A Detailed Guide on Deductions Available Under the New Income Tax Regime

tax deduction new policy — (Source: livemint.com)

The Union Budget 2020 presented a new tax regime under Section 115BAC. This new tax regime features more slabs with reduced tax rates. However, individuals need to forego the significant tax deductions and exemptions available under the old tax regime. Nevertheless, taxpayers are still allowed to continue with the old tax regime or avail the new one.

This article summarises the deductions available under the new income tax regime. So, the assessee willing to pay taxes under this new regime can continue reading.

Exemptions & Deductions Allowed Under the New Income Tax Regime

tax deduction slab — (Source: palankarta.com)

Here are the following exemptions and deductions available under the new income tax regime:

The employers' payment towards NPS, EPF and superannuation is exempted from being taxed. The maximum exemption limit is ₹ 7.5 lakhs. In the case of employers' contribution towards the superannuation account, the maximum exemption limit is ₹ 1.5 lakhs.
If the interest earned on the EPF scheme is not more than 9.5%, a taxpayer can claim tax exemption on it.
Employees receiving gratuity from their employer qualify to claim tax exemption up to a prescribed limit. However, there is no maximum limit for government employees to claim exemption on gratuity, while it is capped at ₹ 20 lakhs in the case of non-government employees. Moreover, gratuity received on employees' death is eligible for tax exemption without any limits.
According to Section 10(15) (i) of the Income Tax Act, taxpayers can claim exemptions on the interest accumulated on the post office savings account's balances. The maximum exemption limit is ₹ 3,500 and ₹ 7,000 for individual and joint accounts, respectively. However, in the new tax regime, interest earned from the post savings account and the bank is not eligible for tax exemption under Section 80 TTA. Only post office savings account holders can claim this exemption up to a specified limit.
As per the rules of the new tax income tax regime, an assessee cannot claim a deduction on the premiums of a life insurance policy. However, under Section 10(10D), the funds received from a life insurance company after the account's maturity qualify for tax exemption.
The contributions towards the PPF account are not valid for exemptions under the new tax regime. However, the interest and maturity amount received from the Sukanya Samridhi Yojana and PPF are exempted from being taxed.
The maturity amount earned from the NPS account is eligible for tax exemption under the new tax regime. However, in the new tax regime, only employers' contributions towards employees' NPS accounts qualify for tax deduction under Section 80CCD (2) instead of employees' payments made towards their own NPS account. Moreover, payments received at the time of closing the NPS account and partial withdrawals up to a specific limit are valid for tax exemptions.
Non-government employees can enjoy tax exemption on leave encashment up to a maximum of ₹ 3 lakhs.
If an assessee chooses to take voluntary retirement, he or she can claim tax exemption on the monetary benefits he receives up to ₹ 5 lakhs.
Employees receiving gifts from employers up to ₹ 5,000 remain tax-free in the new and old tax regimes.
Reimbursements covering the travelling cost, regular expenditures on transfer, tour and conveyance allowances for performing official duties are eligible for tax exemption.
If a non-government employee receives gratuity, one-third of their commuted pension is eligible for tax exemption. However, if an employee does not get the gratuity, only half of their commuted pension is valid for tax exemption.
As per the Section 80 JJAA, additional cost incurred on an employee is eligible for deduction under the new tax regime.
Transport allowances covering the travelling cost of specially-abled individuals qualify for tax exemption.

Exemptions & Deductions That Are Not Allowed Under the New Income Tax Regime

Here are the following earnings against which individuals cannot claim exemptions and deductions under the new income tax regime:

Leave travel and house rent allowances.
Special allowances as mentioned in Rule 2BB, including hostel allowances, children's education allowance, uniform, transport and per diem allowances
Allowances provided to MLAs and MPs
Allowances which are granted for clubbing a minor's income
Tax exemptions available for Special Economic Zone based on Section 10 AA
Tax deductions available on entertainment allowances, professional or employment tax as mentioned in Section 16
Deductions on interest paid towards a housing loan for a vacant or self-occupied property. Moreover, taxpayers cannot adjust the deduction amount with the income earned.
Deductions on rental income arising from a property
Additional depreciation applicable under Section 32(1)(iia)
Tax deductions available under sections 33AB, 32AD, and 33ABA
Deductions available on expenditure incurred on scientific research or donation as mentioned in sub-clause (iia), sub-clause (iii), sub-clause (ii), of sub-section (2AA) or sub-section (1) of Section 35
Deduction as specified in Section 35CCC or 35AD
Tax deductions from pension received by a family as per the clause (iia) of section 57
Deductions as specified under Chapter VI-A such as Sections 80CCC, 80D, 80CCD, 80DDB, 80DD, 80EE, 80E, 80EEA, 80GG, 80EEB, 80G, 80IA, 80GGC, 80GGA, 80-IBA, 80-IAC, 80-IB, 80C, and 80-IAB.

