Here are 5 clever strategies to reduce taxes under the new tax regime

• by Vaibhav
• Updated: September 11th, 2025

When the 2025 Budget raised the income tax rebate threshold to ₹12 lakh under the new tax regime, it provided significant relief to taxpayers. For many in the salaried segment, the new system now delivers better advantages compared to the old one—not only through lower taxes but also by simplifying compliance. With fewer deductions to track, tax filing has become more straightforward.

However, the flip side is that fewer deductions are available. Well-known exemptions such as Section 80C for investments, 80D for health insurance premiums, and House Rent Allowance (HRA) are not applicable in the new regime. This has led some to assume that tax planning is no longer relevant. That’s a misconception. Even though the new regime offers fewer options, there are still valid and effective ways to optimize and lower tax liability. The trick is to understand and make use of these strategies wisely

Use NPS benefit

People do not invest in the National Pension System (NPS) because they believe it locks up his money for too long. Nonetheless, NPS continues to be a powerful tax-saving option within the new regime. Employer contributions of up to 14% of the basic salary are eligible for exemption under Section 80CCD(2), but a large number of employees fail to take full advantage of this benefit. Originally intended for retirement planning, NPS also serves as an excellent tool for building wealth over the long term.

Nonetheless, NPS continues to be a powerful tax-saving option within the new regime. Employer contributions of up to 14% of the basic salary are eligible for exemption under Section 80CCD(2), but a large number of employees fail to take full advantage of this benefit. Originally intended for retirement planning, NPS also serves as an excellent tool for building wealth over the long term.

Many investors opt to begin early and contribute regularly through monthly SIPs, aiming to build wealth over time. However, the returns earned from these investments are fully taxable when they are cashed out. A more tax-savvy approach would be to divert a part of the SIP amount—specifically the portion earmarked for retirement, which can be up to 14% of one’s basic salary—into the National Pension System (NPS). This strategy not only helps in lowering the taxable income but also ensures a more favorable tax treatment at the time of withdrawal. Under Section 10(12A) of the Income Tax Act, retirees can withdraw up to 60% of their accumulated NPS corpus tax-free upon turning 60. This feature makes NPS an appealing and strategic option for retirement planning in the current tax landscape.

It’s worth noting, though, that the annuity bought with the NPS corpus at retirement is subject to tax. Despite this, the equity component of NPS (NPS-E) offers strong returns along with appealing tax advantages. Additionally, NPS promotes consistent and disciplined investing—an essential element for building a secure retirement fund.

Concerns about NPS’s restricted liquidity shouldn’t be a major issue, as it’s designed to support long-term retirement goals. For unforeseen expenses, it’s wiser to maintain a separate emergency fund.

“To make the most of the tax benefits offered by NPS, it helps to keep your basic salary at the highest level possible, ensuring that your employer’s 14% contribution also remains substantial.”

Boost your EPF contribution

Most people are aware that contributions made by employers toward the Employees’ Provident Fund (EPF) and the National Pension System (NPS) are included in your Cost to Company (CTC). However, when it comes to EPF, many employees choose to contribute just ₹1,800 per month—which is 12% of the capped salary of ₹15,000—without realizing that this is only the minimum requirement and not a limit.

In fact, if your basic salary exceeds ₹15,000, you can contribute up to 12% of your full salary to the EPF. You can discuss with your employer about revising your salary structure to increase your contribution. Importantly, the employer’s portion of the contribution continues to be tax-exempt even under the new tax regime. Although contributing more may reduce your take-home pay, it significantly strengthens your retirement savings. “Opting for the full 12% contribution is a smarter choice,” as it helps retain the tax benefit from the employer’s contribution while growing your retirement fund more effectively over time.

“While this benefit is available under the old tax regime, it continues to be a useful tax-saving option for salaried individuals in the new regime—provided they choose to contribute more to their Provident Fund.”

That said, investing solely for tax advantages isn’t always the best approach. It’s important to first assess whether increasing your EPF contributions supports your long-term retirement plans.

For those with a conservative investment style who prefer safer options like fixed deposits or savings accounts, enhancing EPF contributions could be a good fit. However, it’s essential to stay within prescribed limits. The total employer contribution across EPF and NPS should not exceed ₹7.5 lakh in a financial year, as any excess amount becomes taxable. So, if you’re already contributing a significant amount to NPS, adding more to EPF might not offer much additional benefit.

Moreover, an employee’s own contribution to EPF is tax-exempt only up to ₹2.5 lakh per year. Going beyond this limit just to reduce tax liability may not be financially worthwhile.

Navigating Debt and Arbitrage Opportunities

Although FDs, arbitrage funds, and debt funds often generate comparable returns, their tax treatment differs significantly.

Arbitrage funds are designed to offer returns similar to debt instruments but benefit from favorable equity tax rules. In contrast, debt funds are taxed every year based on your income tax slab, which can reduce the overall gains. Arbitrage funds, however, are classified as equity and are taxed only when you redeem them, with lower rates if held for over a year. Specifically, if the investment is held for more than 12 months, the redemption is taxed at just 12.5%.

By moving their investments from FDs to arbitrage funds, investors can take greater advantage of compounding. With FDs, the interest is taxed every year, which limits the growth potential of the investment. In contrast, arbitrage funds are taxed only upon redemption, allowing the returns to compound without annual tax interruptions over a longer period.

Switching to arbitrage funds can not only help lower tax liabilities but also lead to better post-tax returns compared to FDs or debt funds. To further enhance tax efficiency, investors can practice gains harvesting—a strategy that applies not only to arbitrage funds but to any equity mutual fund. This approach involves booking profits of up to ₹1.25 lakh each year and reinvesting them at the same price, thereby increasing the cost of acquisition and reducing future capital gains tax on paper.

“It’s important to remember that the ₹1.25 lakh exemption on capital gains applies per PAN, per financial year.”

For instance, if you invested ₹5 lakh in a fund and earned a profit of ₹1.25 lakh, you can sell investments worth ₹6.25 lakh without any tax liability and repurchase them shortly after. This resets the acquisition cost to ₹6.25 lakh instead of the original ₹5 lakh. In the case of investments made through SIPs, gains are calculated using the first-in, first-out (FIFO) method.

Consultants and the Presumptive Tax Regime

Unlike salaried employees, non-salaried individuals don’t have access to benefits such as employer contributions toward NPS or provident fund. However, self-employed professionals—like consultants and freelancers—can take advantage of the presumptive taxation scheme under Section 44ADA. This scheme permits them to declare 50% of their total receipts as taxable income, regardless of their actual business expenses.

For instance, an individual earning ₹20 lakh in a financial year can report just ₹10 lakh as taxable income without the need to keep expense records or submit supporting documents—even if the entire amount was spent on personal expenses. This approach removes the burden of maintaining detailed accounts and is applicable as long as total receipts don’t exceed ₹75 lakh.

“Many professionals, including retirees who work as consultants, prefer this option because it helps lower their taxable income considerably, making it an attractive tax-saving method under the new regime.” By choosing this route, some taxpayers may reduce their taxable income enough to stay below the basic exemption threshold and avoid paying any income tax altogether.

However, self-employed individuals using this scheme must still adhere to GST rules if their annual turnover exceeds ₹20 lakh. In some cases, GST might not be applicable, as the services provided—such as educational services—are currently exempt from taxation.

Other deductions

Although the new tax regime has removed many popular deductions, a few exemptions are still available. For example, you can claim a deduction on the interest paid on a home loan if the property is rented out. Under Section 24(b), owners of let-out properties can deduct the home loan interest up to the amount of rental income earned during the financial year. However, this benefit doesn’t apply to self-occupied homes under the new tax structure.

There are additional deductions that many taxpayers might overlook because they assume they are taxable. “The new regime clearly specifies which deductions are disallowed, but several others are neither expressly permitted nor prohibited, meaning you can still claim them.”

Certain work-related expenses also remain eligible. “Expenses on training or education aimed at professional growth can be claimed. If your employer has already accounted for these in your salary, you don’t need to take further steps.”

While most of these deductions are related to employment expenses, they can still play a role in lowering your tax liability. It’s important to leverage every available opportunity to reduce taxes within the new regime. That said, you shouldn’t invest purely for tax benefits if it doesn’t align with your broader financial goals or long-term plans. Before committing funds, carefully evaluate the returns, risks, benefits, and liquidity to ensure it’s the right decision for your situation.

Disclaimer: The views and information shared here are for general awareness only. Please seek professional advice before making any financial or legal decisions.