Deductions in new tax regime (2023-24)

Deductions in new tax regime (2023-24)

The new tax regime under Section 115BAC of the Income-tax Act, 1961 is now the default for every individual taxpayer — not an opt-in. It trades the bulk of your familiar deductions for flatter rates and a generous Section 87A rebate that eliminates tax entirely below a defined income ceiling. For FY 2026-27 (AY 2027-28), the list of what survives is deliberately short: a ₹75,000 standard deduction, employer NPS under Section 80CCD(2), a handful of specific allowances, and the rebate itself. If your combined old-regime deductions — HRA, home loan interest, Section 80C, health insurance — do not cross ₹4–5 lakh in a meaningful way, the new regime will almost certainly produce a lower tax bill.

What Section 115BAC Actually Does

Section 115BAC was introduced in Finance Act 2020 and fundamentally overhauled by Finance Act 2023. From AY 2024-25 (FY 2023-24) onwards, the new regime is the automatic default for:

• Individuals (resident and non-resident)
• Hindu Undivided Families (HUFs)
• Associations of Persons (AOPs) and Bodies of Individuals (BOIs), added from AY 2024-25

You do not opt in — you must actively opt out if you want to use the old regime. The mechanism differs between salaried and business/professional taxpayers (covered in the Form 10-IEA section below).

The trade the regime makes is structurally simple:

• Give up: Most deductions under Sections 80C to 80U, HRA exemption under Section 10(13A), leave travel allowance under Section 10(5), and home loan interest under Section 24(b)
• Get: Lower slab rates at every income band, a higher Section 87A rebate threshold, and a flat ₹75,000 standard deduction

The regime's implicit assumption is that many taxpayers — particularly younger earners who do not hold home loans, pay rent in lower-cost cities, or max out 80C — never truly exploit the deductions they theoretically qualify for. For them, lower rates are worth more than the deduction framework they underuse.

Tax Slabs Under the New Regime

For FY 2024-25 (AY 2025-26) — the last fully settled assessment year with confirmed CBDT data — the new regime slab structure is:

A 4% health and education cess applies to computed tax. No surcharge applies below ₹50 lakh of income. The top rate of 30% on income above ₹15 lakh is identical to the old regime's top rate, but it kicks in later and applies to fewer rupees of income for most taxpayers.

What Budget 2025 changed (FY 2025-26 onwards): Finance Act 2025 restructured the slab bands — widening the nil bracket to ₹4 lakh — and, more significantly, raised the Section 87A rebate ceiling from ₹7 lakh to ₹12 lakh under the new regime. Combined with the ₹75,000 standard deduction, this made the effective zero-tax limit for salaried individuals ₹12.75 lakh. For FY 2026-27 (AY 2027-28), refer to the slab structure as notified under Budget 2026 and the relevant CBDT circular before finalising any computation.

Deductions Still Available in the New Regime

This is the complete, exhaustive list. If a deduction or exemption is not below, it is unavailable.

Standard Deduction — ₹75,000

A flat ₹75,000 is deducted from salary or pension income without any documentation or investment requirement. Originally introduced at ₹50,000 in the new regime from FY 2023-24, it was raised to ₹75,000 from FY 2024-25 — applicable to both regimes from that year.

It is available to:

• Salaried employees — deducted from gross salary before applying slabs
• Pensioners receiving pension under the "Salaries" head (i.e., directly from a former employer, not annuity income from an insurance policy)

What it does not cover: Family pension paid to a nominee after an employee's death is taxed under "Income from Other Sources," not "Salaries." It gets a different, smaller deduction — covered separately below.

Employer NPS Contribution — Section 80CCD(2)

This is, without question, the most powerful deduction available in the new regime for private sector employees. Your employer's contribution to your National Pension System (NPS) Tier-I account is deductible up to:

• 14% of salary (basic + DA) for central and state government employees
• 14% of salary for private sector employees — equalised from the previous 10% ceiling under Budget 2024, effective FY 2024-25

The critical distinction: only the employer's contribution qualifies. Your own voluntary NPS contributions — under Section 80CCD(1) (up to 10% of salary) or the additional ₹50,000 under Section 80CCD(1B) — are not deductible in the new regime.

