How to Maximize Tax Deductions Under the New Tax Regime in India (AY 2025-26)
Dipali Waghmode- Apr 30
- 12 min read
Updated: May 2
The new tax regime introduced in the Finance Act 2024 offers lower tax rates but fewer deductions compared to the old regime. However, there are still opportunities to reduce taxable income and minimize tax liability. By understanding the available provisions, such as the standard deduction, NPS contributions, and interest deductions on rental property, taxpayers can optimize their taxes under the new system. Knowing how to leverage these options effectively can help make the most of the new regime's benefits.
Table of Contents
How to Maximize Tax Deductions Under the New Tax Regime in India (AY 2025-26)
To maximize tax deductions under the new tax regime for AY 2025-26, taxpayers can make use of the ₹75,000 standard deduction available to salaried individuals, which reduces taxable income directly without requiring proof of investment or expense. Additionally, employer contributions to the National Pension Scheme (NPS) under Section 80CCD(2) can further lower taxable income, with a limit of 10% of salary for non-government employees and 14% for government employees. Property owners can also claim an interest deduction of up to ₹2 lakh per annum under Section 24(b) for home loans on rented properties. By utilizing these provisions, taxpayers can effectively reduce their taxable income and minimize their overall tax liability under the new tax regime.
Key Features of the New Tax Regime
The new tax regime simplifies the tax system by offering lower tax rates, but it comes with fewer exemptions and deductions. Here’s a quick breakdown of the key features for AY 2025-26:
Seven tax slabs: Tax rates range from 0% to 30%, starting with a zero tax rate for income up to ₹4 lakh and going up to 30% for income above ₹24 lakh.
Basic exemption limit raised: The exemption limit has been increased to ₹12 lakh, which means that income up to ₹12 lakh is effectively tax-free.
Standard deduction: Salaried individuals are eligible for a standard deduction of ₹75,000, which effectively increases the tax-free income limit to ₹12.75 lakh.
Minimal deductions: Unlike the old regime, the new tax regime does not allow deductions under common sections like 80C (investments), 80D (insurance premiums), and others. However, a few targeted deductions remain.
Section 87A rebate: The tax rebate under Section 87A has been increased to ₹60,000 for taxable incomes up to ₹12 lakh, allowing further tax reduction for eligible taxpayers.
Is Standard Deduction Available Under the New Tax Regime?
Yes, the new tax regime provides a standard deduction of ₹75,000 for salaried individuals and pensioners. This deduction reduces the taxable salary income directly, without requiring any proof of investment or expenditure.
The standard deduction is one of the few provisions in the new regime that can effectively reduce your tax burden. It applies to all salaried individuals, making it a simple yet significant way to reduce taxable income. This means that if your total income is ₹12 lakh, you will only be taxed on ₹11.25 lakh after applying the standard deduction.
Understanding the ₹75,000 Deduction
The ₹75,000 standard deduction in the new tax regime is a fixed amount that automatically reduces the salary income of eligible taxpayers. It applies to salaried individuals and pensioners, irrespective of any additional deductions or exemptions.
Example: If your salary is ₹10 lakh, after applying the ₹75,000 standard deduction, your taxable income will reduce to ₹9.25 lakh. This helps reduce the overall tax liability
Benefit: Since it’s a fixed amount and does not require any specific investment or expenses to be made, it simplifies income tax filing and helps taxpayers easily reduce their taxable salary.
This deduction is available for both employees and pensioners, making it a straightforward way to lower taxable income under the new tax regime.
Employer’s Contribution to NPS: A Potential Tax Saver
One of the key opportunities available under the new tax regime for taxpayers is the employer’s contribution to the National Pension Scheme (NPS). The contribution made by the employer to the NPS Tier-I account is eligible for a tax deduction under Section 80CCD(2).
While this deduction is available in both the new and old tax regimes, it’s worth noting that the new regime allows you to claim this benefit without needing to meet any specific conditions, other than ensuring that the contribution comes from your employer.
