Maximize Savings Under the Revised Income Tax Regime 2025-26

 The Indian tax scenario on income has been gradually changing, and the "New Tax Regime" has become increasingly popular, especially following the major changes in Budget 2023, ongoing to FY 2025-26 (Assessment Year 2026-27). The easier regime, now the default option, has less expensive rates but less deductions and exemptions than the Original Old Tax Regime.

For most taxpayers, it can be puzzling to figure out how they can maximize their savings in this new system. In case you've made a choice (or ended up by default) under the new income tax regime, don't worry!

This guide from EximPe will delve into effective strategies and highlight the specific "income tax saving options in new tax regime" that allow you to optimize your tax liability for the current financial year.

Understanding the Revised Income Tax New Regime (FY 2025-26)

Before diving into strategies, let's briefly recap the core aspects of the revised New Tax Regime for FY 2025-26:

  • Default Option: The new regime is now the default. Unless you actively opt for the old regime, your income tax will be calculated under this system.
  • Lower Tax Rates: The most attractive feature is the concessional tax slabs designed to leave more money in your hands, particularly for lower and middle-income groups.
  • Limited Deductions: Unlike the old regime, the new regime largely does away with popular deductions under Sections 80C, 80D, HRA, LTA, and interest on self-occupied home loans (Section 24(b)).
  • Enhanced Rebate (Section 87A): A significant change is the increased tax rebate under Section 87A. For FY 2025-26, this rebate ensures that individuals with taxable income up to ₹12,00,000 pay zero tax.
  • Standard Deduction for Salaried: Salaried individuals and pensioners can now claim a standard deduction of ₹75,000 under the new regime. This means for salaried individuals, income up to ₹12,75,000 (₹12,00,000 + ₹75,000) can effectively be tax-free.

New Income Tax Slabs for FY 2025-26 (AY 2026-27)

Here are the revised income tax slab rates under the new regime:

A 4% Health and Education Cess applies to the income tax liability.

Strategies to Maximize Savings Under the New Tax Regime

While the new regime minimizes traditional tax-saving investments, it doesn't mean you can't optimize your tax outflow. The strategies here focus on leveraging the few available benefits and optimizing your overall financial planning.

1. Leverage the Standard Deduction (for Salaried & Pensioners)

This is arguably the most significant income tax saving option in new tax regime for salaried individuals and pensioners.

  • Action: Ensure your employer correctly accounts for the ₹75,000 standard deduction when calculating your TDS. If you are filing your ITR, automatically apply this deduction.
  • Impact: This flat deduction directly reduces your taxable income, offering considerable tax relief, especially for those below the ₹12.75 lakh income threshold where it can lead to zero tax.

2. Optimize Employer's Contribution to NPS (Section 80CCD(2))

The new regime allows for a deduction on your employer's contribution to your National Pension System (NPS) account.

  • Action: Encourage your employer to contribute to your NPS account. This deduction is allowed up to 10% of your Basic Salary + Dearness Allowance (for private sector employees) or 14% (for central government employees).
  • Impact: This is one of the few avenues where you can reduce your taxable income beyond the standard deduction in the new regime. It not only saves tax but also contributes to your retirement corpus.

3. Review Allowances and Exemptions Still Permitted

While many are out, certain exemptions and allowances remain available even in the new regime. Be aware of these to ensure they are correctly accounted for in your income:

  • Gratuity (Section 10(10)): Certain limits for gratuity received at retirement or termination of service are exempt.
  • Leave Encashment (Section 10(10AA)): Commuted leave encashment at retirement is exempt up to prescribed limits for non-government employees, and fully exempt for government employees.
  • Voluntary Retirement Scheme (VRS) (Section 10(10C)): Exemption for VRS compensation up to ₹5 lakh.
  • Family Pension (Section 57(iia)): For family pensioners, a deduction of one-third of the pension or ₹25,000, whichever is less, is allowed. The limit here has been increased for FY 2025-26.
  • Agricultural Income: Fully exempt from tax.
  • Interest from Post Office Savings Account: Interest up to ₹3,500 (for individual accounts) or ₹7,000 (for joint accounts) is exempt.
  • Interest on EPF/PPF: Interest earned on EPF/PPF is exempt if the contribution is within the prescribed limits (for EPF, interest on employee contributions exceeding ₹2.5 lakh in a financial year is taxable).
  • Disability-related allowances: Transport allowance for specially-abled individuals, conveyance allowance for performance of duties, and daily allowance for employees on tour/transfer are still allowed.

4. Focus on High-Income Bracket Savings (Reduced Surcharge)

For very high-income earners, the new regime offers a significant benefit through a reduced surcharge rate.

  • Action: If your income exceeds ₹2 crore, the maximum surcharge rate under the new regime is 25%, compared to 37% in the old regime. This translates to a lower effective tax rate for ultra-high net worth individuals.
  • Impact: This can lead to substantial tax savings for the highest income brackets, making the new regime surprisingly beneficial for them despite the lack of deductions.

