How to Save Tax Under the New Tax Regime FY 2025- 26

If you have tried to file taxes by yourself, you’d have experienced how stressful it is. In India, tax is a confusing topic, considering how complex the tax structure is with all the exemptions and deductions.

While it had its benefits, it also came with high complexity, compliance burden and lots of errors. To simplify taxation, the government introduced the new tax regime in 2020. Ahead, we explain the new tax regime and how you can save tax under this regime.

What is the New Tax Regime?

The new tax regime was announced in the Union Budget 2020 and came into effect from FY 2020–21. Then, it was introduced as an alternative to the old tax regime. The new tax regime has lower tax slab rates and a simpler structure with many of the exemptions and deductions removed.

Salaried taxpayers have the option to choose between the old and new regimes each year. The adoption of the new regime was low as it didn’t have the popular deductions. In 2023, the government reduced the number of slabs and increased the rebate limit and made the new regime more competitive.

In the Union Budget 2024, the new tax regime was made the default option and taxpayers had to actively opt for the old regime if they preferred it. This was done with the intent to reduce complexity and shift India towards a deduction-light, rate-driven tax structure.

New Tax Regime Slab Rates for FY 2025-26

The attractive features of the new regime are its progressive tax structure with wider slabs and lower rates.

– Rs. 0 to Rs. 4 lakhs: No tax
– Rs. 4 lakhs to Rs. 8 lakhs: 5%
– Rs. 8 lakhs to Rs. 12 lakhs: 10%
– Rs. 12 lakhs to Rs. 16 lakhs: 15%
– Rs. 16 lakhs to Rs. 20 lakhs: 20%
– Rs. 20 lakhs to Rs. 24 lakhs: 25%
– Above Rs. 24 lakhs: 30%

Under the new tax regime, many taxpayers automatically pay less tax compared to the old regime’s higher slab rates, even without claiming multiple deductions.

Benefits You Get Under the New Tax Regime

Even though it removed many deductions, the new tax regime comes with its benefits.

Increased Standard Deduction: Salaried employees can receive Rs. 75,000 standard deduction, compared to just Rs. 50,000 under the old regime. This automatic deduction reduces your taxable income without requiring any investment or documentation.

Enhanced Family Pension Exemption: If you receive a family pension after the death of an employee, one-third of that pension is exempt from tax, up to a maximum of Rs. 25,000 annually. This is an improvement over the old regime’s Rs. 15,000 limit.

FACT Under Section 115BAC, taxpayers get lower income tax rates, but in return, they have to give up most tax benefits. This means exemptions and deductions like House Rent Allowance (HRA), Section 80C investments, and interest on home loans for self-occupied houses cannot be claimed.

Deductions You Still Can Claim Under New Tax Regime

You still can claim some benefits under the new tax regime.

Higher Employer NPS Contribution: Under Section 80CCD(2), your employer’s contribution to the National Pension System is exempt up to 14% of your basic pay, compared to only 10% under the old regime. This enhanced limit makes the new regime particularly attractive for employees whose companies contribute more to NPS.

Home Loan Interest on Let-Out Property: If you’ve rented out a property and are paying interest on a home loan for it, you can claim the entire interest amount under Section 24(b) without any upper limit. This is particularly beneficial for real estate investors.

Exempt Allowances: Several work-related allowances remain tax-free, including cost of tour and transfer, daily allowances for outstation business travel, conveyance allowance for official duties and transport allowance for differently abled employees up to Rs. 3,200 per month.

Exempt Perquisites: Various employer-provided benefits don’t add to your taxable income, such as telephone or mobile phone provided at your residence, health insurance premiums paid by your employer, recreational facilities like club memberships and gifts from relatives or received on special occasions like weddings.

Retirement Benefits: Your financial security at retirement remains protected with exemptions for gratuity, leave encashment up to Rs. 25 lakhs for non-government employees and provident fund withdrawals after five years of continuous service.

Deductions Not Allowed Under New Tax Regime

While you enjoy the new benefits, the new tax regime lets go of some old benefits as well.

