The New Tax Regime in India has become the default option for most taxpayers, offering lower tax rates compared to the Old Regime. However, since the New Regime does not support popular deductions like Section 80C (PPF, ELSS) or Section 80D (Health Insurance), many believe there are no ways left to save tax under this system.
This is a misconception. In this article, we’ll explore legal and effective strategies to minimize your tax liability under the New Regime for FY 2025-26 (AY 2026-27).
1. Take Advantage of the Enhanced Standard Deduction
For FY 2025-26, the government increased the standard deduction under the New Tax Regime from ₹50,000 to ₹75,000. This is a flat, automatic deduction available to all salaried individuals and pensioners, requiring no investment declarations or proof submissions.
2. Invest in NPS (Section 80CCD(2))
While the individual NPS deduction of ₹50,000 under Section 80CCD(1B) is only available under the Old Regime, employer contributions to your NPS account are eligible for deduction under Section 80CCD(2) under the New Tax Regime.
- How it works: Your employer can contribute up to 10% of your basic salary plus dearness allowance (DA) into your NPS account.
- The benefit: This amount is deducted directly from your taxable income, offering significant savings, especially for individuals in the 20% or 30% tax brackets.
3. Understand the Section 87A Rebate Threshold
One of the most attractive features of the New Tax Regime is the Section 87A rebate. For FY 2025-26, if your net taxable income is up to ₹12,00,000, you are eligible for a full tax rebate, reducing your tax liability to zero.
- Standard Deduction impact: Since you get a standard deduction of ₹75,000, salaried individuals with a gross annual salary of up to ₹12,75,000 pay zero tax under the New Regime.
- Marginal relief: If your taxable income exceeds ₹12 Lakh by a small amount, you may qualify for marginal relief to ensure your tax doesn’t exceed the income that went over the limit.
To compare how your deductions stack up, try our Income Tax Calculator.
4. Claim Tax-Free Salary Components
Even under the New Regime, certain allowances and salary restructurings remain tax-exempt:
- Gratuity: Exemption up to ₹25 Lakh on retirement or resignation.
- Leave Encashment: Exemption up to ₹25 Lakh for non-government employees upon retirement.
- Employer Co-contributions: Employer contributions to EPF (up to 12% of basic, subject to a combined cap of ₹7.5 Lakh along with NPS and Superannuation).
- Conveyance & Travel Allowances: Allowance to meet expenses incurred on official travel or transport.