Deductions available under New Tax Regime for FY 2025-26

Let’s talk about the new tax regime for Financial Year 2025-26 (which corresponds to Assessment Year 2026-27). If you’ve been grappling with the choice between the old and new tax regimes, you’re not alone. The new tax regime, introduced to simplify taxation with lower rates, comes with a trade-off: fewer deductions. However, for FY 2025-26, there are some significant updates that make it even more appealing for many taxpayers.

The core philosophy of the new regime is “simpler, lower tax rates, fewer deductions.” It’s designed for those who prefer not to bother with a myriad of tax-saving investments and expenditures.

The Big Picture for FY 2025-26: More Attractive Than Ever

The Union Budget 2025 has brought some notable changes to the new tax regime, aiming to make it the preferred choice for a wider segment of taxpayers. Here’s what you need to know:

1. Increased Basic Exemption Limit: For FY 2025-26, the basic exemption limit under the new tax regime has been increased. This means a larger portion of your income is entirely tax-free.

2. Boosted Rebate Under Section 87A: This is a game-changer! The rebate under Section 87A for the new tax regime has been significantly increased. This means that individuals with a net taxable income up to a certain threshold will pay zero income tax. For FY 2025-26, this threshold has been raised to ₹12 lakh. So, if your total taxable income is up to ₹12 lakh, you effectively pay no tax.

3. Enhanced Standard Deduction for Salaried Individuals: Great news for salaried folks! The standard deduction for salaried individuals and pensioners under the new tax regime has been increased to ₹75,000. This is a direct reduction from your gross salary before calculating tax, making up to ₹12.75 lakh (₹12 lakh rebate limit + ₹75,000 standard deduction) effectively tax-free for many.

What Deductions ARE Still Available?

While the new regime largely strips away many popular deductions (like those under Section 80C, 80D, HRA, LTA, home loan interest on self-occupied property, etc.), it’s not entirely devoid of tax benefits. Here are the key deductions and exemptions you can still claim in the new tax regime for FY 2025-26:

• Standard Deduction (for Salaried/Pensioners): As mentioned, a flat ₹75,000 can be claimed from your salary or pension income. This is a significant direct benefit.
• Employer’s Contribution to NPS (Section 80CCD(2)): If your employer contributes to your National Pension System (NPS) Tier-I account, you can still claim a deduction for this contribution. The limit has been increased to 14% of your basic salary (Basic + Dearness Allowance) for central government employees, and continues to be 10% for others. This is a powerful, often overlooked, benefit.
• Agniveer Corpus Fund (Section 80CCH): Contributions made to the Agniveer Corpus Fund by individuals enrolled in the Agnipath Scheme are deductible.
• Transport Allowance for Differently-Abled Employees: Specific transport allowances provided to employees who are blind or orthopedically handicapped are still exempt.
• Conveyance Allowance: Any allowance granted to meet expenditure incurred on conveyance in the performance of duties of an office or employment.
• Travel Allowance: Allowances for meeting the cost of travel on tour or transfer.
• Daily Allowance: Allowances to meet ordinary daily charges incurred by an employee on account of absence from their normal place of duty.
• Exemption on Voluntary Retirement (Section 10(10C)): Amounts received on voluntary retirement or separation are exempt up to a specified limit.
• Gratuity (Section 10(10)): Certain gratuity payments are exempt from tax.
• Leave Encashment (Section 10(10AA)): Leave encashment at the time of retirement or superannuation, up to a certain limit, remains exempt.
• Interest on Home Loan (for Let-Out Property): While interest on a home loan for a self-occupied property is not deductible, interest paid on a home loan for a let-out or deemed let-out property can still be deducted under Section 24(b). However, any loss from house property that is set off against other income is limited to ₹2 lakh, and any unadjusted loss cannot be carried forward.
• Deduction for Family Pension (Section 57(iia)): For individuals receiving family pension, a deduction of ₹25,000 or one-third of the pension received, whichever is less, is allowed.

What’s NOT Available (The Trade-Off):

This is where the new regime simplifies things by removing the need for specific investments or expenditures to save tax. The major deductions you cannot claim under the new regime include:

• Section 80C, 80CCC, 80CCD(1): No deductions for investments like PPF, EPF, ELSS, life insurance premiums, home loan principal repayment, tuition fees, etc.
• Section 80D: No deduction for health insurance premiums.
• Section 80E: No deduction for interest on education loans.
• Section 24(b) for Self-Occupied Property: No deduction for interest on housing loans for self-occupied or vacant property (unlike the old regime’s ₹2 lakh limit).
• House Rent Allowance (HRA): No exemption for HRA.
• Leave Travel Allowance (LTA): No exemption for LTA.
• Professional Tax and Entertainment Allowance: Not deductible for salaried employees.
• Other common Chapter VI-A deductions: Most deductions under sections like 80DD, 80DDB, 80G (donations), 80TTA/TTB (interest on savings/fixed deposits), etc., are not available.

Who Should Opt for the New Regime in FY 2025-26?

With the enhanced rebate and standard deduction, the new tax regime becomes significantly more attractive for:

• Individuals with lower to middle incomes: Especially those whose taxable income (after the standard deduction) is up to ₹12 lakh, as they will pay zero tax.
• Those who don’t utilize many tax-saving instruments: If you prefer not to lock your money into specific investments for tax benefits (like ELSS, PPF, etc.), the new regime offers a simpler, lower-tax option.
• Young professionals: Who might not yet have significant investments or home loans that yield large deductions under the old regime.
• Individuals receiving primarily salary income: And have limited avenues for claiming deductions.

The Bottom Line

For FY 2025-26, the new tax regime has undeniably become more taxpayer-friendly, particularly for those in the lower to middle-income brackets. It offers a simpler tax structure with reduced rates and a high effective tax-free income limit for many.

However, the choice between the old and new regime still boils down to your individual financial situation, income level, and existing investments/expenditures. It’s always a good idea to calculate your tax liability under both regimes before the financial year ends to see which one leaves more money in your pocket.

A quick consultation with a tax advisor can help you make the most informed decision for your unique circumstances! Contact NIRA Associates via mobile +918588900433 or email csniraassociates@gmail.com for getting your Tax planned professionally.