How to Save Income Tax Under New Regime 2026 — 7 Legal Ways
Introduction
Starting from FY 2023-24, the new tax regime became the default option for all individual taxpayers in India. That means unless you explicitly opt out, you are automatically assessed under the new regime. And with this change, a widespread misconception took hold: "new regime = no deductions = no way to save tax."
That is simply wrong.
While it is true that popular deductions like Section 80C, 80D, and HRA are not available under the new regime, there are still several powerful, perfectly legal ways to reduce your tax liability. The government deliberately retained certain exemptions and deductions even under the new structure — and smart taxpayers should take full advantage of them.
In this article, we break down the 7 most effective ways to save income tax under the new regime for FY 2025-26 (AY 2026-27), along with a comparison table to help you decide which regime is better for your specific situation.
New Regime Tax Slabs for FY 2025-26
Before we dive into the savings strategies, here are the current tax slabs under the new regime:
| Income Range | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
7 Legal Ways to Save Tax Under the New Regime
1. Standard Deduction — ₹75,000 (Automatic)
The standard deduction of ₹75,000 is available to all salaried employees and pensioners under the new regime. This was increased from ₹50,000 in the Union Budget 2024. The best part? You do not need to submit any proof or make any investment — it is applied automatically by your employer.
Who qualifies: All salaried individuals and pensioners.
Tax savings: At the 30% slab, this saves you up to ₹23,400 (including cess).
2. NPS Employer Contribution — Section 80CCD(2)
This is the single most powerful tax-saving tool under the new regime. If your employer contributes to the National Pension System (NPS) on your behalf, that amount is fully deductible from your taxable income. The limit is 14% of basic salary for central government employees and 10% for all others.
Who qualifies: Any salaried employee whose employer offers NPS contribution as part of the CTC.
Tax savings: On a basic salary of ₹10 lakh, employer NPS of ₹1 lakh (10%) saves you ₹31,200 at the 30% slab.
3. Leave Encashment Exemption — Up to ₹25 Lakh
When you retire or leave a job, accumulated earned leave that is encashed is exempt from tax up to ₹25 lakh (increased from ₹3 lakh in 2023). This exemption applies under both old and new regimes. For government employees, the entire amount is exempt.
Who qualifies: Employees receiving leave encashment at the time of retirement or resignation.
Tax savings: Up to ₹25 lakh can be received completely tax-free.
4. Gratuity Exemption — Up to ₹20 Lakh
Gratuity received by an employee who has completed 5+ years of service is exempt up to ₹20 lakh. For government employees, the entire gratuity is exempt without any cap. This exemption is retained under the new regime and provides significant savings at the time of retirement or superannuation.
Who qualifies: Employees with 5+ years of continuous service receiving gratuity on retirement, death, or disablement.
Tax savings: Up to ₹20 lakh received entirely tax-free.
5. Retrenchment Compensation — Up to ₹5 Lakh Exempt
If you are laid off or retrenched, the compensation received is exempt from tax up to ₹5 lakh under Section 10(10B). This is available under both regimes and provides a cushion during job loss. The exemption is the lower of the actual amount received or ₹5 lakh.
Who qualifies: Employees who are retrenched (laid off involuntarily) under the Industrial Disputes Act.
Tax savings: Up to ₹5 lakh received tax-free during a difficult transition.
6. EPF Interest Exemption (Employer Contribution)
The employer's contribution to EPF (up to 12% of basic salary) and interest earned on it is exempt from tax up to a threshold. While the employee's EPF contribution does not get a deduction under the new regime, the employer's share and interest up to the annual contribution limit of ₹7.5 lakh (combined across EPF, NPS, and superannuation) remains tax-free.
Who qualifies: All salaried employees enrolled in EPF.
Tax savings: Employer EPF contribution grows tax-free, providing long-term wealth accumulation without current tax liability.
