Tax Management for Salaried Under New Regime

y2jmoneytree
5 days ago
4 min read

Remember when your parents forced you to save money in PPF or LIC policies just to save tax? That was like a strict gym trainer forcing you to do pushups. You hated it, but it kept you financially fit.

The New Tax Regime (NTR) is like a gym with no trainer. The government has removed the mandatory "exercises" (e.g. Section 80C, 80D, HRA). You get more cash in hand, but there is no penalty if you skip investing.

The result? Many salaried professionals are falling into the "Lifestyle Inflation Trap" -spending the extra cash instead of investing it. Here is your guide to tax efficiency in the New Regime.

The "Survivors": What Deductions Still Exist?

Many think the New Regime has zero deductions. That is a myth. Here are the survivors you must use:

Standard Deduction (₹75,000): Whether you ask for it or not, this is automatically deducted from your salary income.
Employer NPS (Section 80CCD(2)): This is the biggest tax-saver left for salaried people.
- How it works: If your employer contributes to your National Pension System (NPS) on your behalf (deducted from your CTC), that amount is tax-free up to 10% of your Basic + DA.
- The Win: It lowers your taxable income slab. If you earn ₹15 Lakhs and put ₹1 Lakh via Employer NPS, you pay tax only on ₹14 Lakhs.
Home Loan Interest: The tax deductibility of home loan interest in the new tax regime in India depends on how the property is used.
- Self-Occupied Property: You get ZERO deduction on interest paid.
- Let-Out (Rented) Property: You CAN claim interest deduction, but the loss you can set off against your salary is capped at ₹2 Lakhs.

The ULIP Conundrum: Is it the Tax Haven?

Unit Linked Insurance Plans (ULIPs) are unique hybrids of Investment and Insurance. In the Old Regime, they were popular for the 80C deduction.

How do they work in the New Regime?

On Entry (Investment): You get ZERO tax benefit on the premium paid. Since 80C is gone in new regime, paying the premium doesn't lower your taxable salary.
On Exit (Maturity): This is where it gets interesting. Under Section 10(10D), the maturity proceeds of a ULIP are generally Tax-Free, provided your annual premium is less than ₹2.5 Lakhs.

The Comparison:

Mutual Funds: Long Term Capital Gains (LTCG) above ₹1.25 Lakh are taxed at 12.5%
ULIPs: Maturity is 0% Tax (conditions apply)

Note: While "0% Tax" sounds amazing, remember that ULIPs come with a lock-in periods and often have higher internal charges (mortality charges, admin fees etc.) compared to Mutual Funds. You must calculate if the Tax Saved is greater than the Costs Paid.

The HUF (Hindu Undivided Family) option

We often get asked: "Can we use an HUF to save tax on my salary?"

The Short Answer: No.

The Smart Answer: Yes, but indirectly

The Rule: You cannot transfer your hard-earned salary to an HUF account. That is called "Clubbing of Income," and the Income Tax Department will tax it in your hands anyway.

However, you can use an HUF to create a separate "Tax File" for your family’s other income.

Capital Source: Use money received from ancestors (inheritance), wedding gifts, or specific family assets.
Invest via HUF: Open an investment account in the name of the HUF
The Benefit: The HUF gets its own Basic Exemption Limit (₹3 Lakhs) and its own tax slabs.

Example: If you invest ₹10 Lakhs in your name, the interest is taxed at 30% (your slab). If the HUF invests that ₹10 Lakhs (using ancestral capital), the interest might be tax-free if it falls under the HUF's exemption limit.

Consider HUF only if:

There is/ will be meaningful non-salary income (ancestral property, business, larger assets)
You are ready to maintain separate records and returns, with CA guidance

From "Tax Saving" to "Tax Efficiency"

Under the New Regime, since you can't save tax when you invest, choose instruments that are taxed gently when you withdraw.

Avoid FDs for Long Term: In the New Regime, FD interest is added to your salary and taxed at your slab rates (which could be 20-30%).
Choose Tax Efficient Investments: Look for investment instruments such as Arbitrage Funds/NPS/ULIPs/Real Estate (basis your personal situation, goals, time period, risks etc.).
Tax Harvesting: Use available tax benefits such as tax-free limit (on LTCG) up to ₹1.25 Lakh for tax saving [Available to everyone, and not just salaried people]
Avoid Insurance Blunders: A dangerous trend is people cancelling Term Life and Health Insurance because "80C and 80D are gone". Avoid this. You don't buy a helmet to save on traffic fines; you buy it to save your head. Only clean-up/cancel unnecessary insurance + investment combo products that you bought because of lack of enough information. Review this to fix past mistakes.

Conclusion

Tax Regime is a tool and not a Strategy!

The New Tax Regime isn't about "not investing" or "no room for being tax efficient". It is about investing without the government holding your hand and becoming little more aware of taxation: