Jigar M. Patel
International Tax Attorney
The introduction of the new tax regime under Section 115BAC of the Income-tax Act introduced with effect from Assessment Year 2021-22 has fundamentally reshaped the landscape of personal taxation in India. Currently, positioned as the default choice, it offers a simplified structure with significantly lower tax rates and higher rebate limits, but at the cost of foregoing most traditional deductions and exemptions.
Scope for Tax Saving under the New Regime
However, the new regime is not entirely devoid of tax-saving mechanisms and continues to offer some meaningful tax saving opportunities, even without the extensive list of exemptions or deductions, earlier available under the old tax regime.
Understanding the tax reliefs still available under the new regime and benchmarking its impact with the earlier scheme is important for taxpayers to strategically reap the best savings.
What is still in store for the Salaried?
One of the deductions still permitted under the new tax regime is the employer’s contribution to the National Pension Scheme (NPS) under section 80CCD(2). For salaried taxpayers in the highest tax bracket, this continues to be one of the most powerful tax-planning tools.
Section 16(1) allows standard deduction of Rs. 75,000 for salaried individuals and pensioners. As a special benefit, even exemption for conveyance or tour and transfer allowance has been continued under CBDT instructions. Standard deduction of one-third of the pension, subject to a maximum of Rs. 25,000 is also allowed under section 57(iia) on the family pension received by family members of a deceased employee.
Moreover, retirement benefits such as gratuity, provident fund, leave encashment, commutation of pension etc. still continue to enjoy the same privileges for exemption and tax treatment, as under the old tax regime.
Deduction for Interest from Rental Income
The popular deduction of upto Rs. 2 lakhs in respect of interest payable on home-loans for self-occupied properties is not available under the new regime. However, interest paid on borrowings in case of let-out properties, whether residential or commercial is fully deductible under section 24, making it one of the noteworthy deductions that has still survived under the shift to the new regime.
However, it needs to be borne in mind that while only Rs. 2 lakhs of the resulting loss is permitted to be set-off against other head income in the same financial year, any additional loss can be carried forward for eight years for set off against future rental incomes.
Bouquet of Tax Reliefs for Capital Gains continued intact
One of the biggest reliefs for taxpayers in the transition from the old to the new tax regime is the fact that the deductions under section 48 and the host of exemptions under sections 54 to 54F in respect of computation of capital gains were not disturbed. Consequently, tax saving opportunities in respect of earnings by way of capital gains continue to be enjoyed by taxpayers, irrespective of their choice of old vs. new.
Important Exemptions under section 10 also sheltered
The good news is that the tax exemptions under section 10 in respect of interest on notified tax-free bonds and specified tax saving schemes such as the Public Provident Fund and the Sukanya Samriddhi Yojana have remained undisturbed. Similarly, exemptions for agricultural income have been equally tax sheltered.
