It is essential to be proactive in exploring tax-saving options to ensure that you are maximising your earnings. By taking advantage of tax-saving strategies, you can increase your take-home salary and ultimately improve your financial stability.
Income tax deduction: With the start of the new financial year in April, you still have time to plan your tax bill and restructure your salary to cut down the tax outgo. Proper tax planning can help you save on taxes and boost your in-hand salary. The Income Tax Act allows deductions for investments, savings, and expenses in a financial year.
When looking at your gross salary, it may seem like you are earning a substantial amount of money. However, it is important to consider your net salary or take-home pay, which is the amount you actually receive after deductions such as taxes. If you do not take steps to save taxes, you may find that your net salary is significantly lower than you anticipated.
It is essential to be proactive in exploring tax-saving options to ensure that you are maximising your earnings. By taking advantage of tax-saving strategies, you can increase your take-home salary and ultimately improve your financial stability. Planning ahead and being mindful of how taxes impact your earnings can make a significant difference in your overall financial situation. Therefore, to get maximum salary benefits for employees, it is essential to minimise taxable income through tax-efficient structures. One should utilise exemptions, allowances, and deductions from the income tax act to decrease the tax burden effectively.
Business Today spoke to Jitesh Agarwal, Founder – Treelife, who shared some steps on minimising tax liability.
Here are a few steps:
1. Understanding Your Tax Bracket
Agarwal said knowing one’s tax bracket is the first step towards effective tax planning. “Individuals have the option to choose between the old and new tax regimes for the assessment year 2024-25. The new tax regime offers potentially lower tax rates for various income ranges. However, it also eliminates some deductions available under the old regime,” he said.
Here are the available brackets under the two tax regimes:
|
Income Range |
Old Regime Tax Rate |
Income Range |
New Regime |
|
Up to Rs 2,50,000 |
No tax |
Up to Rs 3,00,000 |
No tax |
|
Rs 2,50,000 to Rs 5,00,000 |
5% |
Rs 3,00,001 to Rs 6,00,000 |
5% |
|
Rs 5,00,000 to Rs 10,00,000 |
20% |
Rs 6,00,001 to Rs 9,00,000 |
10% |
|
Above Rs 10,00,000 |
30% |
Rs 9,00,001 to Rs 12,00,000 |
15% |
|
– |
Rs 12,00,001 to Rs 15,00,000 |
20% |
|
|
Above Rs 15,00,000 |
30% |
||
The Old Tax Regime is the age-old tax structure that has been in place for decades. Taxpayers can claim various deductions and exemptions under different sections of the Income Tax Act. There are around 70 deductions and exemptions available under this scheme that help minimise your taxable income. It also allows a deduction of Rs 1.5 lakh under Section 80C.
The New Tax Regime was introduced in the Union Budget 2020 with concessional tax rates. The taxpayers opting for the new tax regime cannot claim major deductions like HRA, LTA, Section 80C, and many others.
The Union government in Budget 2023 made this a default choice. If a taxpayer does not explicitly choose between the old and new tax regimes, then their taxes will be automatically calculated under the new regime.
Salaried individuals and business professionals are given the opportunity to switch between the old and new tax regimes every year. However, individuals who do not fall into these categories are only allowed to transition between the old and new regimes once in their lifetime.
2. Most taxpayers, especially those with high income or those having several tax-saving investments, prefer the Old Tax Regime.
In the past, the Income Tax department introduced several deductions from taxable income under Chapter VI A. Section 80C is the most well-known and widely used deduction. But it is mostly for those who will opt for or have already opted for the Old Tax regime. You can claim deduction of up to Rs 1.5 lakh for eligible investment under Section 80C.
Agarwal said that under the old tax regime, taxpayers could invest in following schemes and opt for tax deductions. These are:
> Public Provident Fund (PPF): Offers tax deductions (up to Rs 1.5 lakh) under Section 80C of the Income Tax Act and tax-free interest, making it a compelling option for long-term savings and wealth creation.
> Home Loan Benefits: Deductions are available on both principal (Section 80C) up to Rs 1.5 lakh and interest (Section 24) up to a maximum of Rs 2 lakh for home loans, significantly reducing tax liability.
> Health Insurance Premiums: Premiums qualify for deductions under Section 80D (up to Rs 25,000 for individuals and Rs 50,000 for senior citizens), promoting health coverage and tax savings.
> Retirement, Sustainability, and Charity: Deductions exist for contributions to NPS (Section 80CCD) up to Rs 1.5 lakh per year, interest on electric vehicle loans (Section 80EEB), and charitable donations made to registered organisations (Section 80G).
> Tax-Free Income & Favorable Dividend Tax Rates: Interest earned on savings accounts (up to Rs 10,000) is tax-free, with a higher limit for seniors (Rs 50,000). Additionally, dividends received from stocks and mutual funds are subject to favorable surcharge rates.
> Tax Rebates: Rebates are available under both old and new tax regimes. Under the old tax regime, individuals with a taxable income of up to Rs 5 lakh can claim a tax rebate of up to Rs 12,500 under Section 87A. The new tax regime offers a potentially higher rebate of up to Rs 25,000 for individuals with income up to Rs 7 lakh.
By implementing these tax planning strategies, individuals can significantly reduce their tax burden and improve their financial well-being. Taking a proactive approach to tax planning empowers individuals to navigate the tax system effectively and unlock greater financial flexibility.
However, the taxpayers have a choice to switch between the two regimes. The frequency of switches permitted depends on your profession or specific criteria set forth by tax regulations.
Source: https://www.businesstoday.in/personal-finance/tax/story/income-tax-fy25-how-to-reduce-tax-liability-in-a-given-financial-year-check-details-430411-2024-05-21
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