New Delhi: A common perception among taxpayers is that the new tax regime falls short on deductions compared to the old system. Under the old regime, individuals could claim benefits under Section 80C for instruments such as EPF, PPF, and ELSS, under Section 80D for health insurance premiums, and under Section 24(b) for interest paid on home loans.
While it is true that the new regime offers fewer deductions, its lower tax rates combined with a set of targeted benefits continue to make it a viable and attractive option for a large number of salaried individuals.
Rebate Under Section 87A
The new tax regime provides a tax rebate of up to Rs 60,000 under Section 87A of the Income Tax Act, 1961. As a result of this rebate, individuals with an annual income of up to Rs 12 lakh in a financial year may have no income tax liability at all a provision that makes the new regime particularly appealing to middle-income earners.
Standard Deduction
Salaried employees are entitled to a standard deduction of Rs 75,000 under the new tax regime, which directly reduces their taxable income. When factored into the calculations alongside the Section 87A rebate, income of up to Rs 12.75 lakh can effectively become tax-free. This benefit plays a meaningful role in lowering the overall tax burden for salaried professionals.
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Employer’s NPS Contribution Under Section 80CCD(2)
Contributions made by an employer to an employee’s National Pension System (NPS) account are eligible for a tax deduction under Section 80CCD(2). This deduction is generally permitted up to 10 percent of the employee’s salary, and in certain cases up to 14 percent. Since this employer contribution is deducted from taxable income, it further reduces the total tax outgo.
Gratuity Under Section 10(10)
Gratuity the lump sum paid to an employee upon retirement or completion of service also carries tax advantages under the new regime. Government employees receive full exemption on their gratuity amount, while private sector employees are entitled to a tax-free gratuity of up to Rs 20 lakh, subject to applicable government guidelines.
Leave Encashment Under Section 10(10AA)
Leave encashment refers to the payment an employee receives for accumulated unused leave at the time of retirement. Under the new tax regime, this amount is also exempt from tax up to a prescribed limit, providing additional financial relief to employees at the point of retirement.
In sum, while the new tax regime may offer fewer deduction avenues than its predecessor, its combination of lower tax rates and these specific exemptions makes it a compelling choice for a wide segment of taxpayers.
