Which Tax Regime Offers Better Exemptions And Deductions?

By Author: TaxHelpdesk
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Exemptions, allowances, and deductions are essential tools for reducing the tax liability of taxpayers in India. However, these benefits are not uniformly available under both the old and new tax regimes. The new tax regime offers lower income tax slab rates but restricts many exemptions, allowances, and deductions. Conversely, the old tax regime has higher slab rates but allows taxpayers to claim a broader range of tax-saving benefits. Let's delve deeper into the differences between these two regimes and how they impact your tax filing decisions.
Exemptions and Allowances: Old vs. New Tax Regime
Under the old tax regime, taxpayers can claim numerous exemptions and allowances, significantly reducing their taxable income. These include:
House Rent Allowance (HRA) Exemption
Leave Travel Allowance (LTA) Exemption
Children Education Allowance
Entertainment Allowance
Voluntary Retirement Exemption
Gratuity Exemption
Leave Encashment Exemption
Conveyance Allowance for Journey from Home to Work
Perquisites for Official Purposes
Daily Allowance
Transport ...
... Allowance for Specially-Abled Persons
Gifts Received from Employers (up to ₹5000)
Other Allowances Including Food Allowance (₹50/meal for up to 2 meals/day)

In contrast, the new tax regime simplifies the tax structure by offering lower tax rates but at the cost of most exemptions and allowances. While some benefits like the Voluntary Retirement Exemption, Gratuity Exemption, Leave Encashment Exemption, Conveyance Allowance, Perquisites for Official Purposes, Daily Allowance, and Transport Allowance for Specially-Abled Persons are still allowed, many are not. Notably, HRA, LTA, and several other allowances are not available under the new regime.
Deductions: Old vs. New Tax Regime
The old tax regime also offers a variety of deductions to reduce taxable income:
1. Taxable Income Eligible for Tax Rebate: Up to ₹5,00,000
2. Maximum Amount of Tax Rebate Available: ₹12,500
3. Standard Deduction: ₹50,000
4. Interest on Home Loan (Section 24b):
Self-Occupied or Vacant Property: ₹2,00,000
Let-Out Property: Permitted based on the amount of interest

5. Section 80C: ₹1,50,000 (Investments in LIC, EPF, PPF, Tax Saving FDs, etc.)
6. Employee's Self Contribution to NPS (Section 80CCD(1B)): ₹50,000
7. Employer's Contribution to NPS (Section 80CCD(2)): Allowed
8. Contributions to Agniveer Corpus Fund (Section 80CCH): The entire contributed amount
9. Medical Insurance Premium (Section 80D): ₹25,000/Rs. 50,000
10. Interest on Education Loan (Section 80E): Allowed as per the interest on loan amount
11. Interest on Electric Vehicle Loan (Section 80EEB): Allowed as per the interest on loan amount
12. Donations to Trusts (Section 80G): If in cash - ₹2,000 (max), others - any amount
13. Donations to Political Parties (Section 80GGB/GGC): Any amount (non-cash)
14. Savings Bank Account Interest (Section 80TTA/TTB): ₹10,000 / ₹50,000
15. Individuals with Disability (Section 80U): ₹75,000 / ₹1,25,000
The new tax regime limits deductions significantly. While the standard deduction of ₹50,000 is available from FY 2023–24, most other deductions under sections 80C, 80D, 80E, etc., are not allowed. However, deductions for employer contributions to NPS and interest on home loans for let-out properties remain.
Selecting the New or Old Tax Regime
When deciding which tax regime to opt for, it is crucial to evaluate the allowances, exemptions, and deductions available under each regime. Calculate your net taxable income after accounting for all eligible benefits. The regime with the lower tax liability is generally the more favourable choice.
Inform your employer about your chosen regime so that the correct Tax Deducted at Source (TDS) can be applied to your salary.
Conclusion
The interplay of exemptions, allowances, and deductions in the old and new tax regimes significantly impacts the financial responsibilities of Indian taxpayers. While the old regime offers extensive tax-saving opportunities through various exemptions and deductions, the new regime simplifies the tax structure with lower rates but fewer tax-saving options. Choosing between the two regimes is a strategic financial decision, requiring careful consideration of individual financial circumstances and tax-saving potential.
For expert assistance in navigating these regimes and optimizing your tax liabilities, contact or consult TaxHelpdesk. Stay informed and make the best choice for your financial well-being.