New income tax regime: Salaried individuals can claim these deductions
Although the new tax regime has become more appealing after the Union Budget 2023-24, it does not incorporate the standard deductions available under the old tax regime.
The new tax regime, which has zero tax liability for people with income up to Rs 7 lakh, has become the default regime for taxpayers.
India Today Business Desk
Written By: Koustav Das
In Short New tax regime has become the default option for taxpayers
Two deductions applicable for salaried individuals
Common deductions not eligible under new income tax regime
If you intend to choose the new tax regime for the financial year 2024-25, there are two deductions available specifically for salaried individuals.
The new tax regime, which has zero tax liability for people with income up to Rs 7 lakh, has become the default regime for taxpayers.
Although the new tax regime has become more appealing after the Union Budget 2023-24, it does not incorporate the standard deductions available under the old tax regime.
However, there are some deductions that salaried deductions can claim under the new regime.
Standard Deduction
It is a straightforward benefit offered exclusively to salaried individuals and pensioners. When calculating the net taxable salary or pension income, employers automatically subtract Rs 50,000 as a standard deduction from the gross salary. No documentation is required to claim this deduction.
This deduction is reflected in Part B of Form 16, the TDS certificate issued by the employer, detailing the taxes deducted from the salary throughout the financial year. When filing the income tax return (ITR), individuals can claim this deduction under the head "Income from salaries/pension" as per Section 16(ia) of the Income-tax Act.
In addition, family pensioners are also eligible for the standard deduction, albeit at a reduced rate of Rs 15,000 compared to the Rs 50,000 available for salaried individuals and pensioners. Family pension is taxed under the head "Income from other sources."
Section 80CCD (2) deduction under NPS
This deduction has been available since the introduction of the new tax regime in the fiscal year 2020-21.
It applies when an employer deposits funds into an employee's Tier-I NPS account. The income tax laws specify the maximum deduction allowed for both private and government employees.
Private sector employees can claim up to 10% of their salary as a deduction, while government employees can claim up to 14% of their salary under Section 80CCD (2).
Salary, according to income tax laws, includes basic pay plus dearness allowance.
Typically, the employer's contribution to an employee's Tier I NPS account forms part of the employee's cost to the company (CTC), which can reduce the employee's take-home pay.
The employer's NPS contribution is included in the gross salary payable by the employer. Employees must claim the deduction under Section 80CCD (2) when filing their income tax return (ITR). Part B of Form 16 will contain details of the employer's contribution to the NPS account.
Employees do not need to provide proof of NPS contribution to avoid higher TDS from salaries because the contribution is made directly by the employer to the NPS account, similar to how Employees' Provident Fund (EPF) contributions are made.
However, employees should check their employer's policy on proof submission.
It's important to note that if an employer's NPS contribution exceeds a certain limit, it may be taxable in the hands of the employee.
According to income tax laws, if the total contributions by an employer to EPF, NPS, and Superannuation fund in a financial year exceed Rs 7.5 lakh, the excess amount will be taxable to the employee.
Additionally, any interest, dividend, or return earned on the excess contribution will also be taxable.
