Opting for new tax regime? Here are a few deductions you can and cannot avail

The new tax regime provides a lower tax rate but removes several deductions that are otherwise available under the old tax regime. For example, it does not allow you deductions on long term savings, health insurance such as PPF, house rent allowance or home loan. But under the new tax regime, you can still avail certain deductions. 

For example, taxpayers can claim a deduction for interest paid on housing loans taken for a rented-out property under section 24(b) in the new tax regime. The interest paid on the housing loan is deductible from the rental income received from the property, which reduces the taxable income from the property. It is important to note that the deduction for interest paid on housing loans taken for a self-occupied property is not available under the new tax regime.

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Similarly, under the new tax regime, taxpayers can claim the benefit of employer contributions to their National Pension System (NPS) account under section 80CCD(2) of the Income Tax Act. This deduction is restricted to the employer's contribution to NPS made for the benefit of the employee, up to 10 per cent of the employee's salary (Basic + DA). Apart from the deductions for interest on let-out property under section 24(b) and NPS contributions under section 80CCD(2), the new tax regime provides exemptions for the voluntary retirement exemption, gratuity exemption and leave encashment exemption.

“Under the new regime, which will be the default regime from FY23-24, deductions will not be allowed under chapter VIA of the income-tax act’1961 such as deduction for donations made to specified charitable institutions or trusts under section 80G, deduction for interest income earned from savings account up to Rs 10,000 under section 80TTA/80TTB for senior citizens and deduction for interest paid on education loans under section 80E, life insurance premium, etc. The taxpayers under the new regime have to forgo these deductions," Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm, said.

"However, the contribution made by private sector employer towards Tier 1 NPS account is eligible for tax deduction under section 80CCD (2) up to 10 per cent of employee’s basic pay plus dearness allowance of salary in any particular financial year under the new regime. Also, if a taxpayer opts for the new tax regime exemptions such as Leave Travel Allowance, House Rent Allowance, Children Education Allowance, Deduction for professional tax, Interest on housing loan and deductions on specified investments, etc will not be allowed. However, interest paid on housing loan taken for a rented-out property can be claimed as deduction under section 24(b) in the new tax regime as well," he added.

The new regime seems to be more beneficial for the taxpayers with lower tax slabs. Taxpayers would now need to evaluate their tax liability under both the tax regimes and decide accordingly.