How Employer Contributions to NPS Reduce Taxable Income
Under Section 80CCD(2), the employer’s contribution to the NPS Tier-I account is deductible from your taxable income. The amount eligible for deduction is limited to 14% of the salary (basic + DA) for government employees and 10% for other employees.
Example: If your basic salary and dearness allowance (DA) total ₹8 lakh annually, and your employer contributes 10% to NPS, the contribution of ₹80,000 will be deducted from your taxable income. This reduces your overall taxable income and, in turn, lowers your tax liability.
This provision is especially beneficial for those who are contributing to the NPS, as it allows them to reduce their tax burden with a contribution that is invested for their future retirement.
Interest Deduction for Rental Property Under the New Regime
If you own a rental property, the interest paid on the home loan can be deducted under Section 24(b) of the Income Tax Act. This provision allows you to claim up to ₹2 lakh in deductions annually on the interest paid on home loans for properties that are rented out.
This deduction is available under both the old and new tax regimes, providing a valuable opportunity for taxpayers who have taken out a loan to purchase a rental property.
Claiming Up to ₹2 Lakh for Home Loan Interest
Under Section 24(b), you can claim a deduction of up to ₹2 lakh per annum on the interest paid on a home loan for a rented property. This deduction is available irrespective of whether you are under the old or new tax regime.
Example: If you pay ₹1.5 lakh in interest on your home loan for a rented property, you can claim the full ₹1.5 lakh as a deduction under Section 24(b). If your interest payment exceeds ₹2 lakh, the maximum deduction you can claim is ₹2 lakh.
This deduction helps reduce your taxable income, particularly if you own a rental property that generates regular rental income, making it an excellent tool for tax planning under the new tax regime.
How Lower TDS Certificates Can Improve Tax Planning
Lower Tax Deducted at Source (TDS) certificates offer a strategic advantage by allowing taxpayers to reduce the upfront tax deducted from their income. Under the new tax regime, obtaining these certificates can prevent excess TDS deductions on various income sources, including interest, rent, and salary. By applying for a lower or nil TDS certificate, taxpayers can ensure that tax deductions are aligned with their actual tax liabilities, improving cash flow and making tax planning more efficient.
Taxpayers can apply for a lower TDS certificate through Form 13, available from the Income Tax Department. This application can be submitted when they have a legitimate reason to reduce their TDS, such as insufficient taxable income or existing deductions. A well-timed request for lower TDS ensures that more money is retained in hand, which can be utilized for investments or savings.
Reducing TDS on Payments with Lower Certificate Claims
Claiming a lower TDS certificate can significantly reduce the amount of tax deducted at source on various payments such as interest income, salary, rent, or professional fees. This benefit is especially valuable for taxpayers who earn income from multiple sources and expect their total taxable income to fall below the threshold for higher TDS rates.
For example, if an individual earns income from both salary and interest, but their total income is lower than the tax threshold, applying for a lower TDS certificate on the interest income can reduce the tax deducted by the bank. This helps manage cash flow more effectively, as the individual can receive their full interest income without unnecessary deductions. Similarly, taxpayers receiving rental income or making professional fees payments can apply for a lower TDS certificate to reduce the initial tax deduction.
Maximizing Tax Benefits through Accurate Bank Declarations
While opening a bank account or receiving interest income, making the right declarations is crucial for ensuring the correct application of tax rules and maximizing tax savings. Providing your Permanent Account Number (PAN) is one of the most important steps in ensuring that TDS is deducted at the correct rate. If no PAN is provided, the bank may deduct TDS at a higher rate, increasing your tax liability unnecessarily.
Additionally, submitting forms like 15G or 15H can help avoid TDS on interest income that falls below the taxable threshold. These forms are particularly useful for senior citizens or individuals with low-income interest earnings. By ensuring that the bank is aware of the correct status and submitting the necessary forms, taxpayers can prevent over-deduction of TDS and ensure more of their income stays in their hands.
