New tax regime vs old tax regime - deductions and exemptions allowed under both the regimes

With the new financial year upon us, it’s time to give some thought to what tax deductions and exemptions you would like to claim. And that will depend on which tax regime — old or new — you opt for.

The concessional tax regime — popularly known as the new tax regime — was introduced in Budget 2020. It offers taxpayers the option to pay taxes at lower slab rates in lieu of foregoing the many deductions and exemptions available under the old regime.

That said, the new tax regime still offers some tax sops from the old regime. Here are a few of them:

Also read: Six income-tax exemptions that even the new tax regime allows

Deduction for home loan interest

One important deduction that you can still claim under the new tax regime is deduction of interest on a home loan for a rented property. But the condition of ‘no negative loss from house property’ makes this deduction less attractive. That is, interest cost in excess of rental income (negative loss from house property) cannot be set off against other income the same year or carried forward to future years. Also, you cannot claim the home loan interest deduction for a self-occupied property.

Under the old tax regime, you can claim this deduction for both self-occupied and rented properties. In the case of a rented property, the interest paid is deducted from the rent received (net of property taxes and standard deduction of 30 percent) to arrive at the income from house property. This helps you to lower your property income and hence the tax to be paid on it.

In fact, as Karan Batra, Founder, Chartered Club explains, as long as the loss from house property (interest paid minus rent received after adjusting for property tax and standard deduction) does not exceed Rs 2 lakh, it can be set off against any other income in the same year to reduce your overall tax liability. Any loss from rented property over and above Rs 2 lakh gets carried forward and can be claimed in the subsequent 8 years.

But this works differently under the new tax regime. According to Parizad Sirwalla, Partner, KPMG Tax India, no negative loss from house property is allowed to be set off against other income under this regime.

She explains this with an example. Suppose 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 can offset only Rs 5 lakh interest against the rental income to arrive at income from your house property.

Under the new regime, the remaining unadjusted Rs 3 lakh cannot be offset against any other income in the same year or be carried forward. However, under the old regime, in the above example, Rs 2 lakh (of the 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 allowed. The remaining Rs 1 lakh can be carried forward into subsequent years.

Also see: List of top funds – MC30

Tax exemption on gratuity received

Gratuity is a lumpsum amount that an employee receives from an employer on leaving the organisation after at least five years of service. This forms part of your total salary but is paid when you resign or retire. The 5-year condition does not apply in the case of death or disablement of the employee.

According to Archit Gupta, Founder and CEO, Clear, the entire gratuity received by government employees is tax-exempt both under the old regime and the new tax regime.

For non-government employees of organisations covered by the Payment of Gratuity Act, gratuity up to a maximum of Rs 20 lakh is tax exempt under both tax regimes. All organisations with 10 or more employees are covered under the Act.

Also read: Does the new tax regime do more damage than good by disincentivising savings?

Tax exemption on leave encashment

As a salaried individual, you may be entitled to what is known as paid or privilege leave. Most employers allow their employees to carry forward any paid leave they have not used during a year. You can encash the accumulated paid leave later. That is, the employer pays you an amount in lieu of the unutilised paid leave.

Under the new tax regime, too, employees are entitled to tax exemption on leave encashment at the time of resignation or retirement. The tax-exemption limit depends on whether you are a government or a non-government employee.

As a government employee, your entire leave encashment is tax-exempt. Non-government employees can claim tax exemption on leave encashment of up to Rs 25 lakh from April 1, 2023.

If you encash your leave while still working for the organisation, the entire amount is taxable, says Gupta. This is applicable to both government and non-government employees under both tax regimes. However, he adds, “in the case of death of an employee, the entire leave encashment is tax-exempt for the legal heir”.

Also listen to: Financial and tax planning 2023-24: How to choose the most suitable tax regime | Simply Save