What Are the Key Deductions Allowed Under the New Tax Regime?

It was introduced in the Union Budget 2020. With its launch, an era of dual system of tax was introduced with new income tax slabs and rates. Hindu Undivided Families (HUFs) and individuals can opt for either of the two methods in place, i.e., the old and new tax regimes. However, corporations and other non-individual tax payers are not allowed to avail the new tax regime.

For the current fiscal year 2022-23, taxpayers can choose to pick any of the two tax systems to file income tax returns. But once the choice of tax regime has been confirmed, the tax payer will have to the stick to the chosen regime for the financial year. However, the taxpayer can change the choice of tax regime in the subsequent year.

While most new regime tax deductions and exemptions have been discontinued, some exemptions under the new tax regime are still allowed.

Let's take a quick look at the available new tax regime deductions:

•  Deduction under Section 80 CCD(2): This deduction under the new tax regime applies to salaried individuals. They can claim a deduction for the employer's contribution to the pension scheme. Employees in the private sector can claim 10% of their salary (basic salary+ dearness allowance). The new tax regime deduction allowed for government sector employees in this section is up to 14% of basic + dearness allowance under this subsection of Section 80CCD.
•  EPF Contribution by Employer: Employer contribution to EPF (Employee Provident Fund) which is up to 12% of Basic + Dearness allowance is also exempt from tax under the new tax regime.
•  Section 10 (10D) Benefits: Any life insurance pay outs received by the tax payer are exempt from tax under both the new and old tax regime as per Section 10 (10D) of the Income Tax Act.
•  Gratuity Pay outs: Pay outs received in lieu of gratuity on completion of 5 years or more of continuous service are also exempt from tax under the new tax regime. The limit for tax free gratuity pay-out is Rs. 20 lakh during the tax payer’s lifetime.
•  Leave Encashment on Retirement: Salaried individuals who encash accrued leave balance at retirement do not have to pay tax on the payout received u/s 115 BAC
•  Interest and Maturity Amount from PPF and Sukanya Samriddhi Yojana: Interest pay out and maturity amount received from investments like Public Provident Fund and Sukanya Samriddhi Yojana are also not taxable under the new tax regime.
•  Voluntary Retirement Scheme Proceeds: Voluntary Retirement Scheme (VRS) proceeds of up to Rs. 5 lakh are exempt from tax under the new tax regime.
•  Standard Deduction: Budget 2023 announcement has extended the standard deduction of ₹50,000 to the new tax regime for FY 2023-24 (AY 24-25) onwards. However, this benefit is not available for individuals and HUF who have opted from the new tax regime in FY 2022-23 (AY 2023-24). As a result of this change introduced in Budget 2023, standard deduction benefit is the same under both the new and old tax regime.

As you can see from the above list, the tax deduction options offered by the new tax regime are comparatively less as compared to the old regime. So, let’s take a closer look at the various tax deductions you will have to forego if you opt for the new tax regime and its lower slab rates.

As discussed above, despite the many new tax regime deductions, several major deductions are not allowed under Section 115BAC. Here are popular tax saving options and income tax deductions for salaried and self-employed individuals that you cannot avail under the new tax regime:

• Significant deductions under chapter VI A. It includes Section 80C, 80CCC, 80CCD, Section 80E, 80EEA, 80DD, 80DDB, 80G and others.
•  Section 80D deduction for health insurance payment and
•  Section 24(b) deduction for home loan interest payment.
•  House Rent Allowance (HRA) under section 10(13A): Exemption on taxes is allowed under the section.
• Allowances under section 10(14): The section applies when the employer is performing duty out of regular office space.
• Deduction from family pension under 57(iia).
• Section 10 (5) Leave Travel Allowance (LTA).
• Deduction for donation towards scientific research.

The above list is not exhaustive as there are a total of around 70 tax saving investments and options with different tax deduction limits that are unavailable under the new tax regime.