If your employer contributes 14% of a ₹12 lakh basic salary, that is ₹1,68,000 reducing your taxable income — worth approximately ₹50,400 in tax saved at the 30% slab, plus cess. Many private sector employees never negotiate this into their CTC structure, which is a significant missed opportunity.

Agniveer Corpus Fund — Section 80CCH

From AY 2024-25, contributions made by Agniveers to the Agniveer Corpus Fund — plus the matching government contribution — are fully deductible under Section 80CCH. This applies exclusively to personnel enrolled under the Agnipath Scheme.

Family Pension Deduction

Recipients of family pension can deduct the lower of:

• One-third of the family pension received, or
• ₹25,000

This deduction applies under the head "Income from Other Sources" and is preserved in the new regime.

Allowances That Survive Under Section 10

Several allowances remain excluded from taxable salary:

• Transport allowance for employees with disabilities — exempt up to notified limits
• Conveyance allowance for actual travel on official duty — exempt to the extent of actual expenditure incurred
• Daily allowance / tour allowance while on duty away from headquarters — exempt to actual expenditure
• Gratuity on retirement/death — exempt up to ₹20 lakh for non-government employees under Section 10(10), subject to the ceiling under the Payment of Gratuity Act 1972
• Leave encashment on retirement — exempt up to ₹25 lakh for non-government employees under Section 10(10AA), as revised in 2023

Children's education allowance (₹100 per month per child), uniform allowance, and most other items under Section 10(14) are not available under the new regime.

Deductions and Exemptions You Lose

If your total across these heads routinely runs to ₹4 lakh or more, run a proper comparison — do not assume the new regime wins by default.

Section 87A Rebate — How the Zero-Tax Ceiling Works

Under the new regime, Section 87A provides a 100% tax rebate when your taxable income falls at or below the specified ceiling. You pay zero tax — not reduced tax, zero.

How to apply it in four steps:

1. Add up all income under the five heads
2. Subtract the standard deduction (₹75,000 if salaried) and Section 80CCD(2) employer NPS contribution
3. If taxable income ≤ ceiling → rebate = tax computed → net tax = ₹0
4. If taxable income > ceiling → no rebate (but marginal relief applies just above the ceiling)

Marginal relief prevents the sudden cliff. If your taxable income is ₹7,05,000 against a ₹7 lakh ceiling (the FY 2024-25 position), your tax is capped at ₹5,000 — the excess of income over the ceiling. You will not pay the normal tax of ₹20,500 that the slabs would otherwise produce.

The evolution of the zero-tax limit for salaried individuals:

The keywords "Section 87A rebate 7 lakh" reflect the FY 2023-24 and FY 2024-25 position — still relevant for those who are filing or revising returns for those assessment years.

Worked Examples: New vs. Old Regime (FY 2024-25 as Benchmark)

These calculations use FY 2024-25 slabs and rates — fully settled. The logic and structure apply directly to FY 2026-27 once those rates are confirmed.

Case 1 — ₹10 Lakh Gross Salary, Limited Deductions

Ananya, 29, software professional in Pune. Pays ₹14,000/month rent. HRA component ₹8,000/month. Invests ₹50,000/year in PPF. No home loan.

Old regime:

• Gross salary: ₹10,00,000
• Standard deduction: (₹75,000)
• HRA exempt (lowest of: 40% of basic ₹4L = ₹1.6L; rent – 10% of basic = ₹1.68L – ₹40K = ₹1.28L; actual HRA ₹96K): ₹96,000
• 80C (PPF): (₹50,000)
• Taxable income: ₹7,79,000
• Tax: ₹12,500 + (₹2,79,000 × 20%) = ₹68,300
• Add 4% cess: ₹71,032

New regime:

• Gross salary: ₹10,00,000
• Standard deduction: (₹75,000)
• Taxable income: ₹9,25,000
• Tax: (₹4L × 5%) + (₹2.25L × 10%) = ₹20,000 + ₹22,500 = ₹42,500
• Add 4% cess: ₹44,200

New regime saves ₹26,832. Ananya's old-regime deductions beyond the standard deduction total only ₹1,46,000 — nowhere near enough to overcome the rate advantage of the new regime.

