PROSPERR.IO

The new tax regime has been the subject of considerable debate since its introduction in 2020 and even more so after the overhaul in 2023 that made it the default option for most taxpayers. The criticism it draws most often is that it strips away the deductions people have relied on for years. While that is partially true, the picture is far more nuanced than a blanket 'no deductions allowed' verdict.

The new regime does away with many popular exemptions but it does not eliminate all of them. For those who are salaried or drawing a pension, there are still meaningful tax-saving levers available. The key is knowing exactly what survives under the new framework and using each provision strategically.

This guide lays out every option that remains available, explains the limits with clear numbers, and helps build a realistic picture of what tax planning looks like under the new regime.

The Revised Tax Slabs: Lower Rates, Wider Brackets

Before getting into the deductions, it is worth appreciating why many people end up with a lower tax outgo under the new regime even without the usual deductions. The tax slabs themselves are considerably more favorable now. Since FY 2023-24, the slabs are:

Additionally, the basic exemption limit was raised to Rs. 3 lakh, and the rebate under Section 87A now applies up to a taxable income of Rs. 7 lakh which means zero tax liability for those with income at or below that threshold. This alone makes the new regime particularly suitable for those with simpler income profiles.

What Has Been Retained: Deductions That Survive

The new regime is not entirely devoid of relief. Several deductions and exemptions continue to apply. Here is a consolidated view:

1. Standard Deduction — Rs. 75,000

This is one of the most impactful changes made to the new regime. Until FY 2022-23, the standard deduction of Rs. 50,000 was available only under the old regime. From FY 2023-24 onwards, it has been extended to the new regime as well and the amount was further raised to Rs. 75,000 from FY 2024-25 onwards.

For pensioners receiving pension from a former employer, the standard deduction of Rs. 75,000 is also available. However, those receiving family pension can claim a standard deduction of Rs. 25,000 (raised from Rs. 15,000 earlier) or one-third of the pension amount whichever is lower.

2. Employer's NPS Contribution — Section 80CCD(2)

This is arguably the most powerful deduction available under the new regime for the employed. When the employer contributes to the employee's National Pension System (NPS) Tier-I account, that amount is deductible from taxable income with no upper rupee cap, only a percentage ceiling.

The deduction is capped at 14% of Basic Salary plus Dearness Allowance for all employers (this was earlier 10% for private sector employers, but was equalized at 14% under the new regime from FY 2023-24). This is entirely separate from the Rs. 75,000 standard deduction and sits outside the Rs. 1.5 lakh 80C bucket.

This deduction is not available for the employee's own NPS contribution (80CCD(1B) is disallowed under the new regime). It applies only to what the employer puts in.

3. Gratuity Exemption — Section 10(10)

Gratuity received on retirement or separation is exempt from tax up to a prescribed limit. For government employees, the entire gratuity is exempt. For others covered under the Payment of Gratuity Act, the exemption is the least of: the actual gratuity received, Rs. 20 lakh, or the formula-based amount (last drawn salary x 15/26 x years of service). This exemption is fully retained under the new regime.

4. Leave Encashment on Retirement Section 10(10AA)

Accumulated leave encashment received at the time of retirement is exempt from tax for government employees in full. For non-government employees, the exemption is capped at Rs. 25 lakh (revised from Rs. 3 lakh in 2023). This applies under the new regime as well, making it a meaningful benefit for those with significant leave balances at retirement.

5. HRA Is Gone But Not the Pain

House Rent Allowance (HRA) exemption under Section 10(13A) is not available under the new regime. This is one of the biggest losses for those living in rented accommodation in metro cities. However, if the nature of the work or employer policy allows restructuring the CTC to reduce the HRA component and increase the NPS contribution instead, the employer NPS deduction can partially offset this loss.

6. Transport and Conveyance Allowances — Section 10(14)

Certain specific allowances remain exempt even under the new regime:

• Transport Allowance for specially-abled employees — Rs. 3,200 per month

• Conveyance allowance received for official duty expenses

• Daily allowance for travel on official duty

• Running allowance for transport employees (up to 70% of such allowance)

These are narrower than they sound the general transport allowance of Rs. 1,600/month that was popular under the old regime is not available under the new one.

7. Voluntary Retirement Scheme (VRS) Exemption — Section 10(10C)

Amount received under a voluntary retirement scheme is exempt up to Rs. 5 lakh. This is available under the new regime as well, making it useful for those who opt for VRS close to retirement. The exemption applies once in a lifetime and cannot be clubbed with gratuity exemption for the same year.