Ensuring Correct TDS Deduction through PAN and Other Declarations
Ensuring that the correct TDS is deducted begins with accurate and timely declarations. The most critical step in this process is providing your PAN to all institutions paying you income, whether it's a bank, employer, or any other organization. Without PAN, TDS is deducted at a higher rate of 20% instead of the standard rates, resulting in excess tax being withheld.
In addition to PAN, taxpayers must declare their correct filing status, especially for senior citizens who may be eligible for higher exemption limits. Also, for interest income below the taxable threshold, submitting Forms 15G or 15H ensures that TDS is not deducted unnecessarily. These proactive steps prevent tax over-deductions, ensuring that the taxpayer's liability is accurately reflected and reducing the chances of a refund process later on.
Practical Tips for Taxpayers Under the New Tax Regime
Evaluate Both Regimes: Taxpayers should compare their overall deductions and income under both the old and new tax regimes. Online calculators provided by the Income Tax Department can be useful tools in this decision-making process.
Utilize the Standard Deduction: The new tax regime offers a ₹75,000 standard deduction for salaried individuals. Ensure this is factored into your taxable income to reduce your liability.
NPS Contributions: Make the most of the NPS contribution by your employer. The deduction under Section 80CCD(2) helps lower your taxable income.
Claim Rent Deduction: If you are paying rent and meet the criteria, ensure that you claim the home loan interest deduction under Section 24(b), available under the new regime for rental properties.
Apply for Lower TDS Certificates: If your total taxable income is lower than expected, applying for lower or nil TDS certificates can help improve cash flow.
Declare Your PAN Correctly: Ensure that your PAN is linked to all relevant income sources, as this will prevent higher TDS deductions. Also, maintain accurate bank account declarations to avoid unnecessary deductions.
How to Choose Between the New and Old Tax Regimes
Choosing between the old and new tax regimes depends on your individual tax situation. The new tax regime offers lower tax rates and the convenience of minimal documentation. However, it eliminates many traditional deductions and exemptions like HRA, LTA, and Section 80C investments, which could benefit individuals with significant tax-saving investments.
On the other hand, the old tax regime allows taxpayers to avail various exemptions and deductions, which may reduce taxable income. If your total deductions exceed ₹2.5 lakh (for example, through investments in PPF, ELSS, or HRA), the old tax regime may be more beneficial despite its higher tax rates. It’s essential to evaluate both options using tax calculators and consider your financial goals before deciding.
Strategies to Maximize Benefits in the New Tax Regime
Leverage the Standard Deduction: Take full advantage of the ₹75,000 standard deduction for salaried individuals. This deduction is available without any requirement for proof of expenditure or investment.
Employer’s Contribution to NPS: Ensure your employer contributes to the National Pension Scheme (NPS) on your behalf. The deduction of up to 14% of salary is available under Section 80CCD(2) and is a great way to lower taxable income.
Claim Home Loan Interest Deduction: If you are renting out a property, claim the home loan interest deduction of up to ₹2 lakh under Section 24(b), which is available under both the old and new regimes.
Apply for Lower TDS Certificates: If your income is low and TDS is being deducted excessively, apply for a lower TDS certificate to reduce upfront tax deductions and improve cash flow.
Use Forms 15G/15H for Interest Income: For those with low-interest income, using Forms 15G and 15H can help avoid unnecessary TDS deductions.
Maintain Accurate Bank Declarations: Ensure that all bank declarations are correct, including PAN details and filing status, to ensure correct TDS deductions and avoid overpayment.
Conclusion
The new tax regime presents an opportunity to simplify tax filing with lower tax rates, but it also comes with limited deductions. By strategically utilizing the available deductions such as the standard deduction, NPS contributions, and home loan interest for rental properties, taxpayers can reduce their taxable income. Additionally, applying for lower TDS certificates and ensuring accurate declarations can help manage cash flow and avoid unnecessary deductions. With careful planning and evaluation, taxpayers can make the most of the new tax regime and minimize their tax liabilities while staying compliant with the law.
