How to Maximize Tax Savings Under New Tax Regime

Introduction

As we all know, the government by finance act introduced this “new tax system” for making tax filing easier and in this it reduced tax rates as well as tax slabs, but on darker side it also removed many tax benefits that people used before like section 80C, HRA etc. Even though these changes took place, still some deductions are available now also, which can be used by assessee or a taxpayer to save tax, hence, here we should appropriately plan the tax and avoid evading them or using unfair means.

For the year 2024-25, around 72% of taxpayers chose the new tax regime over old one. Out of 7.28 crore tax returns filed, 5.27 crore were under the new system, while 2.01 crore were under the old system. Many people like the new system because of its lower tax rates and higher rebates, but it removes many deductions like House Rent Allowance, Leave Travel Allowance, and Section 80C benefits. This means people need to find new ways to save tax.

Even though the new system removed many deductions, three important tax-saving options still remain. Let’s look at them one by one.

1. Standard Deduction

One of the biggest benefits under the new tax system is the standard deduction. Earlier, taxpayers could claim Rs 50,000, but now the government has increased this to Rs 75,000 for salaried employees and pensioners starting from 2024-25.

Salaried employees who receive a regular salary as well as pensioners who receive a pension after retirement, can use the benefit of standard deduction.

Why is it useful?

As it directly reduces taxable income without needing any specific investment, also it applies automatically when tax returns are been filed, and thirdly unlike other deductions, you don’t have to spend any amount of money to be eligible to claim this benefit.

For example, if a person earns Rs 10 lakh per year, the taxable income reduces to Rs 9.25 lakh after this deduction, helping them save tax.

2. Employer’s Contribution to NPS

As per the Section 80CCD(2) of Income tax act, an employer’s contribution to an employee’s National Pension System account is tax-free up-to INR 50,000 per year, This can help you save more money for future, as well as saves tax.

Salaried employees whose employers contribute to their NPS account will be benefited from this deduction.

Why is It useful?

Employers can contribute up to 10% of an employee’s basic salary and dearness allowance (DA) towards the National Pension System (NPS), which has been increased to 14% as per the Finance Act, 2025. This employer contribution remains tax-exempt up to a limit of INR 50,000. For government employees, the tax-free employer contribution continues to be up to 14%. However, individual contributions to NPS, which were previously eligible for deduction under Section 80C, will no longer qualify for tax benefits under the new tax regime. Notably, the employer’s contribution remains tax-exempt.

For example, if an employee’s salary and DA total Rs 10 lakh per year, the employer can contribute up to Rs 1.4 lakh, out of which 0.5 lakhs is completely tax free.

3. Tax-Free Gratuity and Retirement Benefits

Retirement benefits like gratuity and Voluntary Retirement Scheme money are still tax-free under the new tax system.

Gratuity Exemption (Section 10(10)) states that in case you receive any amount as gratuity at the time you retire or leave a job, you are not required to pay tax on it, but up to a certain limit, currently the tax-free limit is Rs 20 lakh for private-sector employees, and for government employees, the entire gratuity amount is completely tax-free.

Leave Encashment (Section 10(10AA)) states that if you don’t use all your leave days and your company pays you for them, you can claim a tax exemption, but here the maximum tax-free limit is Rs 25 lakh for private-sector employees and for government employees, the entire amount is completely tax-free.

Voluntary Retirement Scheme (VRS) (Section 10(10C)) states that in case you take early retirement, you can get up to Rs 5 lakh tax-free under this section.

What are the minimum deductions required for old tax regime to be beneficial?

The following table shows the minimum deductions required for the old tax regime to be more beneficial than the new regime. If a taxpayer’s deductions exceed these values, the old regime is better or else, the new regime is preferable.

Let us analyse the break-even deductions

Understanding Break-even Point (BEP): The table shows the minimum deductions needed to make the old tax regime more beneficial than the new one. If actual deductions exceed these values, the old tax regime is better; otherwise, the new tax regime should be chosen.

Progressive Trend: As income increases, the break-even deduction threshold also rises.

For example, at an income of Rs 13 lakh, the required deductions are Rs 4,87,500. At Rs 24 lakh and above, the required deductions increase to Rs 7,75,000, This means higher-income individuals need substantial deductions for the old regime to be advantageous.

Strategic Tax Planning: High-income individuals should evaluate their deductions (such as HRA, 80C, 80D, home loan interest, etc.) to determine whether the old regime is beneficial. If deductions are lower than the break-even point, the new tax regime is the better choice.

Policy Implications: The new tax regime provides a simpler tax structure with lower tax rates but removes multiple exemptions and deductions. By comparing actual deductions with the break-even points, taxpayers can make informed decisions.

How these deductions in new regime help you to save more taxes?

Even though the new tax system removed many deductions, these three benefits can still reduce your tax burden. Let’s compare two employees with a Rs 15 lakh annual salary:

Conclusion

The new tax system removes many common deductions, but you can still save tax by using the standard deduction of Rs 75,000, getting tax-free employer contributions to NPS under Section 80CCD(2) or by taking advantage of tax-free retirement benefits like gratuity and leave encashment, By using these tax-saving options and comparing deductions with break-even points, taxpayers can make the best financial decision.

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Author can be contacted at aman.rajput@mail.ca.in