Case 2 — ₹18 Lakh Gross Salary, Active Deductions User

Rajesh, 44, finance manager in Mumbai. Home loan interest ₹2,00,000/year. HRA exempt ₹1,80,000/year. Full Section 80C at ₹1,50,000. Health insurance (self + parents) ₹50,000. No employer NPS.

Old regime:

• Standard deduction: ₹75,000
• HRA exempt: ₹1,80,000
• Section 24(b) home loan interest: ₹2,00,000
• 80C: ₹1,50,000
• 80D: ₹50,000
• Total deductions: ₹6,55,000
• Taxable income: ₹11,45,000
• Tax: ₹12,500 + ₹1,00,000 + (₹1,45,000 × 30%) = ₹1,56,000
• Add 4% cess: ₹1,62,240

New regime:

• Standard deduction: ₹75,000
• Taxable income: ₹17,25,000
• Tax: ₹20,000 + ₹30,000 + ₹30,000 + ₹60,000 + ₹67,500 = ₹2,07,500
• Add 4% cess: ₹2,15,800

Old regime saves ₹53,560. Rajesh's additional deductions of ₹5,80,000 (beyond the standard deduction) compress his taxable income by enough to overcome the old regime's higher marginal rates. The home loan interest deduction alone — unavailable in the new regime — saves approximately ₹60,000 in old-regime tax at a 30% marginal rate.

What this tells you: In Rajesh's income bracket, each ₹1 lakh of substantive deduction (HRA, home loan, 80C) saves roughly ₹20,000–₹30,000 in old-regime tax. The cost of staying in the old regime without enough deductions is real — in this case about ₹53,560 before deductions are applied. You need to accumulate enough deductions to cover that gap and then some.

How to Choose Between the Two Regimes

Do this calculation every April — not July, not after TDS has been deducted for six months.

Step 1: List deductions you will actually claim this year — not theoretical eligibility, but what you will substantiate with documents. Be conservative.

Step 2: Total them up. Rough guidance:

• Below ₹2.5 lakh in combined additional deductions → new regime almost certainly wins
• ₹2.5–₹4 lakh → compare carefully at your specific income level
• Above ₹4 lakh in meaningful deductions → old regime likely wins

Step 3: Run the formal tax computation under both regimes — use a spreadsheet or a tax utility. Compare post-cess outflows, not pre-cess.

Step 4: Communicate your regime preference to payroll by April via the investment declaration form. TDS deducted under the wrong regime creates a refund situation that takes months to settle and occasionally triggers a compliance notice.

Income-level rule of thumb:

• Gross salary ≤ ₹7.75 lakh (FY 2024-25): zero tax in new regime — no comparison needed
• ₹8–14 lakh: outcome depends heavily on whether you have HRA in a metro and a home loan
• ₹15–25 lakh: old regime wins only if structured deductions are substantial (₹5 lakh+)
• Above ₹25 lakh with no home loan and no significant HRA: new regime typically wins despite the 30% top rate

How to Switch Regimes — Form 10-IEA and the Rules

The switching mechanism differs fundamentally between salaried and business-income taxpayers.

Salaried Taxpayers (No Business or Professional Income)

If your income is entirely from salary, pension, capital gains, and other sources — but not business or professional income — you can switch between regimes freely each year at the time of ITR filing. No separate form is required. Choose your regime in the ITR, compute tax accordingly, and settle any TDS differential through refund or self-assessment tax payment.

The only practical constraint: your employer deducts TDS under the regime you declare at the start of the year. Switching late (at ITR filing) is legally valid but creates processing friction.

Business and Professional Income Taxpayers

If you earn business or professional income, the new regime is your default under Section 115BAC(2). To opt out and use the old regime, you must:

1. File Form 10-IEA electronically through the Income-tax e-filing portal (www.incometax.gov.in) on or before the due date under Section 139(1):
2. Non-audit cases: July 31 of the assessment year (e.g., July 31, 2027 for AY 2027-28)
3. Tax audit cases: October 31 of the assessment year (as notified)

1. The opt-out is not freely reversible. Under Section 115BAC(6), a taxpayer with business income who opts out of the new regime may exercise the option to return to it only once in their lifetime. After that single reversal, they cannot oscillate between regimes again.

