Tax Savings Under the New Regime of 2025 — Guide to Deductions & Exemptions
A practical Zerolev guide covering the new regime’s structure, permitted deductions, exemptions, planning tips, worked examples and filing considerations for FY 2025–26.
Introduction & How to Use This Guide
A short roadmap and scope of coverage.
Purpose
This guide summarises the practical steps taxpayers can take to optimise tax under the New Regime (2025). It focuses on permitted deductions, retained exemptions, common planning techniques, sample computations and filing tips. It is designed for advisors, accounting teams and taxpayers seeking to evaluate regime choice and optimise tax legally.
How to read
Each chapter contains (a) statutory summary, (b) practical interpretation, (c) examples where relevant, and (d) action checklist. For complex cases (business income, capital gains, cross-border issues), consult a tax professional.
Overview of the New Regime — Structure & Key Changes
What changed in 2025 and the practical implications.
Structural overview
The New Regime in 2025 introduced revised slab rates and re-evaluated the universe of deductions and exemptions. Key focus areas include removal or limitation of several long-standing exemptions, retention of limited allowances, and simplified concessional treatments for certain savings instruments.
Taxpayers must assess the trade-off between lower base rates and restricted deduction claims. This guide emphasises retained opportunities and record-keeping essentials to support allowable claims.
Decision factors
When deciding between the Old and New regimes, evaluate: (1) availability of large deductions (house loan interest, section 80C bundle), (2) nature of income (salary vs business vs capital gains), (3) long-term planning goals, and (4) one-time benefits (e.g., exemptions on transfer or retirement receipts).
Permitted Deductions Under the New Regime
List, computation notes and documentation required.
Standard deductions retained
The New Regime retains a narrow set of deductions — standard deduction for salaried taxpayers, employer’s contribution to NPS (subject to limits in some cases), and other specified allowances. Check the current Finance Act schedules for the precise list of retained items.
Section-wise highlights
Important heads often highlighted in practice include:
- Standard deduction for salaried persons (where applicable)
- Certain exemptions linked to capital receipts (as specifically preserved)
- Contribution-linked benefits preserved by explicit clause
Computation caveats
Always apply deduction limits precisely (monetary ceilings, percentage caps, or linked thresholds). For items that require proof (medical bills, insurance receipts), preserve originals or certified copies. Where claims are aggregated (80C-style caps), confirm whether the New Regime preserves aggregated ceilings or replaces them.
Commonly-misunderstood items
Some taxpayers assume all old-regime deductions are available — they are not. Typical confusions include: (a) home loan interest deductions, (b) certain educational deductions, and (c) exemptions linked to tax-free perquisites. Confirm each item against the 2025 schedule.
Exemptions That Remain & How They Work
Which exemptions continue and the tests applied.
Retained exemptions
The New Regime preserves certain narrow exemptions for policy reasons — e.g., specific agricultural-linked receipts, small investor exemptions and specified long-term capital gains with grandfathering rules. Where exemptions continue, they often carry stricter qualifying conditions and documentation tests.
Trustee or charitable exemptions are typically unaffected, but procedural conditions and reporting can be tightened.
Exemption examples
Example: A grandfathered capital gain on an asset sold in FY 2025–26 may retain indexation benefit or concession if it falls within transition windows specified in the Finance Act. Always verify date-based cut-offs in the statute.
Tax-efficient Investments & What Still Works
Practical guidance on investment choices under the New Regime.
Retained investment vehicles
Some tax-preferred instruments continue to provide benefits (e.g., employer contributions, certain government bonds, and small-saver schemes that have specific exemptions). The New Regime aims to reduce taxpayer distortion — so instruments that persist typically do so for public-policy reasons.
Planning trade-offs
Evaluate investment decisions on combined metrics: expected post-tax return, liquidity, and non-tax benefits (insurance, employer benefits). Avoid structuring purely for marginal tax benefits if compliance overhead negates returns.
Special rules for Salaried Employees
Declarations, employer reporting and proof collection.
Investment declarations
Salaried employees should furnish accurate declarations to employers for any retained deduction/allowance. Employers must reconcile claims with submitted proofs and may be required to report certain components in Form 16 under the New Regime format.
Perquisites and allowances
Some perquisites have been standardised or valued differently — check the employer’s handbook for valuations, especially motor car, accommodation and other taxable perquisites which may affect net taxable salary.
