The new income tax regime comes with lower tax rates but allows fewer deductions than the old one. Still, you can reduce your tax outgo by using the deductions that are available, making the most of tax-free reimbursements, and taking advantage of the lower tax slabs. For FY 2025–26, after Budget 2025, a big relief has been introduced – salaried individuals earning up to Rs. 12.75 lakh will have zero tax liability. To make the most of this regime, it’s important to know the key strategies that can help you save more under the new rules.Understanding the basics of income tax
Budget 2025 updates
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, has introduced a fresh set of income tax slabs under the revised new tax regime, effective from 1 April 2025. A significant change is the enhanced rebate, which ensures that resident individuals with annual earnings up to Rs. 12,00,000 pay no tax at all. On top of this, salaried taxpayers are entitled to a standard deduction of Rs. 75,000, effectively pushing the tax-free threshold to Rs. 12,75,000. The restructured tax bands and reduced rates at higher incomes make the new framework more appealing and simpler to follow.
What is an income tax slab?
An income tax slab is a system where income is divided into ranges, each charged at progressively higher tax rates. This model ensures fairness, as individuals with greater earnings contribute a larger share of tax, while those with lower income pay less. The slab system avoids a flat tax, ensuring taxation is aligned with one’s capacity to pay. For FY 2025-26, the revised new regime has adjusted these slabs, offering relief particularly to middle-income earners. By linking tax liability directly to income levels, the government ensures both equity and efficiency in revenue collection.
Latest income tax slab after Budget 2025
The revised income tax slabs announced in Budget 2025 under the new regime are designed for clarity and higher take-home pay. The system is progressive, meaning the rate rises as income increases, while still ensuring relief for individuals with moderate earnings. Resident taxpayers enjoy complete tax exemption on income up to Rs. 12,00,000, thanks to the rebate. Combined with the standard deduction of Rs. 75,000, this makes the effective tax-free threshold Rs. 12,75,000.
Income range (Rs.) |
Tax rate (%) |
Up to 4,00,000 |
0% |
4,00,001 – 8,00,000 |
5% |
8,00,001 – 12,00,000 |
10% |
12,00,001 – 16,00,000 |
15% |
16,00,001 – 20,00,000 |
20% |
20,00,001 – 24,00,000 |
25% |
Above 24,00,000 |
30% |
Tax savings breakdown under the new regime
The new tax regime has shifted focus from multiple exemptions to reduced rates and a generous rebate, making tax planning simpler.
Earlier system
In the old regime, individuals had to rely heavily on deductions such as Section 80C or HRA, which required maintaining receipts and making specific investments to reduce taxable income.
Now
The updated regime removes most exemptions but balances this with lower tax rates and higher rebates. For instance, a resident earning Rs. 10,00,000 ends up with zero tax liability under the new framework, while under the old system, the same person could owe Rs. 72,500 without using deductions.
Exemptions and deductions available under the new tax regime
The new tax regime, introduced to simplify compliance, has reduced much of the paperwork and eliminated the need to juggle through a stack of proofs for deductions. It also gives individuals the freedom to invest money where they truly wish to, rather than being forced into specific instruments for tax benefits. That said, the urge to reduce one’s tax outgo still remains—and quite rightly so, since it is our hard-earned money at stake.
Many salaried professionals and taxpayers wonder whether there are still avenues to save tax under the new structure. The good news is that even though several traditional deductions (like Section 80C for investments) are not available here, a number of benefits still exist. These can help ease your tax liability while staying compliant with the rules. Let us explore some of the key exemptions and deductions that continue to be relevant in the new tax regime for FY 2025–26.
Employer’s contribution to PF and NPS
A large part of salaried individuals’ savings is linked to their provident fund (PF) and the National Pension System (NPS). Both continue to provide relief under the new regime.
For provident fund contributions, an employee contributes 12% of their basic salary, while the employer matches this with another 12%. For example, if your basic pay is Rs. 20,000 per month, you contribute Rs. 2,400, and your employer also adds Rs. 2,400. The important point to note is that the employer’s contribution is not taxed, provided the combined employer contribution to PF, NPS, and superannuation does not exceed Rs. 7.5 lakh in a financial year. This rule holds true under both the old and new regimes.
However, the employee’s share of 12% is counted as taxable income under the new regime (it was deductible under Section 80C in the old one).
Similarly, contributions made by the employer towards NPS under Section 80CCD(2) enjoy an exemption in both tax structures, subject to 14% of basic salary for central/state government employees and 10% for others, capped at Rs. 7.5 lakh annually. Using the earlier example of Rs. 20,000 basic salary, an employer’s 14% contribution would be Rs. 2,800 per month, or Rs. 33,600 for the year.
Employees who wish to take advantage of this benefit should request their HR or accounts department to include employer contributions towards NPS. Since such arrangements often cannot be made retroactively, it is wise to plan this at the start of the financial year.
Interest on home loan for let-out properties
Owning property financed through a loan can still help reduce your tax burden under Section 24(b) of the Income Tax Act. The interest component of your home loan for a let-out property is deductible from rental income, reducing the taxable amount.