FAQs
How does the new tax regime differ from the old one for AY 2025-26?
The new tax regime features lower tax slabs with minimal deductions and exemptions, making it simpler but less flexible. In contrast, the old tax regime allows for numerous exemptions and deductions like HRA, LTA, and Section 80C, which can significantly reduce taxable income. However, the new regime offers a standard deduction of ₹75,000 and a higher basic exemption limit of ₹12 lakh, making it beneficial for individuals with fewer deductions.
What deductions are available under the new tax regime for salaried individuals?
Under the new regime, salaried individuals can benefit from a standard deduction of ₹75,000. Other than this, most traditional deductions like HRA, LTA, and Section 80C are not available. However, there are provisions for deductions on home loan interest for rental properties and employer contributions to NPS under Section 80CCD(2).
Can I claim home loan interest under the new tax regime?
Yes, under the new tax regime, you can claim a deduction of up to ₹2 lakh per annum on the interest paid for home loans related to rental properties. This deduction is available even if you are opting for the new tax regime.
What is the NPS contribution deduction under the new tax regime?
Contributions made by the employer to the National Pension Scheme (NPS) are deductible under Section 80CCD(2) up to 14% of your salary (basic + DA). This deduction is available under the new regime and can help reduce your taxable income.
Is it possible to apply for a lower TDS certificate under the new tax regime?
Yes, you can apply for a lower or nil TDS certificate under the new tax regime if you expect your taxable income to be below the threshold. This can help reduce the upfront TDS deductions from various income sources like salary, interest, or rent.
How can I maximize tax savings by accurately declaring my PAN?
Providing your PAN accurately ensures that TDS is deducted at the correct rate. Without a PAN, TDS is deducted at a higher rate of 20%, which results in excess tax being withheld. Ensuring that your PAN is linked to all relevant income sources helps avoid unnecessary over-deductions.
How does the new tax regime's standard deduction affect my tax liability?
The standard deduction of ₹75,000 effectively reduces your taxable salary by this amount, making income up to ₹12.75 lakh tax-free. This deduction is automatically applied to salaried individuals without requiring proof of any investments or expenses.
How do I decide between the old and new tax regime?
The decision between the old and new tax regimes depends on your overall tax situation. If you have significant deductions under the old regime (like HRA, LTA, or 80C investments), it may be more beneficial to continue with the old regime. However, if your deductions are minimal, the new regime's lower tax rates might offer better savings.
Can I use the standard deduction and still maximize other tax-saving options?
Under the new tax regime, the standard deduction of ₹75,000 is the primary benefit available. However, traditional tax-saving options like Section 80C, HRA, and LTA are not available. Therefore, to maximize tax savings, you'll need to rely on the deductions allowed under the new regime, such as home loan interest for rental properties and NPS contributions.
Is there any specific benefit for senior citizens under the new tax regime?
While the new tax regime does not offer separate benefits specifically for senior citizens, they are still eligible for the standard deduction of ₹75,000. Senior citizens may also benefit from a higher basic exemption limit, as they are subject to a lower tax threshold than regular taxpayers. However, the new regime lacks many deductions that older individuals may have relied on in the past.
What is the impact of Section 87A rebate on my tax liability under the new regime?
Under the new tax regime, taxpayers with a taxable income of up to ₹12 lakh are eligible for a rebate of up to ₹60,000 under Section 87A. This rebate reduces the final tax liability, making it a significant advantage for individuals in the lower income brackets.
Are there any hidden advantages in the new tax regime that many taxpayers overlook?
One of the hidden advantages of the new tax regime is the simplicity it offers. Since most deductions and exemptions are eliminated, taxpayers can file income tax returns with fewer complexities. Additionally, the lower tax slabs and higher exemption limits make the new regime beneficial for individuals with straightforward tax situations. The standard deduction and the ability to claim home loan interest on rental properties are key opportunities to save taxes without significant paperwork.
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