1. If Form 10-IEA is not filed by the due date, the new regime applies for that year — even if your ITR reflects old-regime deductions. The switch to the old regime must wait until the following year.

Practical tip: Schedule the regime comparison in the first week of June every year. That gives you six weeks before the non-audit deadline to gather the documents, run the computation, and file Form 10-IEA if needed.

Common Mistakes — and How to Fix Them

Mistake 1: TDS Under Old Regime, ITR Under New (or Vice Versa)

An employee declares old-regime with payroll (submitting HRA proofs, home loan certificate, 80C investments) but then files the ITR under the new regime — perhaps because actual deductions fell short, or because a mid-year calculation showed the new regime wins. Result: excess TDS deducted → refund claim → 3–6 month processing wait.

Fix: Decide your regime for the full year in April and stay with it. If circumstances change materially mid-year (new home loan, job change), inform payroll immediately.

Mistake 2: Ignoring Section 80CCD(2) Entirely

Many employees and payroll teams focus on employee NPS contributions (Section 80CCD(1)), which are not deductible in the new regime, and entirely overlook pushing for the employer contribution component (Section 80CCD(2)), which is deductible. For a ₹15 lakh CTC with a ₹10 lakh basic, a 14% employer NPS contribution is ₹1,40,000 — saving roughly ₹42,000 in tax at the 30% rate, plus cess. Many private sector employees have never asked whether their employer will contribute this.

Mistake 3: Business Taxpayers Missing the Form 10-IEA Deadline

A proprietor or partnership firm runs the comparison in August and realises the old regime saves ₹70,000. The July 31 Form 10-IEA deadline has already passed. The new regime applies for that year; there is no late-filing relief for this form.

Fix: Build the regime comparison into your annual compliance calendar — first two weeks of June, every year.

Mistake 4: Stopping 80C Investments Because "There Is No Tax Benefit"

Taxpayers who move to the new regime sometimes halt PPF, ELSS, or term insurance contributions because they are no longer deductible. This is a financial planning error, not a tax planning one. PPF still compounds at a tax-free rate notified by the government quarterly. NPS still accumulates in a tax-deferred structure. Term insurance remains essential regardless of deductibility. The tax-saving rationale for these investments has weakened; the financial rationale often has not.

Mistake 5: Not Checking Whether Marginal Relief Applies Near the Rebate Ceiling

If your taxable income hovers just above the Section 87A ceiling — say ₹7,10,000 against a ₹7 lakh ceiling — the normal tax computation would yield ₹22,000. But with marginal relief, your tax is capped at ₹10,000 (the excess of income over the ceiling). Some payroll software and even some tax utilities compute this incorrectly. Verify the marginal relief calculation in your Form 16 or cross-check in the AIS/TIS summary on the e-filing portal.

Key Takeaways

• The new regime is the default from AY 2024-25 onwards. Salaried taxpayers can switch at ITR filing; business and professional income taxpayers must file Form 10-IEA by the Section 139(1) due date to opt out.
• Only five categories of deduction survive: Standard deduction (₹75,000), employer NPS under Section 80CCD(2) at 14% of basic, Agniveer Corpus Fund under Section 80CCH, family pension deduction, and specific allowances under Section 10 (gratuity, leave encashment, duty travel).
• Section 80C, 80D, HRA, home loan interest, and personal NPS contributions are all unavailable — no exceptions, no partial claims.
• The Section 87A rebate is the core mechanism: zero tax below the ceiling (₹7 lakh for FY 2024-25; ₹12 lakh from FY 2025-26; verify for FY 2026-27). Add the standard deduction to get the gross salary equivalent for salaried individuals.
• Old regime wins when total additional deductions cross approximately ₹4–5 lakh at salary levels of ₹15–20 lakh. Below that, new regime is almost always cheaper.
• Employer NPS negotiation is the highest-leverage action available under the new regime — 14% of basic salary as employer NPS is deductible, legitimate, and routinely left unclaimed.
• Run the comparison in April, communicate to payroll immediately, and avoid mid-year regime switches that generate TDS mismatches, refund delays, and potential compliance notices.