8. Perquisites for Official Use

Certain perquisites provided by the employer for official purposes do not count as taxable income — and this remains true under the new regime. These include:

• Laptop and computer provided for official use

• Company-provided vehicle used exclusively for business

• Telephone and internet reimbursement for official use

• Medical treatment in employer-provided hospital or dispensary

These are not deductions in the traditional sense, but they effectively reduce the taxable value of perquisites and are worth tracking carefully in the salary structure.

9. Agniveer Corpus Fund — Section 80CCH

Introduced for Agniveers enrolled in the Agnipath Scheme, contributions made by the employee and the Central Government to the Agniveer Corpus Fund are deductible under Section 80CCH. This benefit is available under the new tax regime as well.

What Is No Longer Available Under the New Regime

For context, here is a consolidated view of the key deductions that are not available when opting for the new tax regime:

This is not a comprehensive list, but it covers the most commonly used deductions that salaried taxpayers tend to rely on. The absence of these provisions is what makes the new regime less attractive for those with high deductible investments or significant home loan interest outgo.

Old vs. New: A Side-by-Side Example

Here is a practical comparison for a salaried individual with Basic Salary of Rs. 10 lakh and Total CTC of Rs. 18 lakh per year, with typical investments and allowances:

In this example, the old regime results in lower tax. But change the profile reduce the HRA, remove 80C investments, and increase the employer NPS contribution and the new regime may well come out ahead. The comparison is always individual-specific.

Practical Tips for Maximising Tax Efficiency Under the New Regime

1. Negotiate or request an employer NPS contribution as part of CTC restructuring this is the single most effective tool under the new regime.

2. Track all perquisites carefully. Items like company-provided laptops and internet reimbursements are not taxable if used for official purposes.

3. If drawing a pension, confirm that the Rs. 75,000 standard deduction is being factored in before advance tax payments.

4. Family pension recipients should verify that the Rs. 25,000 standard deduction is applied many miss this at the time of filing.

5. Maintain documentation for gratuity, VRS, and leave encashment the exemptions on these can be substantial and should be reported correctly.

6. Revisit the decision every year. The old vs. new regime comparison changes with every increment, job change, or change in family circumstances.

Conclusion

The new tax regime is not a disadvantage for everyone it is a different calculation. For those who historically claimed limited deductions, or whose employer offers a strong NPS contribution, the new regime can actually result in lower taxes. Understanding what survives — the standard deduction, employer NPS, gratuity, leave encashment exemptions allows for a far more informed decision than simply defaulting to what was always done before.

Frequently Asked Questions

1. Is the new tax regime automatically applied to all taxpayers?

From FY 2023-24 onwards, the new tax regime is the default regime. This means if no explicit choice is communicated to the employer before the start of the financial year, TDS will be deducted based on new regime tax rates. However, salaried individuals retain the right to switch between regimes at the time of filing the ITR — once per financial year. Those with business income have a more restricted choice and cannot switch back as freely.

2. Can the home loan interest deduction be claimed in the new regime?

For a self-occupied property, the deduction of up to Rs. 2 lakh under Section 24(b) is not available under the new regime. However, for a let-out property, the actual interest paid on the home loan can still be claimed as a deduction against rental income — with certain restrictions on setting off any resulting loss against other income heads. This is a nuance that many taxpayers overlook.

3. What if both employer and employee contribute to NPS how much is deductible under the new regime?

Under the new regime, only the employer's contribution to NPS (Section 80CCD(2)) is deductible — up to 14% of Basic + DA. The employee's own voluntary NPS contribution (Section 80CCD(1B)), which gives an additional Rs. 50,000 under the old regime, is not deductible under the new regime. So while contributing to NPS is still a good retirement savings habit, the tax benefit accrues only on the employer's portion in the new regime.

4. Is the rebate under Section 87A available under the new regime?

Yes. The rebate under Section 87A is available under the new regime and applies to taxable incomes up to Rs. 7 lakh. This means individuals whose net taxable income (after standard deduction and 80CCD(2) adjustments) falls at or below Rs. 7 lakh will pay zero tax under the new regime. This is a significant relief for those in the lower-to-mid income bracket and is often a decisive factor in choosing the new regime.

5. Can a pensioner opt for the old tax regime if it is more beneficial?

Yes, pensioners retain the same choice as salaried individuals. They can compare both regimes at the time of filing the ITR and opt for whichever results in a lower tax liability — as long as they do not have business or professional income. Since pensioners often do not have high deductible investments or housing loan interest, the new regime may be competitive for many. However, those with significant medical expenses, insurance premiums, or other 80C investments may find the old regime more suitable. Running the numbers each year is the only reliable way to decide.