How to Evaluate Income Tax Under the New Tax Regime?

Here's a simple example mentioned below that illustrates the calculation process of income tax in the new tax regime-

Suppose Mr Alok earns a gross taxable income of ₹ 18 lakhs in 2022-23. Moreover, his employer contributed ₹ 80,000 to his Tier- I NPS account, which is eligible for deduction under Section 80CCD (2). So, the calculation will be –

Particulars	Amount
Gross taxable income	₹ 18,00,000
Deduction available under Section 80CCD (2)	₹ 80,000
Net taxable income (₹ 18,00,000 - ₹ 80,000)	₹ 17,20,000

Now, Mr Alok needs to compute tax for each of the tax slabs of the new tax regime based on his net taxable income. To make it simpler, here is an example-

After deducting his employer's contribution towards his Tier-I NPS account as per Section 80CCD (2), his current net taxable income equals ₹ 17,20,000. So, this net taxable earning will be deducted from ₹ 2,50,000 as income up to ₹ 2,50,000 is tax-free. So, now his net taxable income is ₹ 14,70,000. At the same time, out of this net taxable income, ₹ 2,50,000 (deduction of ₹ 5,00,000 from ₹ 2.50,000) will be taxed at 5% and so on and so forth.

The calculation is illustrated below in a tabular format:

Tax Slabs	Net Taxable Income	Tax Amount (in ₹)
0 - ₹ 2,50,000	₹ 14,70,000 (₹ 17,20,000 - ₹ 2,50,000)	0
₹ 2,50,000 - ₹ 5,00,000 at 5%	₹ 12,20,000 (₹ 14,70,000 - ₹ 2,50,000)	₹ 12,500 (5% of ₹ 2,50,000)
₹ 5,00,000 - ₹ 7,50,000 at 10%	₹ 9,70,000 (₹ 12,20,000 - ₹ 2,50,000)	₹ 25,000 (10% of ₹ 2,50,000)
₹ 7,50,000 – ₹ 10,00,000 at 15%	₹ 7,20,000 (₹ 9,70,000 - ₹ 2,50,000)	₹ 37,500 (15% of the ₹ 2,50,000)
₹ 10,00,000 - ₹ 12,50,000 at 20%	₹ 4,70,000 (₹ 7,20,000 - ₹ 2,50,000)	₹ 50,000 (20% of ₹ 2,50,000)
₹ 12,50,0000 - ₹ 15,00,000 at 25%	₹ 2,20,000 (₹ 4,70,000 – ₹ 2,50,000)	₹ 62,500 (25% of ₹ 2,50,000)
More than ₹ 15,00,000 at 30%	-	₹ 66,000 (30% of ₹ 2,20,000)
Total tax payments	-	₹ 2,53,500
Total tax payments after adding cess of 4% (₹ 2,53,000 of 4% = ₹ 10,120)	-	₹ 2,63,120

So, Mr Alok's total tax liability in FY 2022-23 is ₹ 2,63,120.

How to Claim Tax Deduction Under the New Income Tax Regime?

Taxpayers need to provide details of deductions while filing tax returns. Under the new tax regime, individuals earning from a profession or a business must file their taxes through Form 10IE. On the other hand, taxpayers earning incomes other than business need to file tax returns through ITR 1 or ITR 2.

So, this is all about the deductions available under the new income tax regime and other related information. Knowing about such details will assist individuals in determining their total tax liabilities and deductions under the new tax regime.

Frequently Asked Questions

All

Is standard deduction available under the new tax regime?

No, salaried individuals cannot claim a standard deduction of ₹ 50,000 if they opt to pay taxes under the new tax regime.

Can a taxpayer claim deduction on interest paid towards an education loan under the new tax regime?

No, taxpayers cannot claim a tax deduction on the interest paid towards an education loan if they choose to pay taxes under the new tax regime.