Tax-saving: Exemptions you can claim under the new and old tax regimes

For financial year 2023-24 as also the subsequent years, the new, minimal exemptions tax regime is the default system. Although the new regime has done away with about 70 exemptions, it does offer a few exemptions.

Put simply, your tax payable will be determined by the rates and rules under this regime unless you specifically pick the old regime, which offers various popular tax breaks under Section 80C, Section 80D, Section 24B and so on.

This, however, does not mean that the new regime does not offer any tax relief. Here are the tax benefits that you can avail of, even if you choose the new regime (as also the old tax regime).

Employers’ contribution to employees’ NPS

This is among the tax benefits that remains under-utilised, though it is available under both regimes. While the National Pension System (NPS)-linked tax deduction — Rs 1.5 lakh under Section 80C  and Rs 50,000 under 80CCD (1B) — do not find a place in the new regime, deduction for employers’ contribution to employees’ NPS has been retained.

An employer’s contribution to the NPS of up to 10 percent (14 percent for government employees) of an employee’s basic pay, plus dearness allowance (DA), is allowed as deduction under Section 80CCD(2). Check if you can negotiate with your employer and restructure your salary to accommodate this benefit from April 1, 2024, and earn tax breaks for the financial year.

However, the tax-free limit on benefits received from employers is capped at Rs 7.5 lakh a year. If the total benefits breach this cap, the excess amount will be treated as the employee's taxable perquisite.

Home loan interest deduction on rented properties

One important deduction that you can still claim under the new tax regime is deduction of interest on home loan for a  property that has been rented out. But the condition of ‘no negative loss from house property’ makes this deduction less attractive.

That is, interest cost in excess of rental income (negative loss from house property) cannot be set off against other income the same year or carried forward to future years. Also, you cannot claim the home loan interest deduction for a self-occupied property, which is available under Section 24(b) of the old tax regime.

Under the old tax regime, you can claim this deduction for both self-occupied and properties given out on rent. In case of a rented property, the interest paid is deducted from the rent received (net of property taxes and standard deduction of 30 percent) to arrive at the income from house property.

This helps you to lower your property income and hence the tax to be paid on it. As long as the loss from house property (interest paid minus rent received after adjusting for property tax and standard deduction) does not exceed Rs 2 lakh, it can be set off against any other income in the same year to reduce your overall tax liability. Any loss from rented property, over and above Rs 2 lakh, gets carried forward and can be claimed over eight subsequent financial years.

However, there is a slight variation in how this tax benefit can be claimed under the new tax regime. Negative loss from house property is not allowed to be set off against other income under this regime.

So, let's say, you have only one property and your rental income (net of property taxes and standard deduction of 30 percent) is Rs 5 lakh and your home loan interest is Rs 8 lakh, you can offset only Rs 5 lakh interest against the rental income to calculate the income from your house property.

Under the new regime, the remaining unadjusted Rs 3 lakh cannot be offset against any other income in the same year or be carried forward. However, under the old regime, in the above example, Rs 2 lakh (of the Rs 3 lakh interest exceeding rental income), can be set off against other income in the same year, as a loss of up to Rs 2 lakh is allowed. The remaining Rs 1 lakh can be carried forward into subsequent years.

Tax exemption on leave encashment

As a salaried individual, you may be entitled to paid or privilege leave. Most employers allow their employees to carry forward any paid leave they have not used during a year. And, you can encash the accumulated paid leave later. That is, the employer pays you an amount in lieu of the unutilised paid leave.

Under the new tax regime, too, employees are entitled to tax exemption on leave encashment at the time of resignation or retirement. The tax-exemption limit depends on whether you are a government or a non-government employee.

As a government employee, your entire leave encashment is tax-exempt. Non-government employees can claim tax exemption on leave encashment of up to Rs 25 lakh from April 1, 2023.

If you encash your leave while still working for the organisation, the entire amount is taxable. This is applicable to both government and non-government employees under both tax regimes. However, if the employee dies while in service, the entire leave encashment will be tax-exempt in the hands of her legal heirs.

Employers’ EPF contribution of up to 12 percent of basic salary

Your employer contributes 12 percent of your basic salary to your EPF account. Like NPS employer contribution, this amount, too, is exempt from tax as long as the aggregate retirement benefits that you receive from your employer do not cross the Rs 7.5-lakh limit in a year.

Tax exemption on life insurance maturity proceeds

Maturity proceeds received under life insurance policies are tax-free. However, this relief comes with certain caveats, if you have bought policies that come bundled with an investment, such as a unit-linked insurance policy (Ulip) or an endowment plan.

From financial year 2021-22, the government has introduced restrictions on maturity proceeds of Ulips. So, if you pay aggregate premiums of over Rs 2.5 lakh on policies bought after February 1, 2021, the maturity proceeds will attract tax.

Budget 2023 has extended similar restrictions to traditional non-Ulip policies, largely endowment plans. If the aggregate premiums of such policies bought after April 1, 2023, exceed Rs 5 lakh, the income earned at the end of the tenure will be subject to tax.

In all cases, proceeds received by nominated family members on the policyholder’s death are not taxable.

Standard deduction on rental income

If you own a property that you have rented out, you can claim a standard deduction of 30 percent against your let-out property’s annual value.

Put simply, annual value is the gross annual value (actual rent or reasonable rent as per market rates) minus municipal taxes paid.

No tax on PPF or Sukanya Samriddhi Yojana maturity proceeds

You will not have to pay tax on maturity proceeds from investments made in the public provident fund (PPF) and Sukanya Samriddhi Yojana. However, under the new regime, investments made in these accounts will not be eligible for Section 80C deduction of up to Rs 1.5 lakh per annum that the old regime provides.