How to maximize tax benefits under the new tax regime?
The new tax regime was introduced to simplify tax filing by offering lower tax rates while removing most deductions and exemptions. While many taxpayers initially found it less beneficial due to the elimination of tax-saving options like HRA, LTA, and 80C deductions, there are still several ways to optimize tax savings under this system.
This article provides an in-depth guide on how taxpayers can legally minimize their tax liability under the new tax regime by using employer benefits, strategic investments, and available deductions. We will also include practical examples, case studies, and frequently asked questions to help you make an informed decision.
Table of Content
Understanding the New Tax Regime
The government introduced the new tax regime in Budget 2020 to provide an alternative to the traditional tax structure. This regime is designed to offer simplified tax calculations with lower rates. However, it eliminates most exemptions and deductions available under the old system.
Tax Slabs Under the New Tax Regime (FY 2024-25)
The revised income tax slabs for FY 2024-25 under the new tax regime are as follows:
Annual Income (₹) | Tax Rate (%) |
Up to 3,00,000 | Nil |
3,00,001 to 7,00,000 | 5 |
7,00,001 to 10,00,000 | 10 |
10,00,001 to 12,00,000 | 15 |
12,00,001 to 15,00,000 | 20 |
Above 15,00,000 | 30 |
Additional Benefits:
Standard Deduction: The standard deduction has been increased from ₹50,000 to ₹75,000 under the new regime.
Surcharge Reduction:Â The highest surcharge rate has been reduced from 37% to 25%, benefiting high-income earners.
Key Differences Between the Old and New Tax Regimes
Feature | Old Tax Regime | New Tax Regime |
Tax Rates | Higher | Lower |
Exemptions & Deductions | Available | Not Available (except a few) |
Standard Deduction | ₹50,000 | ₹75,000 |
Investment Benefits | Allowed | Limited |
How to Reduce Tax Liability Under the New Regime?
Even though most deductions have been removed, taxpayers can still lower their taxable income through various strategic methods. Below are some key approaches:
1. Optimize Salary Structure with Employer Benefits
Salary components can be restructured to include non-taxable benefits, such as:
Employer’s Contribution to NPS (Section 80CCD(2)): Contributions of up to 10% of basic salary are tax-free.
Food Coupons/Vouchers: Exempt up to ₹50 per meal.
Company-Leased Accommodation: Though HRA is not exempt, structured rent reimbursements can lower taxable income.
2. Claim the Increased Standard Deduction
The new tax regime allows a ₹75,000 standard deduction for salaried individuals and pensioners. This automatic deduction reduces taxable income without requiring specific investments.
3. Leverage National Pension System (NPS) Benefits
The new tax regime still offers tax benefits for NPS contributions:
Employer Contribution (Section 80CCD(2)): Up to 10% of the employee’s salary remains tax-free.
Additional Self-Contribution (Section 80CCD(1B)): An extra ₹50,000 can be deducted if the employee voluntarily contributes to NPS.
4. Utilize Business Deductions Under Section 80JJAA
Businesses hiring new employees can claim an additional 30% deduction on salaries paid to fresh recruits for three consecutive years. This reduces taxable profits significantly.
5. Tax Benefits for Senior Citizens
Senior citizens receive additional exemptions on interest income:
Section 80TTB allows exemption on interest income up to ₹50,000 from savings accounts, fixed deposits, and post office schemes.
No Advance Tax Requirement if the only sources of income are pension and interest earnings.
Maximizing Tax Savings With Employer Benefits
Employers can structure salaries in a way that optimizes tax benefits for employees. Some key employer-provided benefits that help reduce tax liability under the new regime include:
Employer’s Contribution to NPS (Section 80CCD(2)): Employers can contribute up to 10% of an employee’s basic salary toward NPS. This amount remains tax-free and is one of the few deductions allowed under the new regime.
Food Coupons/Vouchers: Non-monetary perks like meal vouchers are tax-free up to ₹50 per meal, helping reduce taxable income.
Gratuity and Leave Encashment: Amounts received as gratuity (subject to limits) and encashment of earned leave at retirement are exempt from tax.
Company-Leased Accommodation: While HRA exemptions are removed in the new regime, structured rent reimbursements through a company lease agreement may help reduce tax liability.
Health Insurance Premium Paid by Employer: Premiums paid by employers on behalf of employees for group health insurance are not considered taxable income.
Example Calculation:
If an employee has a basic salary of ₹10 lakh, an NPS contribution of ₹1 lakh (10% of basic salary) by the employer would remain tax-free. This would reduce taxable income from ₹10 lakh to ₹9 lakh, leading to lower tax liability.
Utilizing Standard Deductions and Other Exemptions
While the new tax regime has removed most exemptions, a few key benefits remain available to taxpayers:
Standard Deduction: The standard deduction for salaried individuals and pensioners has been increased to ₹75,000. This amount is automatically deducted from taxable income.
Interest on Post Office Savings (Section 10(15)): Interest earned up to ₹3,500 (individual accounts) or ₹7,000 (joint accounts) remains tax-free.
Employer’s EPF Contribution: While EPF contributions do not provide tax deductions, employer contributions up to 12% of basic salary remain tax-free.
Retirement Benefits: Gratuity, commutation of pension, and leave encashment at retirement are exempt from tax up to specific limits.
Example:
A salaried employee earning ₹12 lakh annually will get an automatic ₹75,000 standard deduction, reducing taxable income to ₹11.25 lakh before tax calculations.
How Investing in NPS Helps Under the New Tax Regime?
