Lower tax on higher income in new tax regime from April 1: How your salary structure will decide if you get a big tax savings Many salaried employees hesitated to switch to the new tax regime as they could save taxes on the investments and expenses made during the financial year. However, unlike the old tax regime, where the 30% tax rate starts at incomes above Rs 10 lakh, the 30% tax rate in the new tax regime will start from incomes above Rs 24 lakh
The new income tax regime will have new income tax slabs from April 1, 2025. Further, individuals choosing the new income tax regime will have to pay no tax if their net taxable income does not exceed Rs 12 lakh. However, many taxpayers are still with the old tax regime. This is because the old income tax regime offers many deductions and tax exemptions. Many individuals give tax savings a higher priority, which makes the old tax regime more attractive.However, as budget 2025 has substantially brought down income tax slab rates for incomes up to Rs 24 lakh, more and more salaried taxpayers are considering a switch to the new tax regime.
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Nevertheless, an individual wanting to switch from the old to the new tax regime will not only have to ensure that income tax saved is more in the new tax regime but also need to know the deductions and exemptions that cannot be claimed by them.
ET Wealth decodes for you how your current salary structure in the old tax regime will be impacted and how you should rejig your current salary structure to save more tax in the new tax regime.
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Tax savings in old tax regime with current salary structure
Usually, individuals opting for the old tax regime have certain deductions available under the current salary structure. These are as follows:a) Employee's contribution to the Employees Provident Fund under Section 80C
b) Exemption on leave travel allowance (LTA) up to a certain extent
c) Exemption on house rent allowance (HRA) if living on a rented apartment
d) Employer's contribution to the National Pension System (NPS) under Section 80CCD (2)
e) Food coupon vouchers such as Sodexo of Rs 2,200 per month or annually of Rs 26,400
f) Other investments and expenses under Section 80C
g) Deduction of Rs 50,000 for NPS investment under Section 80CCD (1b)
h) Section 80D deduction for health insurance premium paid for self, family and parents
i) Section 80TTA deduction on interest earned from savings account
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Tax savings from new tax regime
Unlike the old tax regime, the new tax regime offers limited deductions. An individual opting for the new tax regime can claim the standard deduction from salary income and Deduction under Section 80CCD (2) for the employer's contribution to NPS.It is important to note that the reimbursements provided for telephone and conveyances are exempt from tax under both tax regimes. However, it will depend on the submission of bills to the employer ensuring that expenses are made in relation to performing official duty.
CTC is Rs 25 lakh: New or old; which tax regime is beneficial?
Given below is an example of an individual whose current CTC is Rs 25 lakh and who always opted for the old tax regime to save income tax.As the income tax slabs in the new tax regime will change from April 1, 2025, it is worth doing a comparison analysis to see if he will save more tax by opting for the new tax regime from FY 2025-26.
Break-up of CTC of Rs 25 lakh
| Components | OTR (In Rs) | NTR (In Rs) |
| Basic | 1000000 | 1000000 |
| HRA | 400000 | 400000 |
| Leave travel allowance | 100000 | 100000 |
| special allowance | 115500 | 75500 |
| Mobile reimbursement | 50000 | 50000 |
| Conveyance reimbursement | 240000 | 240000 |
| Employer's NPS contribution | 100000 | 140000 |
| Food coupons | 26400 | 26400 |
| Gross Pay | 2031900 | 2031900 |
| Car leasing | 300000 | 300000 |
| Employer's EPF contribution | 120000 | 120000 |
| Gratuity | 48100 | 48100 |
| Total CTC | 2500000 | 2500000 |
The above table shows a break-up of the CTC of Rs 25 lakh differently for the old tax regime (OTR) and the new tax regime (NTR). This is because an employer's contribution to the NPS account is different. Under the old tax regime, up to 10% of the basic salary is allowed as a deduction under Section 80CCD (2). On the other hand, 14% of the basic salary is allowed as a Section 80CCD(2) deduction.
Further, it is important to note that different components of the CTC will have different tax treatments under both tax regimes.
Here is the table below on how different components of the CTC will be taxed under the old and new tax regimes:
| Particulars | OTR | NTR |
| Total Pay | 2031900 | 2031900 |
| Add: Car lease perquisite value (<1600 CC engine) | 21600 | 21600 |
| Gross pay | 2053500 | 2053500 |
| Less: Mobile reimbursement | 50000 | 50000 |
| Less: Conveyance reimbursement | 240000 | 240000 |
| Less: Car leasing amount | 300000 | 300000 |
| Net Pay | 1463500 | 1463500 |
| Less: LTA exemption** | 100000 | 0 |
| Less: Standard deduction | 50000 | 75000 |
| Less: HRA exemption | 260000 | 0 |
| Less: Food coupons | 26400 | 0 |
| Taxable salary | 1027100 | 1388500 |
| Less: Section 80C deduction | 150000 | 0 |
| Less: Employer's NPS Contribution | 100000 | 140000 |
| Less: NPS deduction of Rs 50000 | 50000 | 0 |
| Less: Section 80TTA deduction on Savings Accounts | 10000 | 0 |
| Less: Section 80D deduction on health insurance | 50000 | 0 |
| Net taxable salary | 667100 | 1248500 |
| Tax amount (including cess) | 47,757 | 50440 |
**Only twice in a block of 4 years
The table above shows that mobile reimbursement and conveyance reimbursement are tax-exempt under both tax regimes, i.e., old and new tax regimes. Similarly, car leasing amount is exempted up to a certain extent.
According to income tax laws, the perquisite value of car leasing is taxable up to Rs 1800 per month or Rs 21,600 annually for a car with up to 1600CC engine. Any amount received over and above is exempted from tax. Hence, Rs 21,600 is added to the total pay as a perquisite value. However, the amount received as car leasing from the employer is exempted from tax. This is deducted from the gross pay.
Similarly, there are other exemptions that are claimed from salary income. Only standard deduction is available under both tax regimes. Other exemptions such as LTA, HRA and food coupons are exempted under the old tax regime only.
Once we have arrived at net taxable income, an individual can claim other deductions such as Section 80C, Section 80D, etc.
The tax outgo in the old tax regime is lower as compared to the new tax regime. However, LTA, which is claimed now, may not be available for exemption in the next financial year. This is because LTA exemption is available twice in the block of four years. Hence, if a salaried is not claiming LTA now, these calculations can change.
In most of the cases where individual taxpayers have limited means of claiming deductions or exemptions the new tax regime with revised tax slab appears to offer higher tax saving in financial year 2025-26.
However, there may be few taxpayers who may be eligible for a good number of deductions and exemptions. Moreover, there are many other deductions available to individual taxpayers in the old tax regime depending on their specific situation. For instance, a person living on rent in a city of work may have constructed or purchased a house in another city with the help of a home loan. He/she may not only get deduction for HRA but get further deduction of up to Rs 2 lakh on interest payment of such a housing loan.
Similarly, in case a person living or rent has a let-out house property then he/she can also claim deductions of up to Rs 2 lakh on interest payments of a housing loan besides the deduction for HRA. Similarly, there are many other deductions, which include cases of disability, donations to exempted institutions and so on. So, given your specific conditions, if overall deductions still give you a better deal, then you stick to the old tax regime.
However, if you have exhausted the option of deductions and exemptions and are likely to end up paying more income tax in the old tax regime then it would be better for you to switch to new tax regime, as it will not only save more income tax but also keep it hassle free as no need to arrange the proofs and keep records for claiming deductions and exemptions.
( Originally published on Mar 20, 2025 )
This story originally appeared on: India Times - Author:Faqs of Insurances
