Deductions Allowed In Tax Regime

Navigating the Maze: Deductions Allowed In Tax Regime

Introduced in the Union Budget 2020, the new tax regime launched an era of dual system of taxes for individuals and Hindu Undivided Families (HUFs). With new tax slabs and rates, individuals can opt for either of the two methods in place, i.e. old and new tax regimes. However, once you choose either of the two methods, the taxpayer will have to stick to the chosen regime for that financial year.

Tax season can be a daunting time for taxpayers who want to maximize their deductions. New tax regime deductions are expenses that you can subtract from your taxable income. It effectively reduces the amount of income taxes you pay, thus lowering your tax liability. Think of it as chipping away at your taxable income.

Not all expenses qualify as deduction allowed in new tax regime, numerous deductions are available under various sections of the tax code. While most deductions and exemptions have been discontinued, some deductions allowed in new tax regime include HRA, LTA, 80C, 80D, and more.

Understanding the deductions in your specific tax regime is crucial to minimizing tax burden and saving your hard-earned money.

List of Deductions Allowed In New Tax Regime

Let’s look into some of the deductions and exemptions that are still allowed:

Deduction under Section 80 CCD(2): This deduction applies to salaried individuals as they can claim a deduction for the employer’s contribution to the pension scheme. Employees working in the private sector can claim 10% of their salary. Under the subsection of Section 80CCD, the new tax regime deductions for government employees is up to 14% of basic salary + dearness allowance.

• - Standard Deductions: Budget 2023 has extended the standard deduction of Rs. 50000 to the new tax regime for FY 2023-24 onwards. With this, the benefit from standard deduction remains the same under new and old tax regimes.

• - Gratuity: Gratuity payouts i.e. the amount paid on completion of 5 years or more of continuous service is a deduction under new tax regime. The limit for gratuity that is tax-free is Rs. 20 lakhs during the lifetime of a taxpayer. Gratuity paid on the death of a taxpayer is fully exempted.

• - Leave encashment: Section 115 BAC, allows non-government employees to use leave encashment as tax exemption. This income is not taxable up to a limit of Rs. 3 lakhs.

• - Public Provident Fund (PPF) and Sukanya Samriddhi Account earnings: The interests earned and maturity amounts received from both these schemes are tax exempted.

• - EPF Contribution by Employer: Employer contribution to Employee Provident Fund (EPF) which is up to 12% of basic and dearness allowance is a deduction available in new tax regime. The exemption applies to a maximum contribution of Rs. 7.5 lakhs annually for all such accounts.

• - Amount withdrawn from NPS: An amount withdrawn up to 60% of your NOS account balance at maturity is tax deductible. Partial withdrawals of up to 25% of your self-contribution are tax-free.

• - Voluntary Retirement Scheme (VRS) Proceeds: VRS proceeds of up to Rs. 5lakhs are exempted from tax.

• - Allowances for Official Duties: The permissible deductions in the new tax regime include; transport allowances for specially-abled individuals, allowances to cover transportation costs, compensations for travel expenses from official tours, and daily allowances.

Choosing Between Old & New Tax Regime

There are many new tax regime deductions, however, several major deductions from the old tax regime are not allowed in the new tax regime. These include:

• - Section 80D deduction for health insurance payment

• - Section 24 (b) deduction for interest paid on home loan

• - Section 10 (5) Leave Travel Allowance (LTA)

• - Deduction from family pension under 57 (iia)

• - House Rent Allowance (HRA) under section 10 (13A)

*If gross total income is less than R.s 7.5 lakhs or Rs. 10 lakhs any tax regime can be followed. For gross total income Rs. 8 to 9 lakhs, old tax regime shall be beneficial and for gross total income above Rs. 10 lakhs, the new tax regime will be beneficial.

The government introduced the new tax regime to simplify calculations and reduce tax burden on Indian taxpayers. Taxpayers can select from either of the two tax regimes for efficient tax planning. While choosing two tax regimes consider the two main parameters; the tax exemption you currently avail, and the deduction you currently claim.

Exemptions You Currently Avail

You will loose exemptions under the new tax regime if your taxable income includes;

• - HRA (if you are living in rented accommodation)

• - Food coupons

• - Leave allowance, and

• - Compensation for phone bills.

Deductions You Already Claim

The new tax regie excludes the following:

• - Home loan EMI for self-occupied property

• - 80C investments like life insurance premiums

• - 80D investments like health insurance premiums

Calculations For Taxpayers

Taxpayers should find out the total amount of exemptions and deductions to avail. Subtract it from the income and calculate the tax payable under the old regime.

Further, taxpayers can compute taxable income without claiming such benefits. Compute the tax payable as per the new tax rates.

Taxpayers can compare the tax amounts to make a wise decision. For better understanding, it is advised that taxpayers use the comparison tool available on the official website of the income tax department.

Remember, not to make your investment decisions solely based on tax savings. For instance, the old tax regime is appropriate for life insurance policyholders as tax deductions will translate to greater savings. While life insurance does provide tax savings, it should not be the only reason for this investment.

FAQs

Is there any exemption in the new tax regime?

There are many exemptions in the new tax regime. However, taxpayers will have to forego 70 deductions in the new tax regime if they choose the new tax regime over the old one.

Is interest deduction allowed in the new tax regime?

Yes, homeowners can claim a deduction for interest on home loan under the new tax regime if the said home is put on rent. The deduction for interest paid on home loan if restricted to Rs. 2 lakhs in case of self-occupied property.

What are the benefits of new tax regime?

The government introduced the new tax regime to reduce the tax burden for taxpayers. While this new tax regime simplified the tax laws, it also removed the complicated calculations of the deduction percentages. Moreover, the new tax regime helps to save on taxes on long-term investments too.

Can we claim 80C and 80D in new tax regime?

Deductions under new tax regime including the popular ones like 80C (for investments), 80D (for medical insurance premiums), and 80E (for education loan interest) are no longer allowed.

What is the Section 10 exemption in the new tax regime?

Certain exemptions are considered special allowances under Section 10 of the Income Tax Act. These exemptions are granted to specific individuals who are high court judges, UNO employees, Supreme Court and High Court judges entitled to receive Sumptuary Allowance, and Indian citizens working as government employees outside India.