Optimizing Tax Savings Under the New Tax Framework
The government introduced the new tax framework through the Finance Act to simplify tax compliance by lowering tax rates and revising tax slabs. However, this also led to the removal of several tax benefits that taxpayers previously utilized, such as deductions under Section 80C and exemptions like HRA and LTA. Despite these revisions, some deductions remain available, enabling taxpayers to plan their taxes efficiently.
For the financial year 2024-25, nearly 72% of taxpayers opted for the new tax system. Out of 7.28 crore tax returns filed, 5.27 crore fell under the new regime, while 2.01 crore remained under the old structure. Many taxpayers prefer the new system due to its reduced tax rates and higher rebates, though the removal of key deductions necessitates alternative strategies for tax savings.
While numerous exemptions have been discontinued, three major tax-saving opportunities still exist within the new framework. Let’s explore them in detail.
1. Standard Deduction Benefit
One of the primary advantages of the new tax system is the standard deduction. Previously set at Rs 50,000, this deduction has now been increased to Rs 75,000 for salaried individuals and pensioners from FY 2024-25.
Why is it beneficial?
It directly lowers taxable income without requiring any specific investments.
It is automatically applied when filing tax returns.
Unlike other deductions, no expenditure is necessary to claim this benefit.
For example, if an individual earns Rs 10 lakh annually, the standard deduction reduces their taxable income to Rs 9.25 lakh, thereby lowering their tax liability
2. Employer Contributions to NPS (Section 80CCD(2))
Under Section 80CCD(2) of the Income Tax Act, an employer’s contribution to an employee’s National Pension System (NPS) account remains tax-free up to Rs 50,000 per year. This provision enables taxpayers to save taxes while simultaneously securing their retirement.
Why is it advantageous?
Employers can contribute up to 10% of an employee’s basic salary and dearness allowance (DA) towards NPS, increased to 14% as per the Finance Act, 2025.
Contributions up to Rs 50,000 from employers are entirely tax-free.
For government employees, the tax-exempt employer contribution remains at 14%.
For example, if an employee’s salary and DA total Rs 10 lakh annually, the employer can contribute up to Rs 1.4 lakh, with Rs 50,000 being completely tax-exempt.
3. Exemptions on Gratuity and Retirement Perks
Retirement benefits, such as gratuity and voluntary retirement scheme (VRS) payouts, remain tax-free under the new system.
Gratuity Exemption (Section 10(10)): Employees receiving gratuity upon retirement or job termination are eligible for tax exemption up to Rs 20 lakh in the private sector, whereas government employees enjoy full tax exemption.
Leave Encashment (Section 10(10AA)): Payments received for unused leave days qualify for tax exemption, with a cap of Rs 25 lakh for private-sector employees, while government employees receive full tax exemption.
Voluntary Retirement Scheme (VRS) (Section 10(10C)): Employees opting for early retirement can claim a tax exemption of up to Rs 5 lakh on VRS payouts.
Comparing the New and Old Tax Regimes
To determine whether the old tax system is more beneficial, taxpayers must assess their total deductions against break-even thresholds. The table below outlines the minimum deductions required for the old system to be more advantageous:
| Income (AY 2026-27) | Required Deductions (Rs) |
|---|---|
| 13L | 4,87,500 |
| 14L | 5,12,500 |
| 15L | 5,37,500 |
| 16L | 5,75,000 |
| 17L | 6,08,300 |
| 18L | 6,41,700 |
| 19L | 6,75,000 |
| 20L | 7,08,300 |
| 21L | 7,25,000 |
| 22L | 7,41,700 |
| 23L | 7,58,400 |
| 24L and above | 7,75,000 |
Key Takeaways:
Break-even Threshold: This represents the minimum deductions required for the old tax system to be financially favorable. If actual deductions surpass these values, the old system is preferable.
Progressive Trend: As income increases, the necessary break-even deduction amount also rises. For example, at an income of Rs 13 lakh, the required deductions are Rs 4.87 lakh, whereas at Rs 24 lakh, they increase to Rs 7.75 lakh.
Strategic Tax Planning: High-income taxpayers should evaluate deductions such as HRA, 80C, 80D, and home loan interest to determine which tax system offers better savings.
Policy Considerations: The new tax framework simplifies tax calculations with lower rates but eliminates multiple exemptions. Comparing actual deductions with break-even points helps taxpayers make informed financial decisions.
Impact of These Deductions on Tax Savings
While the new tax system has removed several deductions, these three key benefits can still significantly lower taxable income. Let’s compare two employees earning Rs 15 lakh annually:
| Particulars | Without Deductions | With Standard Deduction + NPS + Gratuity |
| Gross Salary | Rs 15,00,000 | Rs 15,00,000 |
| Standard Deduction | Nil | Rs 75,000 |
| Employer NPS Contribution (10%) | Nil | Rs 1,50,000 |
| Taxable Income | Rs 15,00,000 | Rs 12,75,000 |
| Tax Payable (New System) | Higher | Lower |
The new tax system eliminates many traditional deductions but still enables taxpayers to save through the standard deduction of Rs 75,000, tax-free employer contributions to NPS, and exemptions on retirement benefits such as gratuity and leave encashment. By leveraging these tax-saving opportunities and comparing deductions with break-even thresholds, taxpayers can make well-informed financial decisions to maximize their savings.
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