The introduction of the New Tax Regime was heralded as a move towards simplification. While it offers lower slab rates, it comes with a trade-off: the forfeiture of many popular deductions and exemptions.
However, the narrative that it is a "no-exemption" regime is a misconception. A careful examination reveals over 45 provisions that taxpayers can still leverage to optimize their tax liability.
This guide provides a comprehensive walkthrough of the deductions and exemptions that remain at your disposal.
The Foundation: Core Tax Rules
Before diving into specific deductions, it's crucial to understand the foundational benefits baked into the new system. These form the first line of tax savings for every individual.
Basic Exemption Limit
No tax is levied on income up to ₹3 Lakh.
Rebate u/s 87A
Zero tax on income up to ₹7 Lakh via a ₹25,000 rebate.
Marginal Relief
Prevents sharp tax hikes for incomes just above the ₹7 Lakh threshold.
Major Reliefs for Salaried Individuals & Pensioners
This demographic, forming a large chunk of taxpayers, retains some of the most substantial benefits. The government has ensured that key post-employment and retirement benefits continue to enjoy tax-exempt status.
Key Deductions and Retirement Benefits
The most significant relief is the re-introduction of the Standard Deduction of ₹75,000 for both salaried employees and pensioners. This flat deduction provides immediate, no-questions-asked tax relief. For pensioners, there's also a deduction on Family Pension, capped at ₹15,000 or one-third of the pension received, whichever is lower.
Retirement planning also gets a boost. The employer's contribution to an employee's National Pension System (NPS) account under Section 80CCD(2) remains deductible, up to 14% of salary for government employees and 10% for others.
Terminal benefits also continue to be tax-efficient:
Gratuity
Exempt up to ₹20 Lakh (non-govt) or fully exempt (govt).
Leave Encashment
Exempt up to ₹25 Lakh (non-govt) or fully exempt (govt).
Voluntary Retirement Scheme (VRS)
Compensation received is exempt up to ₹5 Lakh.
Provident & Superannuation Funds
Payouts from recognized funds are exempt under various sections.
Commuted Pension
Lumpsum amount is fully or partially exempt depending on employer type.
Special Exemptions for Armed Forces Personnel
The regime provides specific exemptions for armed forces personnel, acknowledging their service. This includes exemptions for disability pensions, family pensions in case of death during operational duty, and pensions received by winners of gallantry awards like the "Param Vir Chakra".
Navigating Allowances and Perquisites
While many allowances like HRA and LTA are not available, certain reimbursements for expenses incurred in the line of duty are still exempt. These include Travel, Tour, and Daily Allowances for official purposes, and Conveyance Allowance for work-related travel. Additionally, the Transport Allowance of up to ₹3,200 per month remains available for differently-abled persons.
Property, Capital Gains, and Investments
The new regime does not completely ignore income from assets and investments. For those earning rental income from a let-out property, a 30% ad-hoc Standard Deduction is still applicable. You can also deduct home loan interest paid against this rental income, though you cannot carry forward any losses.
On the capital gains front, the crucial exemptions under sections 54, 54B, 54D, 54EC, 54F, 54G, and 54GA for reinvesting gains are still available. The indexation benefit for calculating long-term capital gains from property sales also remains, protecting your gains from being eroded by inflation. For equity investors, long-term capital gains up to ₹1,25,000 under Section 112A remain tax-free.
Tax-Efficient Savings and Gifts
Several popular savings instruments retain their tax-exempt status on maturity. Interest and maturity proceeds from the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana are fully exempt. Maturity proceeds from LIC policies are also exempt, provided the annual premium does not exceed 10% of the sum assured. Further, interest from Post Office Savings accounts (up to ₹3,500) and tax-free bonds is also exempt.
The rules around gifts and inheritance are unchanged. Gifts from specified relatives and property received under a will or inheritance are fully exempt. Gifts from non-relatives are exempt up to ₹50,000 in a financial year, with a full exemption for gifts received on the occasion of marriage.
For Entrepreneurs: Business & Professional Deductions
The new regime is not just for individuals. Business owners and professionals can still claim depreciation under Section 32 and deductions for additional employee costs under Section 80JJAA. The simplified presumptive taxation schemes under sections 44AD, 44ADA, and 44AE also continue to be an option.
Miscellaneous but Mighty: Other Key Exemptions
A host of other exemptions remain, including contributions to the Agniveer Corpus Fund, income from agriculture, compensation received for disasters, and scholarships granted to meet education costs.
In Conclusion, while the New Tax Regime is the default option and appears simpler on the surface, it is far from being devoid of tax-planning opportunities. Taxpayers, especially those in the salaried class, still have access to a wide array of deductions and exemptions. A thorough understanding of these 45+ provisions is essential to making an informed decision and ensuring you are not leaving any money on the table.