5. Prioritize Non-Tax-Saving Investments for Growth

Since traditional tax-saving instruments (like ELSS, PPF, etc.) don't offer direct tax benefits under the new regime, your investment strategy should shift.

  • Action: Focus on investments that align with your financial goals (wealth creation, retirement planning, emergency fund) rather than solely for tax benefits. Consider:
    • Equity Mutual Funds (non-ELSS): For long-term wealth creation.
    • Direct Equity: For higher risk-adjusted returns if you have expertise.
    • Debt Instruments: For stability and regular income.
    • Real Estate: For long-term asset appreciation (though home loan interest on self-occupied property is not deductible).
  • Impact: This approach encourages a more rational investment philosophy, where financial decisions are driven by growth potential and personal goals, rather than merely saving income tax.

6. Optimize Your Salary Structure (If Possible)

While most allowances are not exempt, understanding how your salary components are structured can sometimes help.

  • Action: If your employer offers flexibility, ensure your salary components align with the few permissible exemptions. For instance, any re-imbursement of official expenses (like official travel, internet for work from home if specifically allowed by IT rules) is generally not considered taxable income if proper bills are submitted.
  • Impact: This is a minor point, but every bit helps in maximizing your take-home pay.

7. Pay Attention to TDS and Advance Tax

Even with the new regime, accurate tax compliance is crucial.

  • Action: Ensure your employer has your chosen regime (new or old) declared so they deduct the correct TDS. If you have other income sources (e.g., freelance income, capital gains), calculate and pay your advance tax promptly to avoid penalties.
  • Impact: Proper TDS and advance tax planning prevent last-minute tax burdens and penalties.

8. Use Online Tax Calculators for Comparison

Making an informed decision is paramount.

  • Action: Before the end of the financial year (or at least before filing your ITR), use an online tax calculator that supports both the old and new regimes for FY 2025-26. Input your estimated income and all potential old regime deductions (even if you plan to choose the new regime).
  • Impact: This calculation will clearly show which income tax regime is truly more beneficial for you, removing any guesswork. Even if the new regime is your default, you can still switch to the old regime while filing your ITR if the calculation proves it's more advantageous.

Who Benefits Most from the New Tax Regime?

The revised new tax regime is particularly beneficial for:

  • Individuals with minimal or no tax-saving investments: If you don't typically utilize deductions like 80C, 80D, HRA, etc., the lower tax rates of the new regime will likely result in lower tax outgo.
  • Lower and Middle-Income Earners: Especially those with taxable income up to ₹12.75 lakh (salaried) or ₹12 lakh (non-salaried), who can achieve zero tax liability due to the enhanced rebate and standard deduction.
  • Individuals preferring simplicity: The new regime means less paperwork and tracking of investments/expenses for tax purposes.
  • High-income earners: The reduced surcharge rate for income above ₹2 crore makes the new regime attractive for them.

Conclusion

The revised income tax new regime for FY 2025-26 offers a compelling alternative to the traditional tax structure, emphasizing lower rates over a complex web of deductions. Although it makes tax planning very easy, it also requires taxpayers to have a change in their financial planning.


Here are some areas you should maximize your savings - Take advantage of standard deduction (if salaried), maximize employers NPS contribution, beware of few exemptions left, and make your investments match your financial goals and not just tax advantages. To make an informed choice concerning your financial health, always ensure that you run a tax calculator to determine your liability under the old regime and the new regime and make an informed choice.

FAQs

1. What is the new income tax regime in India?

It is a simplified tax system offering lower tax rates but limited deductions and exemptions.

2. Can I still save tax under the new income tax regime?

Yes, through options like standard deduction, NPS employer contributions, and rebate under Section 87A.

3. Is HRA allowed under the new regime?

No, exemptions for House Rent Allowance (HRA) are not permitted under the new regime.

4. What is Section 80CCD(2) in the new regime?

It allows tax exemption for employer's contribution to the National Pension Scheme (NPS), up to 10% of basic salary.

5. What is the income tax rebate under Section 87A?

A rebate of ₹25,000 is available for taxpayers with income up to ₹7 lakh under the new regime, making their tax zero.

6. Can I claim deductions under 80C or 80D in the new tax regime?

No. These deductions are not allowed under the new regime.

7. Which regime is better for tax saving: old or new?

If you have substantial deductions (above ₹2.5 lakh), the old regime may save more tax. Otherwise, the new regime is better for simplicity.

8. Can I switch between regimes every year?

Yes, salaried individuals can choose between the old and new tax regimes every financial year during ITR filing.

9. Are there any tax-free investments under the new regime?

While deductions are limited, tax-free returns from investments like PPF, EPF, or certain bonds still offer post-tax benefits.

10. Is standard deduction applicable under the new tax regime?

Yes, salaried and pensioned individuals can claim a ₹50,000 standard deduction under the revised new regime.


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