Section 80C Investments: This is the biggest change in the new tax regime. You cannot claim deductions for investments in LIC premiums, Public Provident Fund, Equity Linked Savings Schemes, National Savings Certificates, tax-saving fixed deposits, children’s tuition fees or principal repayment on home loans. For many taxpayers who max out this Rs. 1.5 lakhs deduction annually, this is a significant loss.

House Rent Allowance: If you’re living in rented accommodation, you cannot claim HRA exemption under the new regime, even if your employer pays it as part of your salary structure.

Section 80D Health Insurance: While employer-paid health insurance premiums remain exempt as a perquisite, you cannot claim deductions for health insurance premiums you pay personally for yourself, your family or your parents.

Self-Occupied Property Interest: The Rs. 2 lakhs deduction for interest paid on home loans for self-occupied properties is exclusively available under the old regime. This is a substantial benefit that homeowners need to factor into their decision.

Overall, the removal of deductions has made tax calculation simpler.

New Tax Regime vs Old Tax Regime: Which Is Better?

These tax regimes are options you can choose from based on your financial situation.

The new tax regime works better for middle-income earners who don’t have many tax-saving investments. They will benefit from the lower tax rates. If you’re earning between Rs. 8-15 lakhs annually, don’t invest heavily in 80C options, don’t pay significant rent and don’t have a home loan, the new regime’s lower slabs result in reduced tax liability.

First-time earners and young professionals usually find the new regime more attractive because it provides higher disposable income and eliminates the pressure to lock money into long-term investments just to save tax. You have the flexibility to invest in options that might offer better returns without the constraint of tax considerations.

The old tax regime is better suited for taxpayers with high deductions, especially those who maximize their Section 80C limit, pay substantial HRA, have significant home loan interest (particularly on self-occupied property), pay high health insurance premiums for themselves and parents or utilize multiple other deductions available under the old regime.

High-income earners with comprehensive investment portfolios may find that, despite the old regime’s higher tax rates, the cumulative benefit of all available deductions results in lower overall tax liability.

Should You Switch to New Tax Regime?

You can switch to the new tax regime if:

– Taxable income is ₹12–15 lakhs or below with minimal deductions; lower slab rates typically reduce tax outgo.

– You don’t have a home loan or rental expenses; the absence of major deductions makes the new regime more efficient.

– You prefer liquidity over lock-in products; no need to invest in long-term 80C instruments.

– You are early in your career; a simpler tax structure allows investment decisions without tax-driven constraints.

The best part about the new tax regime is that you can switch between the regimes every financial year if you don’t have a business income. So, try both regimes, calculate your tax liability under each annually and choose whichever results in a lower tax payment. You’re not locked into a permanent decision.

Conclusion

The choice between the old and new tax regimes depends on your income, deductions and life stage. Compare your actual tax liability under both regimes based on real deductions, not assumptions. If you are not fully utilising 80C, HRA or other major deductions, the new regime’s lower rates and simpler structure may be more suitable. For many middle-income taxpayers without large home loans or complex investments, the new regime offers lower taxes with easier compliance. Reassess your choice each year as your financial situation changes and select the regime that maximises post-tax income while aligning with your financial goals.

Frequently Asked Questions

Is there any exemption in the new tax regime?

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Can we save tax in a new tax regime?

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How to get tax relief in a new tax regime?

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How to pay less tax in a new tax regime?

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What deductions can I claim in the new tax regime?

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Is there any exemption in the new tax regime?

Yes. Exemptions include the standard deduction (₹75,000), certain travel and conveyance allowances, family pension exemptions and specific perquisites like employer-provided telephones or insurance premiums.

Can we save tax in a new tax regime?

Absolutely. You save tax primarily through the relaxed slab rates and specific deductions like employer NPS contributions and the standard deduction.

How to get tax relief in a new tax regime?

You can get relief by utilizing the ₹60,000 rebate and ensuring your salary is structured to include exempt perquisites and allowances.

How to pay less tax in a new tax regime?

Focus on maximizing the allowed deductions: contribute to your NPS through your employer, claim interest on let-out properties and use the higher standard deduction.

What deductions can I claim in the new tax regime?

You can claim the standard deduction (₹75,000), Section 80CCD(2) (Employer NPS), Section 24 (interest on let-out property) and Section 80JJAA (additional employee costs).