Tax-Saving Made Easy: In the financial year 2023-24, as well as subsequent years, the new, minimal exemptions tax regime will be the default. Although the new regime eliminates about 70 exemptions, it still offers a few exemptions.
Unless you specifically choose the old regime, which offers various popular tax breaks under Section 80C, Section 80D, Section 24B, etc., your tax payable will be determined by the rates and rules under this regime.
Even so, if you choose the new regime (as well as the old regime), you will be able to take advantage of the following tax benefits.
Contribution of employers to employee satisfaction
Even though it is available under both tax regimes, this benefit is underused. The National Pension System (NPS)-linked tax deductions — Rs 1.5 lakh under Section 80C and Rs 50,000 under Section 80CCD (1B) — no longer exist in the new regime, but the deduction for employers’ contributions to employees’ NPS remains.
Section 80CCD(2) allows employers to deduct up to 10 percent (14 percent for government employees) of an employee’s basic pay and dearness allowance (DA) as contributions to the NPS. Ask your employer to restructure your salary from April 1, 2024, so that you can take advantage of this benefit and earn tax breaks.
There is, however, a tax-free limit of Rs 7.5 lakh per year on employee benefits received from employers. If the employee’s benefits exceed this limit, the excess amount is taxable.
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Deduction for home loan interest on rented properties
You can still deduct interest on a home loan for a rented property under the new tax regime. However, the ‘no negative loss from house property’ condition makes this deduction less valuable.
Therefore, interest costs exceeding rental income (negative loss from house property) cannot be offset against other income in the same year or carried forward. 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.
Self-occupied as well as rental properties were eligible for this deduction under the old tax regime. The income from house property is calculated by subtracting the interest paid from the rent received (net of property taxes and a standard deduction of 30 percent).
This helps you to lower your property income and thus the tax to be paid on it. In order to reduce your overall tax liability, you can set off the loss from house property (interest paid minus rent received after adjusting for property taxes and standard deductions) against any other income you earn in the same year. A loss over Rs 2 lakh from rented property gets carried forward and can be claimed over eight subsequent financial years.
Negative losses from house property cannot be set off against other income under the new tax regime, however.
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, then you will be able to deduct only Rs 5 lakh interest from the rental income when calculating the income from your house.
Under the new regime, the remaining unadjusted Rs 3 lakh cannot be offset against any other income in the same year or carried forward. Under the old regime, in the above example, Rs 2 lakh (of 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 permitted. Rs 1 lakh can be carried forward to future years.
Encashment of leave is tax-free
If you are a salaried employee, you may be entitled to privilege leave or paid leave. It is possible to encash accumulated paid leave later if you have not used it during the year. Your employer pays you an amount in lieu of the unused paid leave.
The new tax regime also exempts employees from paying taxes on leave encashments at the time of resignation or retirement.
From April 1, 2023, non-government employees will be able to claim tax exemption on leave encashments of up to Rs 25 lakh.
While you are still working for the organization, you are taxed on the entire amount if you encash your leave. This applies to both government employees and non-government employees under both tax regimes. If, however, the employee dies while in service, her legal heirs will be tax-exempt from encashment of her leave.
Up to 12 percent of basic salary can be contributed by employers to EPF
As with NPS employer contributions, your employer contributes 12 percent of your basic salary to your EPF account. Both amounts are exempt from tax, provided the aggregate retirement benefits you receive from your employer do not exceed Rs 7.5 lakh.
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Life insurance maturity proceeds are tax-exempt
Generally, life insurance proceeds received at maturity are tax-free. However, some caveats apply if you purchased a policy bundled with an investment, such as a unit-linked insurance policy (ULIP).
In the financial year 2021-22, the government will tax the maturity proceeds of Ulips policies bought after February 1, 2021.
If the aggregate premiums of such policies purchased after April 1, 2023, exceed Rs 5 lakh, the income earned at the end of the tenure will be taxed.
Nominated family members are not taxed on the proceeds received on the death of the policyholder.
Rental income standard deduction
Against the annual value of your let-out property, you can claim a standard deduction of 30 percent.
Basically, annual value is the gross annual value (actual rent or reasonable rent based on market rates) less municipal taxes.
There is no tax on maturity proceeds from PPFs or Sukanya Samriddhi Yojanas
When you invest in a public provident fund (PPF) or Sukanya Samriddhi Yojana, you will not have to pay tax on maturity proceeds. Under the new regime, however, investments in these accounts will not be eligible for Section 80C deductions of up to Rs 1.5 lakh per annum that the old regime offers.
