The Indian Income Tax Act offers various deductions to reduce taxpayers’ taxable income. However, with the introduction of the new tax regime under Section 115BAC, which became effective from the financial year 2020-21, taxpayers are presented with a choice between the old tax regime with deductions and exemptions and the new tax regime with lower tax rates but without most deductions. This blog will outline the key deductions available (or not) under the new tax regime.
Overview of the New Tax Regime
The new tax regime offers reduced tax rates across various income slabs, which are as follows:
| Income Tax Slabs (Rs.) | Tax Rate |
| Up to Rs. 3,00,000 | Nil |
| Rs. 3,00,001 to Rs. 6,00,000 | 5% |
| Rs. 6,00,001 to Rs. 9,00,000 | 10% |
| Rs. 9,00,001 to Rs. 12,00,000 | 15% |
| Rs. 9,00,001 to Rs. 15,00,000 | 20% |
| Above Rs. 15,00,000 | 30% |
Deductions Available Under the New Tax Regime
Despite the removal of most deductions, there are still a few that taxpayers can claim under the new regime:
1. Employer’s Contribution to NPS: Employer’s contribution to the National Pension System (NPS) under Section 80CCD(2) is allowed. The deduction is available up to 10% of the employee’s salary (basic salary plus dearness allowance).
2. Retirement Benefits: Standard exemptions related to retirement benefits, such as gratuity (up to Rs.20 lakh) and leave encashment (as follows), remain available.
- Leave encashment received by government employees at retirement is fully exempt from tax under Section 10(10AA)(i) of the Income Tax Act.
- Leave encashment received by non-government employees is taxable, but certain exemptions are available under Section 10(10AA)(ii). The least of the following is exempt from tax:
- The actual amount of leave encashment received.
- ₹3,00,000 (maximum limit set by the government).
- 10 months’ average salary (salary includes basic salary, dearness allowance, and commission based on a fixed percentage of turnover achieved by the employee).
- The salary for the leave period is calculated on the basis of the maximum leave entitlement of 30 days for every year of service rendered to the employer.
- The actual amount of leave encashment received.
3. Agricultural Income: Exemptions related to agricultural income remain intact.
4. Standard Deduction for Family Pension: The family pension allows a deduction of ₹15,000 or one-third of such income, whichever is lower.
Choosing the Right Regime
Taxpayers must carefully evaluate their financial situation and the benefits of each regime. The new tax regime might benefit individuals who do not have significant investments or expenditures that qualify for deductions under the old regime. Conversely, those with substantial qualifying investments and expenses might find the old regime more advantageous despite higher tax rates.
Conclusion
The new tax regime under Section 115BAC offers a simplified tax structure with lower tax rates but at the cost of most deductions and exemptions. Taxpayers should thoroughly analyze their income, expenses, and investment patterns to choose the regime that maximizes their tax savings.