The Old Regime

The old regime is the traditional tax system that has been in place for a long time. Under this regime, you have to pay tax according to the slab rates that are based on your income level. The slab rates for the financial year 2023–24 are as follows:

For example, if your income is Rs. 15 lakh, you have to pay tax as follows:

The old regime also allows you to claim various deductions and exemptions under different sections of the Income Tax Act, such as Section 80C, Section 80D, Section 80G, etc. These deductions and exemptions can reduce your taxable income and, hence, your tax liability. For example, if you invest Rs. 1.5 lakh in PPF under Section 80C, your taxable income will be reduced by Rs. 1.5 lakh, and your tax liability will be reduced by Rs. 45,000 (assuming a 30% tax rate).

The old regime is suitable for those who have a high income and can avail of many deductions and exemptions. It can help them save more tax and have a lower tax payable.

The New Regime

The new regime is the alternative tax system that was introduced in the 2020 budget. Under this regime, you have to pay tax according to the flat rates that are independent of your income level. The flat rates for the financial year 2023–24 are as follows:

For example, if your income is Rs. 15 lakh, you have to pay tax as follows:

The new regime does not allow you to claim any deductions and exemptions, except for a few ones, such as Section 80CCD(2) for the employer’s contribution to NPS, Section 80JJAA for employment generation, and Section 80LA for income from an international financial services centre. You have to pay tax on your entire income without any reduction.

The new regime is suitable for those who have a low or moderate income and do not have many deductions and exemptions. It can help them pay less tax and have a higher disposable income.

How To Choose The Right Regime

Choosing the right tax regime depends on your income level, your tax-saving goals, and your preferences. You have to compare the tax liability and the tax payable under both regimes and see which one is more beneficial for you. You can use online tax calculators or consult a tax advisor to help you with this decision.

You have to make this choice every year before filing your income tax return. You can switch between the regimes as per your convenience. However, once you choose a regime for a particular year, you cannot change it during that year.

Choosing the right tax regime is a crucial step in tax planning and saving. It can make a significant difference in your tax outgo and your savings. Therefore, you should make an informed and wise decision based on your income and expenses.

What Are Tax Deductions And Exemptions?

Tax deductions are the amounts that you can deduct from your gross income to arrive at your taxable income. For example, if your gross income is Rs. 10 lakh and you claim a deduction of Rs. 1.5 lakh under Section 80C, your taxable income will be Rs. 8.5 lakh.

Tax exemptions are the amounts that are not included in your gross income at all. They are exempt from tax and, hence, do not affect your taxable income. For example, if you receive a house rent allowance (HRA) of Rs. 50,000 and it is exempt from tax, your gross income will not include this amount.

Both deductions and exemptions can help you save tax, but they have different effects on your income and tax calculation. Deductions reduce your taxable income, while exemptions reduce your gross income. Deductions are available to all taxpayers, while exemptions are available only to certain categories of taxpayers, such as salaried employees, senior citizens, etc.

How To Claim Tax Deductions And Exemptions?

There are various sections and provisions under the Income Tax Act that allow you to claim tax deductions and exemptions. Some of the most common and popular ones are:

• Section 80C: This section allows you to claim a deduction of up to Rs. 1.5 lakh for investing in certain instruments, such as the public provident fund (PPF), equity-linked savings schemes (ELSS), national savings certificates (NSC), life insurance premiums, tuition fees, etc. This deduction is available to all taxpayers, irrespective of their income level or source.
• Section 80D: This section allows you to claim a deduction of up to Rs. 25,000 for paying health insurance premiums for yourself, your spouse, and your dependent children. If you are a senior citizen, the limit increases to Rs. 50,000. You can also claim an additional deduction of up to Rs. 25,000 for paying health insurance premiums for your parents and Rs. 50,000 if they are senior citizens. This deduction is also available to all taxpayers.
• Section 80G: This section allows you to claim a deduction of up to 10% of your gross income for making donations to certain funds and charitable institutions, such as the Prime Minister’s Relief Fund, the National Defence Fund, etc. The deduction can be either 50% or 100% of the donation amount, depending on the eligibility of the fund or institution. This deduction is also available to all taxpayers.
• Section 10: This section allows you to claim various exemptions from your gross income, such as house rent allowance (HRA), leave travel allowance (LTA), gratuity, etc. These exemptions are available only to salaried employees and are subject to certain conditions and limits. For example, HRA is exempt from tax only if you are living in rented accommodation, and the amount of exemption is the least of the following: actual HRA received, 50% of basic salary in metro cities or 40% in non-metro cities, or excess rent paid over 10% of basic salary.