While Section 80C deductions are not available under the new tax regime, contributions to the National Pension System (NPS) still offer tax benefits. The key provisions include:
Employer Contributions (Section 80CCD(2)): Employer contributions up to 10% of an employee’s basic salary remain tax-free.
Self-Contribution (Section 80CCD(1B)): Individuals can contribute voluntarily to NPS and claim an additional ₹50,000 deduction, even in the new regime.
Tax-Free Maturity Benefits: 60% of the corpus withdrawn at retirement is tax-free.
Example:
If an employee earns ₹10 lakh annually and contributes ₹1.5 lakh to NPS (₹1 lakh through employer and ₹50,000 voluntarily), taxable income reduces to ₹8.5 lakh, lowering tax liability.
Section 80JJAA: Additional Deduction for Businesses
Section 80JJAA provides businesses with an additional 30% deduction on the salaries of new employees for three consecutive years, encouraging job creation.
Key Conditions:
The business must be subject to tax audit.
Employees must be paid at least ₹25,000 per month.
The employee should not be a contract worker.
Example Calculation:
A business hires 10 new employees with an annual salary of ₹3 lakh each. Under Section 80JJAA, they can claim an extra ₹9 lakh deduction (₹3 lakh × 10 × 30%) on their taxable income for three years.
Tax Planning for Senior Citizens
Senior citizens enjoy specific tax benefits even under the new tax regime:
Section 80TTB: Interest Income Exemption: Interest earned from savings accounts, FDs, and post office deposits is tax-free up to ₹50,000 per year.
No Advance Tax Requirement: If the senior citizen’s income is only from pension and interest, they are exempt from paying advance tax.
Standard Deduction: A ₹75,000 standard deduction applies to pensioners.
Example:
A retired senior citizen earning ₹5.5 lakh annually, including ₹50,000 in interest income, will only pay tax on ₹5 lakh after availing of the Section 80TTB exemption.
How Professionals and Freelancers Can Save Taxes?
Freelancers and professionals can also maximize tax savings under the new tax regime:
Presumptive Taxation Scheme (Section 44ADA): Allows professionals with gross receipts up to ₹75 lakh to pay tax on only 50% of their income.
Claiming Business Expenses: Office rent, internet bills, travel, and software subscriptions can be deducted as business expenses.
FAQs
1. Can I claim HRA in the new tax regime?
No, HRA (House Rent Allowance) exemption is not available under the new tax regime. However, if your employer offers a structured rent reimbursement policy, you may still benefit from reduced taxable income.
2. Is the standard deduction available under the new tax regime?
Yes, the standard deduction of ₹75,000 for salaried employees and pensioners is available under the new tax regime. This deduction is automatically applied and does not require any documentation.
3. Can I claim deductions under Section 80C?
No, deductions under Section 80C, including investments in LIC, PPF, ELSS, and tax-saving FDs, are not permitted under the new tax regime. The idea behind the new regime is to offer lower tax rates without relying on deductions.
4. What is the maximum tax-free contribution to NPS under the new regime?
Employer contributions to NPS (National Pension System) up to 10% of the basic salary remain tax-free under Section 80CCD(2). Additionally, a voluntary contribution of up to ₹50,000 can be claimed as a deduction under Section 80CCD(1B), even under the new tax regime.
5. Is home loan interest deductible in the new tax regime?
No, deductions on home loan interest (Section 24(b)) and principal repayment under Section 80C are not available in the new tax regime. However, first-time homebuyers can still avail of interest deduction benefits under Section 80EEA if they meet specific eligibility criteria.
6. How does the Section 87A rebate work in the new tax regime?
Under Section 87A, if your taxable income is up to ₹7 lakh, you are eligible for a full tax rebate, making your tax liability zero. This rebate ensures that individuals with lower incomes do not pay income tax.
7. Are senior citizens eligible for any special benefits under the new tax regime?
Yes, senior citizens continue to receive certain tax benefits, including:
Interest income exemption under Section 80TTB: Interest earned from savings accounts, FDs, and post office schemes is tax-free up to ₹50,000.
No advance tax requirement if senior citizens have only pension and interest income.
Standard deduction of ₹75,000, applicable to pensioners.
8. Can freelancers opt for the new tax regime?
Yes, freelancers and self-employed professionals can opt for the new tax regime. However, they should note:
They cannot claim deductions under Section 80C.
Presumptive taxation under Section 44ADA is still applicable, allowing professionals with gross receipts up to ₹75 lakh to pay tax on only 50% of their earnings.
9. Is Section 80JJAA applicable under the new tax regime?
Yes, businesses hiring new employees can claim an additional 30% deduction on the salaries paid to new employees for three consecutive years under Section 80JJAA. This deduction helps businesses reduce their taxable income while promoting employment.
10. Can business owners claim GST input tax credit under the new tax regime?
Yes, GST input tax credit (ITC) is entirely separate from income tax provisions and remains applicable regardless of whether a business owner chooses the old or new tax regime. Businesses can still claim ITC on eligible purchases to reduce their GST liability.
11. Should I shift to the new tax regime?
The decision depends on your income structure and tax-saving investments:
If you do not claim major deductions (such as 80C, HRA, or home loan benefits), the new regime with lower tax rates may be beneficial.
If you have high tax-saving investments, the old regime might be more advantageous despite the higher tax rates.
Salaried employees can switch between regimes every year, while business owners must select their regime carefully, as they can switch only once in a lifetime.
12. How do I switch between the old and new tax regimes?
For Salaried Individuals: You can choose the tax regime while filing your Income Tax Return (ITR) every financial year.
For Business Owners and Professionals: Once you opt for the new tax regime, you cannot switch back to the old regime unless you discontinue your business or profession.
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