income tax
Published on 4 April 2025
Key Tax-Saving Strategies Under the New Finance Act 2024-25
Introduction
The government's introduction of the Finance Act has brought about a "new tax system" aimed at simplifying tax filing by reducing tax rates and slabs. However, this act simultaneously eliminated several tax benefits previously available, such as those under Sections 80C and House Rent Allowance (HRA). Despite these changes, certain deductions remain accessible to taxpayers, allowing them to optimize their tax liabilities. As such, it is crucial for taxpayers to strategically plan their taxes and avoid any unfair practices.
In the fiscal year 2024-25, approximately 72% of taxpayers opted for the new tax regime. Out of 7.28 crore tax returns filed, 5.27 crore were under the new system, while 2.01 crore remained under the old regime. The appeal of the new system largely stems from its lower tax rates and increased rebates, yet it has removed many deductions like HRA and Leave Travel Allowance. Consequently, taxpayers find themselves needing new strategies to save on taxes.
Despite the removal of numerous deductions, three significant tax-saving options remain. Below, we explore these options in detail.
1. Standard Deduction
A key benefit within the new tax framework is the standard deduction. Previously set at Rs 50,000, this amount has been increased to Rs 75,000 for salaried employees and pensioners starting from the 2024-25 fiscal year.
Salaried employees receiving a regular salary and pensioners can avail themselves of this benefit.
Why is it Useful?
- Direct Income Reduction: It lowers taxable income without requiring specific investments.
- Automatic Application: The deduction applies automatically when tax returns are filed.
- No Spending Required: Unlike other deductions, no expenditure is necessary to qualify.
For instance, if an individual earns Rs 10 lakh annually, their taxable income would decrease to Rs 9.25 lakh after applying the standard deduction, effectively enabling tax savings.
2. Employer’s Contribution to NPS
Under Section 80CCD(2) of the Income Tax Act, contributions made by an employer to an employee’s National Pension System (NPS) account are tax-free up to Rs 50,000 per year. This not only helps taxpayers save money for the future but also reduces taxable income.
Why is it Useful?
Employers can contribute up to 10% of an employee’s basic salary and dearness allowance (DA) to the NPS, with the recent increase to 14% as per the Finance Act, 2025. Contributions remain tax-exempt up to Rs 50,000, while government employees enjoy the benefit of tax-free contributions up to 14%. Individual contributions to the NPS, previously deductible under Section 80C, are no longer eligible within the new tax framework. However, employers' contributions retain their tax-exempt status.
For example, for an employee with a salary and DA totaling Rs 10 lakh, the employer can contribute up to Rs 1.4 lakh, of which Rs 50,000 is completely tax-free.
3. Tax-Free Gratuity and Retirement Benefits
Certain retirement benefits, including gratuity and amounts received from Voluntary Retirement Schemes (VRS), remain tax-free under the new tax regime.
- Gratuity Exemption (Section 10(10)): Gratuity received at retirement or job termination is tax-free up to Rs 20 lakh for private-sector employees, while government employees enjoy full tax exemption on the gratuity amount.
- Leave Encashment (Section 10(10AA)): Unused leave days compensated by the employer can be tax-exempt, with a maximum cap of Rs 25 lakh for private-sector employees and complete tax exemption for government employees.
- Voluntary Retirement Scheme (VRS) (Section 10(10C)): Tax exemption of up to Rs 5 lakh is available for individuals opting for early retirement.
Break-Even Deductions for the Old Tax Regime
The following table outlines the minimum deductions necessary for the old tax regime to be more advantageous than the new system. Taxpayers whose deductions exceed these amounts may find the old regime more beneficial.
| Income (AY 2026-27) | Break-even Deductions |
|---|---|
| BEP for 13L | 4,87,500 |
| BEP for 14L | 5,12,500 |
| BEP for 15L | 5,37,500 |
| BEP for 16L | 5,75,000 |
| BEP for 17L | 6,08,300 |
| BEP for 18L | 6,41,700 |
| BEP for 19L | 6,75,000 |
| BEP for 20L | 7,08,300 |
| BEP for 21L | 7,25,000 |
| BEP for 22L | 7,41,700 |
| BEP for 23L | 7,58,400 |
| BEP for 24L and above | 7,75,000 |
Analysis of Break-Even Deductions
- Understanding the Break-even Point (BEP): This table illustrates the minimum deductions required for the old tax regime to be advantageous. Taxpayers whose actual deductions exceed these thresholds may benefit more from the old system.
- Progressive Trend: As income rises, so does the break-even deduction requirement. For example, at an income of Rs 13 lakh, deductions need to be Rs 4,87,500; for Rs 24 lakh and above, it increases to Rs 7,75,000. This indicates that higher-income earners require substantial deductions for the old regime to be favorable.
- Strategic Tax Planning: Taxpayers in higher income brackets should assess their deductions (e.g., HRA, Section 80C, Section 80D, home loan interest) to evaluate the most beneficial tax regime. If deductions fall short of the break-even point, opting for the new tax regime may be wise.
- Policy Implications: The new tax regime offers a streamlined tax structure with reduced rates yet fewer deductions. By examining actual deductions against break-even points, taxpayers can make more informed financial decisions.
How These Deductions in the New Regime Help You Save Tax
Although the new tax system has eliminated several common deductions, the three aforementioned benefits provide opportunities for tax savings. For instance, consider two employees earning an annual salary of Rs 15 lakh:
| 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 |
Conclusion
While the new tax system has removed numerous common deductions, taxpayers can still effectively manage their tax liabilities by utilizing the standard deduction of Rs 75,000, tax-exempt employer contributions to NPS under Section 80CCD(2), and tax-free retirement benefits such as gratuity and leave encashment.