Businesses & Professionals — Deductions and Allowed Expenses
How business expense treatment is affected and documentation standards.
Allowed business deductions
For business/professional income, core revenue deductions (rent, salaries, utilities) remain permitted where supported by books and invoices. Some specific incentives or allowances may have been narrowed; capital allowances and depreciation rules are largely technical and need specialist computation.
Practical compliance steps
Maintain contemporaneous vouchers, contract copies, GST-compliant invoices and reconciliations. For cross-border expenditures, preserve proof of withholding tax and treaty relief documents where applied.
Capital Gains — Indexation, Exemptions & Transitional Rules
How capital gains are taxed and preserved exemptions.
Indexation & rate treatment
The New Regime may alter slab or flat rate treatment for capital gains. For long-term gains, indexation or concessional rates may persist for assets meeting specified holding periods. Transitional provisions in the Finance Act govern gains straddling the changeover.
Roll-over & reinvestment reliefs
Where roll-over reliefs exist, ensure reinvestment deadlines and qualifying asset definitions are strictly met. Keep bank confirmations and investment receipts; partial compliance can jeopardise relief.
Worked Examples & Illustrations
Sample computations to compare Old vs New regimes.
Example — Salaried individual
Scenario: Salary ₹12,00,000; Housing loan interest ₹1,00,000 (not allowed under New unless specifically retained); standard deduction (retained) ₹50,000 (example). Compute taxable income under New Regime: Salary - standard deduction = taxable. Under Old Regime: Salary - standard deduction - housing interest - 80C claims etc. The two computations will show whether Old or New is beneficial.
Example — Business owner
Scenario: Firm reports ₹40,00,000 net business income; large capital allowances and carried forward losses may change effective tax. Always run pro-forma tax models for 3 years to capture timing differences.
Filing, Proofs & Audit Considerations
How to prepare returns and audit-proof your claims.
Record keeping
Keep receipts, bank statements, insurer certificates, mutual fund statements and employer confirmations. Where deductions require certification (e.g., interest certificates), obtain them before filing.
Audit & scrutiny triggers
Unusual or large claims, mismatches between filed returns and third-party reporting (Form 26AS, AIS), and repeated amendments attract scrutiny. Maintain reconciliations and two-level review (pre-file and post-file) for critical returns.
Practical Tax Planning Under the New Regime
Legitimate planning techniques that still deliver value.
Timing & income shifting
Timing of receipt (year-end receipts, dividend timing) can affect slab-position. Plan receipts and realisations to avoid bunching income in a year where rates push you into a higher bracket.
Structuring advice
For businesses, consider entity-level structuring (dividend policy, remuneration vs distribution) and capitalisation decisions that remain tax-efficient under the New Regime.
Common Pitfalls & Red Flags
What causes disputes and re-assessments.
Over-claiming risks
Over-claiming deductions without adequate documentation is the most common audit trigger. Avoid claiming ambiguous items and keep contemporaneous proofs.
Mismatches
Mismatches between employer reports, e-TDS statements and return schedules lead to notices. Reconcile regularly with Form 26AS / AIS.
Practical Checklist Before Filing
Actionable pre-filing items.
- Run Old vs New regime pro-forma comparison for the current & next year.
- Collect proof for retained deductions and exemptions.
- Reconcile salary and TDS statements (Form 16 / Form 26AS).
- Ensure capital gains computation aligns with transitional rules.
- Preserve documentation for investments and NOCs where required.
Compliance Calendar & Best Practices
Timelines & routine checks to avoid surprises.
Maintain a compliance calendar with reminders for: TDS deposit/filing, advance tax instalments, GST reconciliations (where applicable), return filing windows, audit deadlines and documentation retention (7 years generally). Periodic internal reviews reduce last-minute scramble and mistakes.
FAQ — Quick Answers
Concise answers to common taxpayer questions.
Can I switch between regimes each year?
The statutory rules govern switching. Usually the taxpayer can choose but may be required to follow conditions; check the latest notification for switching mechanics and lock-in periods (if any).
Are employee benefits impacted?
Some perquisites and allowances are revalued or limited. Consult payroll to confirm taxability and employer reporting.
Final Observations & Next Steps
The 2025 New Regime simplifies rates but restricts many traditional deductions. Taxpayers should run careful numerical comparisons, keep robust records for retained deductions, and adopt planning that emphasises post-tax returns rather than chasing exemptions. When in doubt, seek tailored advice for complex or high-value transactions.
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