The new tax regime introduced by the government aims to simplify tax slabs and reduce paperwork for taxpayers. However, it comes with certain limitations on the exemptions and deductions that individuals can claim. Here’s a breakdown of the exemptions and deductions available under the new tax regime post the Union Budget 2023:
Standard Deduction: Salaried individuals can benefit from a standard deduction of Rs 50,000 under the new tax regime. This deduction allows taxpayers to enjoy tax-exempt income up to Rs 7.5 lakh after applying the standard deduction and tax rebate. Family pensioners can also avail themselves of this deduction, claiming either Rs 15,000 or 1/3rd of their pension, whichever is lower.
Deduction for Employer’s NPS Contribution: Taxpayers can claim a deduction for their employer’s contribution to the National Pension System (NPS) under Section 80CCD(2) of the Income Tax Act.
Deduction for Additional Employee Costs: Employees can claim a deduction for specific allowances provided by their employers under Section 80JJA of the Income Tax Act.
Family Pension Income: Pension received by family members upon an employee’s demise is exempt under Section 57(iia) of the Income Tax Act.
Exemption on Leave Encashment: Taxpayers can claim a tax exemption of up to Rs 25 lakh on leave encashment under Section 10(10AA) of the Income Tax Act, subject to certain conditions.
However, it’s important to note that the new tax regime does not offer deductions in the following scenarios: Chapter VI-A Deductions: Investments in schemes such as Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and deductions under Section 80D for health insurance premiums are not available under the new regimes.
Allowances: Exemptions for allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and entertainment allowances are not applicable under the new tax regime. Interest on Housing Loans: Deductions for interest paid on housing loans are not allowed for self-occupied or vacant properties under Section 24(b) of the Income Tax Act. The new tax regime, which became the default option from the financial year (FY) 2023-24, offers taxpayers the flexibility to choose between the old and new regimes.
However, individuals opting for the new tax regime cannot claim various exemptions and deductions available only under the old tax regime. The new tax regime, introduced as an alternative to the old regime from April 1, 2020 onwards, was designed to simplify tax brackets and lower tax rates.
Finance Minister Nirmala Sitharaman highlighted during the Union Budget 2023 that the new regime aims to leave more money in people’s hands, allowing taxpayers to allocate their funds without government incentives or disincentives. Despite its benefits, individuals should carefully consider their financial situation and the impact of foregoing certain exemptions and deductions before opting for the new ones.
Understanding the available deductions and exemptions is crucial for taxpayers to make informed decisions and effectively manage their tax liabilities.
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