How to Save Income Tax in New Tax Regime? A Guide to Allowed Deductions and Exemptions

The new tax regime introduced under Section 115BAC of the Income Tax Act, 1961 allows fewer deductions and exemptions including a standard deduction of ₹75,000, employer's contribution to National Pension System (NPS), family pension deductions and Agniveer Corpus Fund contributions. Salaried taxpayers earning up to ₹12.75 Lakh can practically achieve zero tax liability under the new tax regime without having to rely on traditional Section 80C or 80D investments. 

Introduced as a concessional tax regime, the new regime is currently the default regime for individuals and Hindu Undivided Families (HUFs) in India. Read more as we explore the allowed deductions and exemptions under the new tax regime and how you can achieve significant tax savings with this regime.

Deduction Under New Tax Regime

The new tax regime has replaced the traditional, tax saving investment-focused deductions and exemptions seen in the old tax regime. Exemptions under Section 80C (for investments), Section 80D (for health insurance premiums) and House Rent Allowance (HRA) are removed and taxpayers can benefit from the following deductions and exemptions under the new tax regime in India. 

Standard Deduction

Under the new tax regime, salaried taxpayers and pensioners can claim a flat, automatic deduction of ₹75,000 directly from their gross salary or pension income. There is no need to provide any investment proof to claim this deduction. Ideally for salaried taxpayers, the employer automatically applies it during TDS calculation. 

Similarly, regular pensioners who receive pension from their former employer can also claim a standard deduction of ₹75,000. When combined with the Section 87A, this standard deduction of ₹75,000 allows salaried taxpayers to showcase zero income tax liability for up to ₹12,75,000.

Employer's Contribution to NPS

It is available to employees, whose employer has deposited their money in the Tier-I NPS account. Under the new tax regime, both private sector and government employees can claim up to 14% of their salary (Basic Salary + Dearness Allowance) as a deduction under Section 80CCD(2) of the Income Tax Act, 1961. 

Illustrative Example

To understand these deductions clearly, let us consider an example. Say, you are a private sector employee who earns ₹9 Lakh as a gross salary and receives a basic salary of ₹6 Lakh. Now, as per the new tax regime, you will receive ₹75,000 as a standard deduction and up to ₹84,000 (14% of ₹6 Lakh) under section 80CCD(2). If the contribution made by employer is ₹70,000, the entire ₹70,000 is deductible as it stays within the eligible 14% limit (₹84,000) under Section 80CCD(2).

The following table shows how you can claim the deduction as per the new tax regime slabs while filing an Income Tax Return for maximum tax savings.

So, from the above table, you understand that you will receive a net taxable income of ₹7.55 Lakh after claiming the deductions as per the new tax regime.

Family Pension Deduction Under Section 57(iia)

If you receive a family pension after the passing of a salaried employee, you can claim a tax deduction under Section 57(iia) of the Income Tax Act. This benefit is available under the new tax regime. You can deduct up to ₹25,000 or one-third (33.33%) of the total family pension you receive in a financial year, whichever amount is less.

A regular pension received by a retiree is taxed as 'Income from Salaries,' but a family pension is taxed as 'Income from Other Sources.' When you file your Income Tax Return (ITR), you can apply this deduction directly to your total family pension income. You do not need to submit any investment proofs for this deduction.

Agniveer Corpus Fund Section 80CCH

If you are part of the Agnipath Scheme and serve in the Indian Armed Forces, you can claim a tax deduction for the money you put into the Agniveer Corpus Fund under Section 80CCH. This deduction is available under the default new tax regime (Section 115BAC). Whatever amount you contribute to the corpus fund under Section 80CCH(1) can be fully deducted from your total income when calculating your taxes.

Any money the government adds to your Agniveer corpus account under Section 80CCH(2) is also fully deductible. After your service ends, the total amount you have saved in the Agniveer Corpus Fund, including any interest earned, is completely exempt from income tax.

Old Regime vs New Regime: Deductions and Exemptions

To Conclude

The default new tax regime under Section 115BAC makes income tax management in India simpler and easier to handle. It removes the need for mandatory investments under Section 80C or 80D, so taxpayers have more disposable income. It also gives salaried employees and pensioners a higher standard deduction of ₹75,000.

If you add employer NPS contributions under Section 80CCD(2) and use the Section 87A rebate, salaried people earning up to ₹12.75 Lakh can effectively achieve zero tax liability. Hence, before you file your Income Tax Return (ITR), check all your possible deductions to see if the simpler new tax regime or the old regime with more deductions will save you more money.

FAQs

What is the default tax regime under Section 115BAC of the Income Tax Act?

The new tax regime is the default tax regime and it is automatically applied to individual taxpayers unless they voluntarily opt for the old regime. 

Can I claim tax savings on my life insurance premiums under the new tax regime?

No, you cannot claim tax deductions for life insurance premiums under Section 80C in the new tax regime. For this, you must choose the old tax regime.

Can I claim home loan interest on a self occupied property in the new tax regime?

No, the home loan interest deduction under Section 24(b) for a self-occupied property is not allowed in the new tax regime. But if you pay home loan interest on a rented property, you can still deduct it from your rental income.

Why do many taxpayers prefer the lower tax rates of the new tax system?

Many people like the lower tax rates because they get more take-home pay each month. It also means you do not have to put your savings into long-term investments just to save on taxes.