Smart Tax Planning Under the New Regime

Smart Tax planning under the New Regime

The new tax regime's ₹12 lakh basic exemption sounds good on paper. But when you realize 80C, 80D, and HRA are gone, the question arises: does tax planning even matter anymore? It does.

Priya Mehta, a 35-year-old marketing manager from Bangalore, was paying ₹1.8 lakh in taxes under the new regime. After using these 5 strategies, her tax came down to ₹1.3 lakh, saving her ₹50,000 under the same regime.

Priya's Financial Profile

Salary Structure (Annual)

Other Assets

• Fixed deposits: ₹5 lakh earning 7% interest
• Rental property: Earning ₹15,000/month with a home loan EMI of ₹4,196/month. The home loan is of ₹50 lakh with an interest rate of 9% and a tenure of 25 years, and it's the 10th year of the loan. So this year's total interest is ₹37,748.

Initial Tax Calculation

• Gross salary (minus EPF): ₹17.78 lakh
• Less standard deduction: ₹75,000
• FD interest: ₹35,930
• Rental income (after 30% deduction): ₹1.26 lakh
• Total taxable income: ₹18.65 lakh

Tax liability: ₹1.80 lakh

Strategy 1: Salary Restructuring with Employer NPS

Priya restructured her salary to include employer NPS contribution of ₹1,00,800 (14% of her ₹7.2 lakh basic salary)

New taxable salary: ₹17.64 lakh

Total Tax: ₹1.59 lakh

60% of this NPS corpus will be tax-free at retirement. Priya chose the NPS equity option for better returns while building her retirement fund.

Tax saved: ₹21,000

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Strategy 2: Employer EPF (Already Working in Her Favor)

Priya realized her employer's EPF contribution of ₹21,600 was already excluded from her taxable income. This wasn't something new to claim; it was already tax-efficient by design.

The confusion many people have is thinking EPF doesn't help in the new regime because 80C is gone. But the employer's EPF contribution was never part of 80C. It's excluded from your gross salary itself.

Her own EPF contribution doesn't give her tax benefits in the new regime, but the interest earned (up to ₹2.5 lakh annually) remains tax-free.

Note: Combined employer contributions to EPF + NPS + Superannuation are tax-free up to ₹7.5 lakh per year. Priya is well within this limit.

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Strategy 3: Fixed Deposits to Arbitrage Funds

Priya had ₹5 lakh in a fixed deposit earning ₹35,000 annually. Since FD interest is taxed at her slab rate of 20%, she paid ₹7,000 in taxes every year.

To improve her post-tax returns, she moved this money to arbitrage funds, which offer similar returns but get favorable tax treatment. If held for more than 12 months, gains are taxed at 12.5%, but long-term capital gains of up to ₹1.25 lakh in a financial year are completely tax-free.

Tax saved in Year 1: ₹7,000‍

The Gains Harvesting Advantage

Priya made use of the ₹1.25 lakh exemption rule smartly. Each year, she sells her arbitrage fund when her gains reach close to ₹1.25 lakh, books the profit tax-free, and reinvests the same amount immediately. This resets her cost price to the new higher value, reducing future taxable gains.

Over five years, this strategy saves an additional ₹4,500+ in deferred taxes.

So here, after using this strategy, she is paying taxes of a total of ₹1.50 lakh, as now capital gain is not applicable to her since she is exempt here.

So she saves in total: ₹30,000 in taxes

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Strategy 4: Claiming Work-Related Reimbursements

Priya was not claiming available reimbursements. Her company policy allowed several reimbursements.

She started submitting bills for:

This ₹60,000 is now non-taxable instead of being part of her special allowance.

Now tax becomes ₹1.38 lakh.

Total Tax saved: ₹42,000 (after adding NPS and work-related reimbursements and using the arbitrage fund strategy)

Note: Her company-provided laptop for work is already tax-free, even with personal use.

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Strategy 5: Rental Property Interest Deduction

Priya owns a 1BHK in Pune that she rents out for ₹15,000 per month. She's still paying off the home loan with an EMI of ₹4,196 monthly.

Earlier, her entire rental income (after 30% standard deduction) was taxable. But she can deduct the interest portion of her home loan from this rental income.

Rental Income Calculation

Without the interest deduction, she'd have paid tax on ₹1.26 lakh. Now it's just ₹84,752.

Now her total tax is ₹1.30 lakh.

Total Tax saved: ₹50,000 (after applying the strategy of NPS, reimbursement, and using the arbitrage fund strategy)

Important: This only works for rented properties. Self-occupied homes don't get interest deduction in the new regime.

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The Complete Picture: Before vs After

Before Tax Planning

After Tax Planning

Total annual tax saved: ₹50,000

Key Takeaways

If you're a salaried professional with similar assets, consider restructuring your CTC for employer NPS contribution, moving fixed deposits to arbitrage funds, claiming eligible reimbursements with proper bills, and using rental property interest deduction if applicable.

The new regime rewards those who understand salary optimization, choose tax-efficient investments, and maximize available deductions.