7. Voluntary Retirement (VRS) — ₹5 Lakh Exempt Under Section 10(10C)
If you opt for voluntary retirement under a scheme meeting prescribed conditions, compensation up to ₹5 lakh is exempt from income tax. This is available under both old and new regimes. The exemption is available only once in a lifetime and the VRS scheme must comply with Rule 2BA of Income Tax Rules.
Who qualifies: Employees taking voluntary retirement from PSUs, private companies, local authorities, or cooperative societies under a qualifying scheme.
Tax savings: ₹5 lakh received completely tax-free as retirement benefit.
Who Should Still Choose the Old Regime?
Despite the attractive slabs, the new regime is not ideal for everyone. If your total deductions and exemptions under the old regime exceed ₹3-4 lakh, you may still pay less tax under the old system. This is particularly true if you:
- Claim HRA exemption (living in a metro with high rent)
- Invest the full ₹1.5 lakh under Section 80C (EPF, ELSS, PPF, etc.)
- Pay health insurance premiums under Section 80D (₹25K–₹1L depending on family)
- Have a home loan with interest deduction under Section 24(b) up to ₹2 lakh
- Claim LTA, education loan interest (80E), or other specific exemptions
If your combined deductions (HRA + 80C + 80D + home loan interest) cross ₹3.75 lakh or more, run the numbers through a calculator before choosing.
Old Regime vs New Regime — Comparison at Different Income Levels
The table below compares approximate tax payable under both regimes at various gross income levels. Old regime assumes standard deductions of ₹50K + 80C (₹1.5L) + 80D (₹25K) + HRA (₹1.5L for applicable slabs).
| Gross Income | Tax — New Regime | Tax — Old Regime* | Better Option |
|---|---|---|---|
| ₹8,00,000 | ₹0 (rebate) | ₹0 | Either |
| ₹12,00,000 | ₹0 (rebate) | ₹23,400 | New Regime |
| ₹15,00,000 | ₹93,600 | ₹1,04,000 | New Regime |
| ₹20,00,000 | ₹2,08,000 | ₹2,34,000 | New Regime |
| ₹30,00,000 | ₹5,09,600 | ₹4,68,000 | Old Regime |
*Old regime figures assume combined deductions of ₹3.75 lakh (80C + 80D + HRA + standard deduction). Actual savings depend on your specific claims. At ₹30L income, higher deductions make old regime favorable.
Pro Tips to Maximize Tax Savings Under New Regime
- Restructure salary for NPS: Ask your employer to allocate up to 10% of basic salary as employer NPS contribution. This is the single biggest deduction available under new regime and costs your employer nothing extra — it just restructures your CTC.
- Use EPF for tax-free compounding: While you cannot deduct your EPF contribution under new regime, the corpus still grows tax-free. Do not opt out of EPF — it remains an excellent wealth-building tool.
- Choose new regime early in the FY: Inform your employer at the start of the financial year so TDS is calculated correctly. This avoids excess deduction and improves monthly cash flow.
- Combine with 87A rebate: If your income (after ₹75K standard deduction + employer NPS) falls below ₹12 lakh, you pay absolutely zero tax. Structure your salary to maximize this benefit.
Calculate Your Tax Savings
Compare Old vs New Regime for your income
Find out exactly which regime saves you more tax based on your actual salary and deductions.
Compare Old vs New Regime →Calculate your take-home salary
See your in-hand salary after tax, EPF, and other deductions under both regimes.
Calculate Take-Home Salary →Plan NPS contributions for maximum tax benefit
Calculate how much employer NPS contribution can reduce your taxable income.
Plan NPS Contributions →Conclusion
The new tax regime is not the "zero savings" regime that many people believe it to be. With the ₹75,000 standard deduction, employer NPS contribution under 80CCD(2), and various retirement-related exemptions, salaried individuals can still save a meaningful amount of tax. The key is to understand what is available and structure your salary and benefits accordingly.
For most people earning between ₹8-20 lakh annually, the new regime with its lower slabs and the 87A rebate will result in lower tax compared to the old regime — unless you have very high deductions. Use our calculator above to check your specific situation and make an informed decision.