To claim these deductions and exemptions, you have to provide the relevant documents and proofs, such as investment receipts, insurance premium certificates, donation receipts, rent receipts, etc. You have to fill out the details of these deductions and exemptions in your income tax return and submit it online or offline. You can also use online tax calculators or consult a tax advisor to help you with this process.

Benefits Of Tax Deductions And Exemptions

Claiming tax deductions and exemptions can have multiple benefits for you, such as:

• Saving tax: By claiming deductions and exemptions, you can reduce your tax liability and pay less tax. This can help you save money and increase your disposable income.
• Investing wisely: By investing in tax-saving instruments such as PPF, ELSS, etc., you can not only save tax but also earn returns and build wealth in the long run. These instruments can help you achieve your financial goals, such as retirement, education, etc.
• Supporting social causes: By donating to funds and charities, you can not only save tax but also contribute to social welfare and development. You can support causes that are close to your heart, such as education, health, the environment, etc.

Claiming tax deductions and exemptions is an essential part of tax planning and saving. It can help you optimise your income and expenses and make the most of your money. Therefore, you should make use of these benefits and claim them as per your eligibility and suitability.

What Are Tax-Efficient Investments?

Tax-efficient investments are the instruments that either provide tax exemption or tax deduction on the invested amount or tax exemption on the income or capital gains generated from the investment. For example, if you invest Rs. 1 lakh in an equity-linked savings scheme (ELSS), you can claim a tax deduction of Rs. 1 lakh under Section 80C and also enjoy tax exemption on the dividends and capital gains from the ELSS.

There are various types of tax-efficient investments, such as:

• Equity-Linked Savings Schemes (ELSS): These are mutual funds that invest at least 80% of their corpus in equity and equity-related securities. They have a lock-in period of three years and offer market-linked returns. They are eligible for tax deductions of up to Rs. 1.5 lakh under Section 80C and also provide tax exemptions on dividends and capital gains under Section 10(38).
• Public Provident Fund (PPF): This is a government-backed scheme that allows you to deposit up to Rs. 1.5 lakh per year for a period of 15 years. The scheme offers a fixed interest rate that the government revises quarterly. It is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C and also provides tax exemption on the interest and maturity amount under Section 10(11).
• National Pension System (NPS): This is a voluntary pension scheme that allows you to contribute to a retirement account, which is invested in a mix of equity, debt, and government securities. You can choose your own fund manager and asset allocation. It is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C and an additional Rs. 50,000 under Section 80CCD(1B). It also provides tax exemption on the employer’s contribution of up to 10% of the salary under Section 80CCD(2). However, the maturity amount is partially taxable, as 60% of the corpus can be withdrawn as a lump sum and 40% has to be annuitized.

How To Choose The Best Tax-Efficient Investment?

Choosing the best tax-efficient investment depends on your risk appetite, time horizon, and financial goals. You have to compare the features, benefits, risks, and returns of each investment option and see which one suits your needs and preferences. You can use online calculators or consult a financial advisor to help you with this decision.