When you pay a home loan EMI, it consists of two elements: principal repayment and interest payment. In the old regime, the principal portion was eligible for deduction under Section 80C, but that option does not exist in the new system. The interest, however, can still be claimed, though the benefit varies depending on whether the property is self-occupied or let out.
For self-occupied homes, interest up to Rs. 2 lakh per year can be claimed. Earlier, this benefit was limited to just one house, but after Budget 2025, the deduction now applies to two self-occupied properties.
For properties that are let out, the entire interest payable can be deducted from the rental income under both regimes. For instance, if your loan interest amounts to Rs. 2 lakh in FY25, and you rent out the property at Rs. 25,000 per month (Rs. 3 lakh annually), the calculation would look like this:
Gross rental income: Rs. 3,00,000
Less municipal taxes: Rs. 10,000
Net annual value: Rs. 2,90,000
Less standard deduction @30%: Rs. 87,000
Less loan interest: Rs. 2,00,000
Net taxable rental income: Rs. 3,000
Thus, after deductions, you only pay tax on Rs. 3,000. However, note that if this calculation results in a rental loss, the new regime does not allow you to set it off against other income, nor can it be carried forward.
If the property remains vacant, you can claim a nil annual value for up to two houses. But if you own more than two, the additional houses will be treated as ‘deemed let-out,’ and notional rent will be added to your taxable income. These nuances can be tricky, so consulting a tax professional is advisable in complex cases.
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Reimbursements from employers
Many organisations include reimbursements as part of employees’ cost-to-company (CTC) structure. These reimbursements, when claimed with proper bills, remain tax-free under the new regime as well.
Examples of such reimbursements include expenses for travel, fuel, driver’s salary, phone or internet bills, and even subscriptions to books or journals required for work. Since these are treated as business-related costs reimbursed by the employer, they are not taxed, provided you submit the necessary supporting documents.
It is important to remember that these benefits are not offered in addition to your salary; they are structured within your CTC. If you fail to provide proof, the reimbursed amount will simply be taxed as part of your income.
Employees should carefully review their appointment letter or salary breakup and discuss with HR to identify which reimbursements they are eligible for. By claiming them diligently, you can legally lower your taxable income without breaching any rules.
Other tax-saving options in the new regime
In addition to the main benefits discussed above, there are several other exemptions that may apply in specific circumstances. While these are not universal, they can still provide meaningful savings for eligible taxpayers.
Some examples include:
Deduction on family pension: One-third of the pension or Rs. 25,000, whichever is lower, is exempt.
Gift receipts: Non-taxable up to Rs. 50,000 in a year.
Gratuity: Exempt up to Rs. 20 lakh under Section 10(10).
Voluntary retirement benefits: Up to Rs. 5 lakh exempt under Section 10(10C).
Leave encashment: Exemption of up to Rs. 25 lakh at the time of leaving employment under Section 10(10AA).
Allowances for official tours, travel, or conveyance, including special transport allowances for differently-abled employees.
Daily allowance when working away from the usual place of duty.
Certain perquisites provided by the employer for work purposes—such as company-provided laptops, medical facilities, or interest-free salary loans.
These options may not apply to everyone, but if they are relevant to your employment or personal circumstances, they can significantly reduce your tax outgo under the new regime.
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Exemptions and deductions not available under new tax regime
While the new tax regime simplifies taxation, it comes at the cost of losing several widely used exemptions and deductions. Here are the key benefits no longer available:
Section 80C deductions (PPF, ELSS, life insurance, tuition fees, loan principal, etc.)
Section 80D (health insurance premiums for self, family, and parents)
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Child education allowance
Professional tax
Entertainment allowance for salaried employees
Interest on home loan for self-occupied or vacant properties
Helper allowance and other special allowances under Section 10(14)
Self-contributions to NPS
Deductions for donations (political parties, charitable trusts, etc.)
Deductions under Sections 80E (education loans), 80TTA/80TTB (savings interest), and more.
These exclusions mean that individuals who heavily invested in tax-saving schemes under the old regime may find their benefits reduced in the new system. However, the reduced rates and enhanced rebate offset this for many taxpayers.
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Tax calculation under new tax regime
Here’s an example to illustrate tax computation under the new system:
Annual salary income: Rs. 12,00,000
Employer contribution to NPS u/s 80CCD(2): Rs. 50,000
Interest on home loan u/s 24(b): Rs. 2,00,000
Description |
Amount (Rs.) |
Annual salary income |
12,00,000 |
Less: Standard Deduction |
75,000 |
Net salary income |
11,25,000 |
Less: Employer’s NPS contribution (u/s 80CCD(2)) |
50,000 |
Less: Home loan interest (u/s 24(b)) |
2,00,000 |
Net taxable income |
8,75,000 |
Tax payable |
27,500 |
Health & Education cess (4%) |
1,100 |
Total tax liability |
28,600 |
This simplified calculation shows how standard deductions and employer contributions reduce taxable income. However, self-contributions to NPS or 80C investments are not applicable in this regime.
