How to Save Income Tax in the New Tax Regime – Legal Deductions and Strategies for FY 2025-26

The new regime's default status has created widespread confusion about what tax-saving is still possible within it. The honest answer: the new regime is designed to be simple, with fewer deductions — the "savings" come from lower slab rates rather than investment-driven deductions. But a few legitimate levers still exist.

This page covers:

• What deductions are available in the new tax regime
• The Rs. 12 lakh effective tax-free threshold — how it works
• Standard deduction Rs. 75,000 — the primary benefit
• Employer NPS contribution under Section 80CCD(2) — a key available deduction
• Family pension standard deduction
• Tax on special allowances — exemptions that survive the new regime
• What is NOT available in the new regime
• Practical strategies to optimise tax in the new regime
• When to switch back to the old regime
• How tax regime choice affects home loan interest deductibility

The new tax regime (introduced under Section 115BAC and made the default from FY 2023-24) takes a fundamentally different approach to income tax compared to the old regime. Rather than offering a complex web of deductions that incentivise specific behaviours (saving in PPF, buying insurance, paying home loan interest), the new regime offers:

1. Lower headline slab rates — particularly in the Rs. 4-12 lakh range
2. A higher standard deduction (Rs. 75,000 vs Rs. 50,000 in old regime)
3. A larger Section 87A rebate (up to Rs. 60,000, making Rs. 12 lakh effectively tax-free)

The trade-off: most investment-linked and expenditure-linked deductions are removed.

Available:

Not available in new regime: Section 80C (PPF, ELSS, life insurance, home loan principal), Section 80D (health insurance), Section 80E (education loan), Section 24(b) home loan interest for self-occupied property, HRA exemption, LTA, and most other common deductions.

For FY 2025-26, the combination of:

• Standard deduction of Rs. 75,000 (reducing gross income to net taxable income)
• Section 87A rebate of up to Rs. 60,000

Makes income up to approximately Rs. 12.75 lakh gross (Rs. 12 lakh net taxable income) effectively tax-free under the new regime. This means:

• Gross salary Rs. 12,75,000
• Less standard deduction: Rs. 75,000
• Net taxable income: Rs. 12,00,000
• Tax on Rs. 12 lakh under new slabs: approximately Rs. 60,000
• Section 87A rebate: Rs. 60,000 (100% rebate)
• Net tax payable: Zero

This is the most significant single benefit the new regime offers — and is genuinely superior to the old regime for most taxpayers with income below Rs. 12.75 lakh who have modest deductions.

Section 80CCD(2) — the deduction for employer contribution to NPS — is one of the most valuable and underutilised tax-saving mechanisms available within the new regime. Key points:

• It is the employer's contribution that is deductible, not the employee's
• Private sector employees: Up to 10% of (basic + DA) is deductible — e.g., if basic is Rs. 50,000/month, employer can contribute Rs. 5,000/month (Rs. 60,000 annually) that is fully deductible
• Government employees: Up to 14% of (basic + DA) is deductible

To access this, ask your employer to restructure your CTC to include an employer NPS contribution component. This reduces your taxable income within the new regime without requiring any investment from your own pocket.

Example: An employee with basic salary Rs. 60,000/month can have employer NPS contribution of Rs. 6,000/month (10%) = Rs. 72,000 annually deducted from taxable income under the new regime — saving approximately Rs. 10,800 in tax at the 15% slab.

A few allowances retain their exemption status even in the new regime:

• Gratuity — exempt up to Rs. 20 lakh for private sector employees
• Leave encashment on retirement — exempt up to Rs. 25 lakh
• VRS compensation — exempt up to Rs. 5 lakh
• Conveyance/transport allowance for differently-abled — up to Rs. 3,200/month
• House Rent Allowance (HRA) — fully taxable (no exemption available)

1. Maximise employer NPS: Structure your salary to include an employer NPS contribution — Section 80CCD(2) deduction is available in the new regime.

2. Claim the standard deduction fully: The Rs. 75,000 standard deduction is automatic for salaried employees — ensure your employer applies it when calculating TDS.

3. Let-out property interest deduction: If you have a let-out property (rented to a tenant), the full home loan interest is deductible from rental income under the new regime — unlike self-occupied property where no interest deduction is available.

4. Compare both regimes annually: Your optimal choice can change year over year as income grows and circumstances change. Run the comparison before your employer's investment declaration deadline each year.

The old regime becomes more beneficial when your combined deductions under it exceed the benefit of the new regime's lower rates. The typical tipping point for a salaried employee is when total old-regime deductions exceed approximately Rs. 3.75-4 lakh (varying by income level). Major deduction triggers include:

• Significant home loan interest payment (Rs. 1.5-2 lakh/year)
• Full Section 80C investment (Rs. 1.5 lakh)
• Substantial HRA exemption (metro city renters)
• Section 80D health insurance premium

If you have all three simultaneously, the old regime is almost certainly better above Rs. 10 lakh incom

This is the most consequential regime-related financial decision for home loan borrowers: Section 24(b) home loan interest deduction (up to Rs. 2 lakh for self-occupied property) is only available under the old regime. Under the new regime, you cannot claim this deduction for a self-occupied property.

For a borrower paying Rs. 1.5-2 lakh in home loan interest annually (which applies to most loans of Rs. 20 lakh or more), this is a significant consideration. The home loan effectively makes the old regime more attractive, as the interest deduction narrows the tax gap between the two regimes.

Bajaj Housing Finance offers home loans from 7.25% p.a.* p.a.* with amounts up to Rs. Rs. 15 Crore* and tenures up to 32 years years. Check your eligibility today.