Deductions allowed under the New Tax Regime

Deductions allowed under the New Tax Regime. Every year, governments worldwide make amendments to their tax regulations, aiming to streamline the tax structure and maximize revenue generation. The article focuses on the key deductions in the new tax regime. The aim of the article is to provide a comprehensive overview of the changes and insights to taxpayers seeking a better understanding of tax exemptions within the new tax landscape.

Table of Contents

The New Tax Regime 

It was first included in the 2020 Union Budget. With its introduction, a new era of a dual tax system with new income tax rates and slabs was inaugurated. The old and new tax regimes are the two options available to Hindu Undivided Families (HUFs) and individuals. It should be noted that corporations are exempted from taking advantage of the new tax regime.

Here, the taxpayers can only select any of the two tax regimes. After selecting any one of them, they can file income tax returns for the current fiscal year 2022–2023. After all, the taxpayer must select a tax regime for the entire fiscal year once their choice of tax regime has been approved. The taxpayer can alter their choice of tax system only in the next year.

List of the Deductions Permitted Under the New Tax Regime

Some exemptions under the new tax regime are still permitted, despite the fact that the majority of new regime tax deductions and exemptions have been eliminated.

Let’s quickly review the deductions in a new tax regime that are available:

• Section 80 CCD(2) deduction

Under the new tax regime deduction, salaried people are eligible for this. They are eligible to deduct the employer’s pension plan contribution. 10% of a private sector employee’s compensation (base salary plus dearness allowance) may be claimed. According to this part of Section 80CCD, of the Income Tax Act, 1961 the new tax regime deduction for employees of the public sector is up to 14% of base pay plus dearness allowance.

• Sukanya Samriddhi Yojana and PPF Interest and Maturity Amount

Interest payout and maturity money received from investments like the Public Provident Fund and Sukanya Samriddhi Yojana are also exempt from being taxed under the new tax system.

• Benefits of Section 10 (10D)

According to Section 10 (10D) of the Income Tax Act, 1961 all life insurance payouts received by the taxpayer are exempt from tax under both the new and old tax regimes.

• Retirement Leave Encashment

Salaried individuals who make use of their accrued leave balance upon retirement are exempt from taxation under Section 115 BAC.

• Standard Deduction

As part of the Budget 2023 announcement, the standard deduction of Rs. 50,000 was increased to apply to the new tax regime beginning in FY 2023–2024 (AY 24–25). HUF and other people who select to forego the new tax system in FY 2022-23 (AY 2023-24) are not eligible for this deduction or incentive. The standard Deductions allowed under the New Tax Regime  is the same under both the new and old tax regimes as a result of the modification made in Budget 2023.

• Proceeds from Voluntary Retirement Schemes

Under the new tax system, voluntary retirement scheme (VRS) proceeds up to Rs. 5 lakh are not subject to taxation.

• Gratuity Payments

Under the new tax system, payments made in place of gratuities after five years or more of uninterrupted service are likewise exempt from taxation. The maximum tax-free gratuity payout is limited to Rs. 20 lakh during the taxpayer’s lifetime. 

• Employer Contribution to EPF

Employer contributions to EPF (Employee Provident Fund) can be up to 12% of Basic + Dearness Allowance and are also tax-free.

Also, read: Old vs. New Tax Regime in India: A Comprehensive Comparison

Typical Old Tax Regime Deductions Are Not Permitted Under the New Regime

As mentioned above, despite the numerous new tax regime deductions, Section 115BAC prohibits the use of a number of significant deductions. The following well-liked income tax deductions are no longer available under the new tax law for employees and self-employed people:

• • The deductions that are significant under Chapter VI A. Sections 80C, 80CCC, 80CCD, 80E, 80EEA, 80DD, 80DDB, 80G, and others are included in it.
  • The tax deductions for contributions to scientific research.
  • Leave Travel Allowance (LTA), Section 10(5).
  • Deduction under Section 80D for payments for health insurance.
  • Allowances under section 10(14): This clause is applicable when an employer performs duties outside of a typical office setting.
  • Deduction for home loan interest payments under Section 24(b).

• Section 10(13A) of the tax code permits an exemption for the House Rent Allowance (HRA).

• The deduction made under 57(iia) from the family pension.

There are approximately 70 distinct tax-saving investments and choices with various tax deduction limits that are not available under the new tax system, therefore the preceding list is not all-inclusive.

Also read: Your Guide to Income Tax Slab 2023-24

Winding Up Note

The key Deductions allowed under the New Tax Regime can significantly influence taxpayers’ financial planning and overall tax liability. It is important for businesses and individuals to acknowledge these deductions, ensuring they take full advantage of the opportunities provided. After understanding the deductions available under the new tax regime, taxpayers can optimize their financial situation effectively. Keeping well-informed of any changes in the tax regime through regular updates and seeking professional advice when necessary is essential in navigating the complexities of the tax system.

In case of any query regarding Key Deductions Allowed Under the New Tax Regime, feel free to connect with our legal experts at Legal Window at 72407-51000.