do not fall under the purview of deductions in the new regime.
- Gratuity: Employer-provided gratuity is also tax-exempt up to ₹20 lakh for employees who have worked for more than 5 years.
By optimizing these benefits, you can reduce your overall taxable income, which will help minimize your tax bill.
Utilizing Standard Deductions and Other Exemptions
While the New Tax Regime has eliminated most exemptions and deductions, there are still a few that you can take advantage of:
- Standard Deduction: As mentioned earlier, the ₹75,000 standard deduction for salaried individuals automatically lowers your taxable income.
- Rebate Under Section 87A: If your taxable income is less than ₹7 lakh, you can claim a rebate of ₹25,000, effectively reducing your tax liability to zero.
- Tax-Free Benefits: Some employer-provided benefits, like food coupons, meal vouchers, and transportation allowances, remain tax-free and can be used to reduce taxable income.
- Capital Gains Exemptions: Tax on long-term capital gains (LTCG) from equity shares and mutual funds is subject to 20% tax after indexation, which can help you save taxes when selling investments.
How Investing in NPS Helps Under the New Tax Regime?
The National Pension Scheme (NPS) is a great investment vehicle that offers tax benefits even under the New Tax Regime. While the old regime allows you to claim NPS under Section 80C, the New Tax Regime allows a separate deduction under Section 80CCD(1B).
- Section 80CCD(1B) allows a maximum deduction of ₹50,000 for NPS contributions, over and above the ₹1.5 lakh limit under Section 80C.
- The NPS offers low-cost investment options and the potential for higher returns, making it an excellent way to save on taxes while building a retirement corpus.
Section 80JJAA: Additional Deduction for Businesses
Section 80JJAA provides an additional deduction for businesses that create new jobs. Under this section:
- Employers can claim a deduction of 30% of additional wages paid to new employees (for businesses with 50 or more employees).
- The deduction is available for 3 years and applies to industries that hire a significant number of new employees.
For businesses, this section provides a significant tax-saving opportunity, encouraging them to expand their workforce.
Tax Planning for Senior Citizens
For senior citizens (aged 60 or above), the New Tax Regime provides several tax benefits:
- Additional Deductions for Health: While you can’t claim deductions under the new regime for health insurance premiums, senior citizens can still claim a ₹50,000 deduction for premiums paid under Section 80D if they are enrolled in mediclaim policies.
How Professionals and Freelancers Can Save Taxes?
Freelancers and professionals (like doctors, consultants, etc.) can save taxes even under the New Tax Regime:
- Business Deductions: Freelancers can claim business-related expenses, including office rent, equipment purchases, travel expenses, and internet bills as tax deductions, even under the new regime.
- Section 80U: If you are a person with disabilities, you can claim a deduction of ₹1.25 lakh under Section 80U.
- NPS Contribution: If you’re a freelancer or professional, you can still contribute to NPS and claim a deduction of ₹50,000 under Section 80CCD(1B).
FAQs: Maximizing Tax Savings Under the New Tax Regime
1. Can I still claim deductions under Section 80C in the new tax regime?
No, deductions under Section 80C (which include investments like PPF, ELSS, LIC premiums, etc.) are not available under the new tax regime. This is one of the major trade-offs in opting for the new regime, which offers lower tax rates but fewer deductions.
2. How can I reduce my taxable income in the new tax regime?
In the new tax regime, while you cannot claim the usual deductions (like 80C or HRA), there are still options to reduce your taxable income:
- Standard Deduction: A ₹75,000 standard deduction is available for salaried individuals and pensioners.
- Section 87A Rebate: If your taxable income is below ₹7 lakh, you can claim a rebate of ₹25,000, effectively reducing your tax liability to zero.
- Tax-free Benefits from Employers: Meal vouchers, LTA, and transportation benefits provided by employers are still tax-free under the new regime.
3. Is the National Pension Scheme (NPS) available under the new regime?
Yes, NPS contributions are deductible under Section 80CCD(1B) (up to ₹50,000) in the new tax regime. This is an added benefit, as the new regime does not provide most of the other common tax-saving avenues.
4. Can I opt for the new tax regime if I am already claiming deductions in the old regime?
Yes, you can switch to the new tax regime even if you’re already claiming deductions under the old regime but for business income if you have choose New Regime then you have to only one chance to change your regime.
5. I am a senior citizen. How does the new tax regime benefit me?
For senior citizens (aged 60 or above), the new tax regime provides the following benefits:
- No deductions for health insurance under the new regime: Although health insurance premium deductions under Section 80D are not available, senior citizens can still benefit from tax-free medical reimbursements.
6. Can I claim a tax rebate if my income is below ₹5 lakh?
Yes, under Section 87A, if your taxable income is less than ₹5 lakh, you can claim a rebate of ₹12,500 in both the old and new tax regimes. This effectively nullifies your tax liability if your income is below ₹5 lakh.
7. Is the new tax regime suitable for freelancers and professionals?
Yes, freelancers and professionals (e.g., doctors, consultants) can benefit from the new tax regime, particularly if they:
- Don’t have many eligible deductions under Section 80C or 80D.
- Benefit from the lower tax rates in the new regime.
- Can still claim business expenses such as office rent, internet bills, and professional fees.
- Can contribute to NPS and claim up to ₹50,000 under Section 80CCD(1B).
8. Are there any exemptions I can claim under the new tax regime?
While the new tax regime removes many common exemptions (e.g., HRA, home loan interest), there are still a few:
- Standard Deduction of ₹75,000 for salaried individuals.
- Rebate under Section 87A (up to ₹25,000) for incomes under ₹7 lakh.
- Tax-free employer benefits, such as meal vouchers, LTA, and transportation benefits.
9. Is there any limit to the number of times I can switch between the old and new tax regimes?
Yes, you can switch between the old and new tax regimes every year. However, once you opt for one regime, you must stick with it for the entire financial year. You will have the flexibility to change your choice each year based on your financial situation.
10. How does the new tax regime affect business owners?
Business owners can still maximize tax savings under the new tax regime through provisions like:
- Section 80JJAA: An additional deduction for businesses that create new jobs. This allows businesses to claim a 30% deduction on additional wages paid to new employees.
- Expenses related to business: Entrepreneurs can still claim business-related expenses like office rent, supplies, and utilities.
11. Can I still claim tax deductions for my home loan under the new regime?
No, the deduction for home loan interest (under Section 24(b)) is not available under the new tax regime. If you’re paying off a home loan, you might prefer the old tax regime for this reason.
12. How does the new tax regime help me if I don’t have any major deductions to claim?
The new tax regime could be very beneficial if:
- You don’t have large tax-saving investments (like PPF, EPF, or insurance premiums).
- You prefer a simplified tax structure.
- You want to benefit from lower tax rates on your income.
13. Can I use both tax regimes if I have a combination of salaried and business income?
If you have both salaried and business income, you can choose a different tax regime for each:
- Salaried Income: Choose the new tax regime if you don’t have significant deductions.
- Business Income: You can opt for the old tax regime to claim business-related expenses.
However, once you choose a tax regime for a particular type of income (either salaried or business income), you must stick to it for the entire year.
14. How can I benefit from the new tax regime if I’m a government employee?
Government employees are still eligible for tax-free benefits like medical reimbursements and transportation allowances. However, deductions like HRA and home loan interest are not available under the new tax regime. The ₹75,000 standard deduction still applies.
15. Can I claim deductions for donations under the new tax regime?
No, the deduction under Section 80G for charitable donations is not available under the new tax regime. However, donations made to government-approved charitable organizations are still tax-free under certain conditions, but they will not reduce your taxable income.