Utilise Section 80C deductions
Section 80C is one of the most popular sections for tax-saving. It allows deductions up to Rs. 1.5 lakh from your total income through various investments and expenditures. Here are some key avenues under Section 80C:
- Public Provident Fund (PPF): Investments in PPF are tax-deductible and the interest earned is tax-free.
- Employee Provident Fund (EPF): Contributions towards EPF are eligible for deduction.
- National Savings Certificate (NSC): Investments in NSC qualify for deduction.
- Equity Linked Savings Scheme (ELSS): Investments in ELSS funds are deductible, and they offer the dual benefit of tax saving and potential market-linked returns.
- Life Insurance premium: Premiums paid for life insurance policies for yourself, your spouse, or your children are deductible.
- Principal repayment on home loan: The principal portion of your home loan EMI is eligible for deduction.
Take advantage of Section 80D for health insurance
Under Section 80D, you can claim deductions for premiums paid towards health insurance policies. The limits are as follows:
- Up to Rs. 25,000 for insurance of self, spouse, and children.
- An additional Rs. 25,000 for insurance of parents (Rs. 50,000 if parents are senior citizens).
- Preventive health check-ups up to Rs. 5,000 are also included within the overall limit.
Benefit from House Rent Allowance (HRA)
If you live in rented accommodation and receive House Rent Allowance (HRA) as part of your salary, you can claim an exemption on HRA under Section 10(13A). The exemption is calculated as the minimum of:
- Actual HRA received.
- 50% of salary (basic + DA) for those living in metro cities (40% for non-metros).
- Rent paid minus 10% of salary (basic + DA).
Interest on home loan (Section 24(b))
Under Section 24(b), you can claim a deduction of up to Rs. 2 lakh on the interest paid on home loans for self-occupied properties. For let-out properties, the entire interest is deductible.
Claim benefits under Section 80E for education loan
Interest paid on an education loan for higher studies is deductible under Section 80E. There is no upper limit on the amount that can be claimed, but the deduction is available for a maximum of 8 years or until the interest is paid, whichever is earlier.
Use the new tax regime wisely
The new tax regime introduced in Budget 2020 offers lower tax rates but does not allow most deductions and exemptions. Depending on your income and investment profile, you might benefit more from the new regime or the old regime with deductions. It's crucial to compare both regimes to determine which one is more advantageous for you.
Deduction for donations (Section 80G)
Donations to specified charitable institutions and relief funds are eligible for deduction under Section 80G. Depending on the institution, the deduction can be 50% or 100% of the donation amount, subject to certain limits.
Save through Section 80TTA and 80TTB
- Section 80TTA: Allows a deduction of up to Rs. 10,000 on interest earned from savings accounts with banks, post offices, or cooperative societies.
- Section 80TTB: For senior citizens, a deduction of up to Rs. 50,000 is available on interest from savings accounts, fixed deposits, or any other deposits.
Invest in National Pension System (NPS) – Section 80CCD
Contributions to the National Pension System (NPS) are eligible for deduction under Section 80CCD. This includes:
- Section 80CCD(1): Deduction up to Rs. 1.5 lakh within the overall limit of Section 80C.
- Section 80CCD(1B): Additional deduction of up to Rs. 50,000 over and above the Section 80C limit.
- Section 80CCD(2): Employer’s contribution to NPS is deductible up to 10% of salary (basic + DA) without any upper limit.
Other specific deductions
- Section 80GG: Deduction for rent paid if you do not receive HRA, subject to certain conditions.
- Section 80GGB and 80GGC: Deductions for contributions to political parties or electoral trusts.
- Section 80RRB: Deduction for income from royalties or patents, up to Rs. 3 lakh.
Save taxes through capital gains exemptions
Capital gains from the sale of assets can be tax-free if invested in specified instruments or assets. For example:
- Section 54: Exemption on long-term capital gains from the sale of a residential property if reinvested in another residential property.
- Section 54EC: Exemption on capital gains from the sale of long-term assets if invested in specified bonds within 6 months.
Saving income tax in India requires a strategic approach, leveraging available deductions, exemptions, and smart investment options. By understanding the provisions under various sections of the Income Tax Act, such as Section 80C, 80D, 24(b), and others, you can effectively reduce your taxable income and enhance your financial well-being. It's advisable to consult with a tax professional or financial advisor to ensure that you are taking full advantage of all possible tax-saving avenues, thereby optimizing your tax planning and compliance.
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Conclusion
The revised new tax regime makes taxation simpler, with fewer exemptions but more straightforward rules. The rebate up to Rs. 12,00,000 and lower tax rates significantly reduce liabilities for middle-income earners. While you will miss out on deductions such as 80C or HRA, the benefit lies in hassle-free compliance without extensive paperwork. For individuals who don’t rely on multiple deductions, this regime is likely more rewarding. However, it’s wise to compare both old and new regimes to see which option works best for your income profile before filing taxes.
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