When you consider switching to the new tax regime, several questions may arise, such as “Is the standard deduction available under the new regime?” Although the Interim Budget 2024 did not introduce additional tax changes, the 2023 Union Budget removed several exemptions from the new tax regime. Despite that, certain deductions and exemptions remain available if you opt for this scheme. Read on for a clear overview of what is still allowed and how to decide which regime suits you best.
What is the New Tax Regime?
The new tax regime, introduced in the Union Budget 2020, offers concessional tax rates with simpler slab structure and fewer exemptions compared with the old regime. Key points:
- The new tax slabs were designed to reduce tax burden for some taxpayers by offering lower rates across income ranges.
- Taxpayers who choose the new regime generally forgo many of the deductions and exemptions available under the old regime.
- The basic exemption limit was revised to ₹3 lakhs from the earlier ₹2.5 lakhs.
- The annual income threshold for eligibility for a tax rebate was increased from ₹5 lakhs to ₹7 lakhs.
Deductions Available Under the New Tax Regime
The new regime retains several specific deductions and exemptions. The primary allowances you can still claim include:
- Standard deduction available to salaried individuals up to ₹50,000 (under relevant provisions).
- Exemption on employer contributions to recognised provident funds, National Pension System (NPS) and similar retirement accounts, subject to specified limits (aggregate cap applicable).
- Partial tax-free withdrawals from NPS: up to 60% of the corpus on exit is tax-exempt in specified cases, and partial withdrawals up to 25% from self-contributions may be tax-free under conditions.
- Family pension standard deduction: 1/3rd of the pension or ₹15,000, whichever is lower.
- Interest earned on certain recognised provident funds and Public Provident Fund (PPF) continues to be tax-exempt within prescribed limits.
- Exemption on gratuity receipts up to specified limits (for both government and non-government employees, subject to applicable ceilings).
- Maturity proceeds from life insurance policies remain exempt where the premium and policy conditions meet legal thresholds.
- Amounts received on voluntary retirement and certain leave encashment payments are eligible for exemption subject to limits and conditions.
- Exemptions for specified travel and conveyance allowances remain applicable as per provisions.
- Contributions to the Agniveer Corpus Fund under section 80CCH are eligible for deduction where applicable.
- Interest on a home loan for a let-out property can be claimed as a deduction under the rules that govern income from house property.
When choosing between the new and old regimes, compute your tax liability under both systems to determine which yields lower tax. If you opt for the new regime, ensure you select “yes” for the question “Are you opting for the new tax regime u/s 115BAC?” when filing your return.
FAQs on Deductions Allowed Under the New Tax Regime
Are any deductions allowed in the new tax regime?
Yes. Although the new regime limits many of the deductions available in the old regime, several specific deductions continue to be allowed. Common examples include:
- Standard deduction up to ₹50,000 for salaried individuals.
- Interest on home loan for let-out property claimed according to the provisions governing income from house property.
- Family pension deduction (1/3rd of pension or ₹15,000, whichever is lower).
- Contributions to the Agniveer Corpus Fund where eligible under section 80CCH.
Is professional tax deduction allowed in the new tax regime?
No. Professional tax is not a deduction specific to the new tax regime. Under the old regime, professional tax may be claimed up to the limits set by state laws (commonly up to ₹2,400 in many cases), but it does not apply as a separate deduction in the new regime.
Which is better, the old or the new tax regime?
The better option depends on your individual tax profile, mainly the total value of deductions and exemptions you can claim under the old regime. General guidance:
- If your total deductions and exemptions are less than ₹1.5 lakhs, the new regime may be more beneficial.
- If your total deductions fall between roughly ₹1.5 lakhs and ₹3.75 lakhs, either regime might suit you depending on income and specific exemptions.
- If your total deductions exceed approximately ₹3.75 lakhs, the old regime often provides greater tax savings.
- Always calculate your tax liability under both regimes before deciding.
What are the tax benefits of the new tax regime?
The new tax regime’s benefits are mainly simpler slabs and lower tax rates for certain income ranges. Specific tax benefits and allowances that continue to apply include:
- Standard deduction (up to ₹50,000 for salaried taxpayers where applicable).
- Certain transport and conveyance allowances as permitted.
- Exemptions on gratuity, leave encashment and specified voluntary retirement receipts subject to limits and conditions.
- Interest deduction on home loans for let-out properties as per income-from-house-property rules.
- Specified exemptions for gifts received from relatives or family within allowed amounts under existing provisions.
Carefully review your income sources, investments and eligible deductions to determine which regime best minimizes your tax. If necessary, consult a tax professional or use tax calculators to compare liabilities under both regimes for an informed decision.