The Plan

How to reduce tax in the new tax regime

If you thought you don't get tax deductions anymore, you are in luck

Tax saving in new regime: How to reduce tax in the new tax regime

Shreya, a 42-year-old IT professional, earns Rs 1.4 lakh monthly and has chosen the new tax regime. Recently, during one of our off-the-cuff interactions, she trotted out the widespread perception that the new tax regime offers no tax deductions. But that's just half-baked information. In fact, she still has options to lower her tax outgo. So, if you, like Shreya, are salivating at the mention of lower taxes, this is what you can do too.

Option 1: Employees' Provident Fund (EPF)

  • Your employer matches the amount you contribute each month to the EPF. This amount can be used for a tax deduction. Let's take Shreya's example to show you how:
  • Her monthly EPF contribution is Rs 8,400.
  • Because employers are required to match her personal contribution, Shreya's company pays a similar amount of Rs 8,400 each month to the EPF.
  • The employer's contribution is eligible for tax deduction.
  • It means Shreya can claim a tax deduction of Rs 1,00,800 (Rs 8,400 x 12 months) at the end of the year.

Option 2: Flexi benefit plan (FBP)
Many companies offer FBP as a part of your CTC. Without getting into too much detail, some of the common types of FBP are:

  • Fuel expenses
  • Telephone and internet bills
  • Food expenses (Sodexo meal card is pretty popular)
  • Leave travel allowance
  • Books and periodicals

Let's get back to Shreya's example. She receives fuel reimbursement and car maintenance charges worth Rs 10,000 each month, Rs 2,200 monthly for food expenses, and a further Rs 500 for phone bills each month. If she provides bills and invoices for each of these allowances, she can substantially reduce her taxable income by Rs 1,52,400 (multiplying all the allowances for the year).

Option 3: National Pension Scheme (NPS)
You can take yourself out of the old tax regime, but you can never stop the NPS from reducing your tax liability.

Although you don't get the additional tax deduction of up to Rs 2 lakh under the new tax regime, your employer's NPS contribution is considered under the new regime. That's right, just like with provident fund, your employer can contribute to the NPS, though they are not mandated to match your monthly investment. Also, remember that your employer's maximum contribution is 10 per cent of your basic pay.

So rejoice, all ye faithful of the new tax regime.

Shreya's tax liability under the new tax regime for FY24

Without suggested deductions With suggested deductions
Annual income @ Rs 1.4 lakh per month 1680000 1680000
Standard deduction 50000 50000
Basic component @ 50% of the gross income 840000 840000
Employer's contribution to EPF (12% of Basic Pay) 100800 100800
Employer's contribution to NPS (10% of Basic Pay) - 84000
Flexi Benefit
Fuel and car maintenance @ Rs 10,000 per month - 120000
Meal card @ Rs 2,200 per month - 26400
Telephone bills @ Rs 500 per month - 6000
Taxable income 1529200 1292800
How much tax you'll pay 165110 112902
How much tax you save 52208

What you should do
Step 1: Get your basic pay as high as possible. Speak to your accountant, as higher EPF/NPS contributions will lessen your tax outgo.
Step 2: Continue with your EPF. Remember, the employer's contribution offers
tax benefits.
Step 3: Ask for FBP or reevaluate if you have it. Your office may offer flexi-benefit plans (FBP). Also, check if the allowances are achievable, as you'll need to provide proof at year-end.
Step 4: Start contributing to NPS. Your employer's contribution has tax benefits.

How much it will help you

  • For simplicity's sake, let's assume your salary, EPF and FBP numbers are the same as Shreya's.
  • You increase the 'basic' component to 50 per cent of your salary (Rs 70,000).
  • If you add NPS and flexi-benefit, the taxable income will shrink by roughly Rs 2.36 lakh.
  • It means your annual tax outgo will reduce by about Rs 52,000. In other words, you'll save more than Rs 4,000 every month.
  • Having said that, investing in NPS will lower your take-home salary. But that's not necessarily a bad thing, as the accumulated money will help you live your retirement stress-free.

Don't ignore these

  • While investing in NPS, opt for the 'Active' investment choice.
  • Ideally, choose the highest allocation to equities (75 per cent).
  • But if you are nearing retirement or have built a large corpus, you can go for the 50-50 split.
  • Buy health insurance and have an emergency fund to cover six months of your expenses.
  • Get life insurance only if you have dependents or plan to have a family later.

Also read: How to retire at 45

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