Some of the factors that you should consider while choosing a tax-efficient investment are:

• Returns: You should look for the investment option that offers the highest returns after adjusting for inflation and tax. You should also consider the historical performance, the expected future performance, and the volatility of the returns.
• Risks: You should look for the investment option that offers the lowest risks in terms of capital loss, liquidity, and inflation. You should also consider your risk tolerance and how much risk you are willing to take for higher returns.
• Lock-in Period: You should look for the investment option that has the shortest lock-in period, or the period during which you cannot withdraw your money. You should also consider your liquidity needs and how soon you will need the money.
• Tax Benefits: You should look for the investment option that offers the maximum tax benefits, in terms of deduction, exemption, or both. You should also consider your tax slab and how much tax you can save by investing in that option.

Choosing the best tax-efficient investment is an important step in tax planning and saving. It can help you optimise your portfolio and make the most of your money. Therefore, you should make an informed and wise decision based on your risk-return profile and tax situation.

Plan Ahead

The first and foremost tip for tax planning is to plan ahead. Do not wait until the last minute to file your income tax return or invest in tax-saving instruments. Start planning your taxes at the beginning of the financial year, and review your tax situation periodically. This will help you avoid any mistakes, errors, or penalties that can arise due to late or incorrect filing. It will also help you make the best use of the available tax benefits and avoid any missed opportunities or oversights.

Review Your Tax Situation

The second tip for tax planning is to review your tax situation regularly. Your income, expenses, investments, and deductions may change over time due to various factors, such as a salary hike, bonus, inheritance, marriage, divorce, etc. These changes can affect your tax liability and tax payable and may require you to adjust your tax planning accordingly. Therefore, you should review your tax situation at least once every quarter and update your income tax return and tax-saving investments accordingly. This will help you avoid any underpayment or overpayment of tax and also take advantage of any new tax benefits or changes in the tax rules.

Optimise Your Tax Regime

The third tip for tax planning is to optimise your tax regime. As we discussed earlier, you have the option to choose between the old and the new tax regimes, depending on your income level and preferences. You should compare the tax liability and the tax payable under both regimes and see which one is more beneficial for you. You can use online tax calculators or consult a tax advisor to help you with this decision. You should also consider the impact of the tax regime on your deductions, exemptions, and investments and see how they affect your overall tax situation. You should make this choice every year before filing your income tax return and switch between the regimes as per your convenience.

Maximise Your Deductions and Exemptions

The fourth tip for tax planning is to maximise your deductions and exemptions. As we discussed earlier, there are various sections and provisions under the Income Tax Act that allow you to claim deductions and exemptions, such as Section 80C, Section 80D, Section 80G, Section 10, etc. These deductions and exemptions can reduce your taxable income and, hence, your tax liability. Therefore, you should make use of these benefits and claim them as per your eligibility and suitability. You should also keep the relevant documents and proofs, such as investment receipts, insurance premium certificates, donation receipts, rent receipts, etc., to support your claims. You should also fill out the details of these deductions and exemptions in your income tax return and submit it online or offline.

Diversify Your Investments

The fifth tip for tax planning is to diversify your investments. As we discussed earlier, there are various types of tax-efficient investments, such as equity-linked savings schemes (ELSS), public provident funds (PPF), national pension systems (NPS), etc. These investments can help you save taxes, earn returns, and build wealth in the long run. However, they also have different features, benefits, risks, and returns and may not suit your risk appetite, time horizon, and financial goals. Therefore, you should diversify your investments across different asset classes, such as equity, debt, and government securities, and also across different instruments, such as mutual funds, fixed deposits, bonds, etc. This will help you balance your risk and return and optimise your tax situation.

Follow The Tax Rules And Regulations

The sixth and final tip for tax planning is to follow the tax rules and regulations. Tax planning is not the same as tax evasion or tax avoidance. Tax evasion is the illegal practice of not paying or underpaying the tax that is due. Tax avoidance is the legal practice of reducing tax liability by using loopholes or gaps in the tax laws. Both of these practices are unethical and harmful and can lead to severe consequences, such as penalties, interest, prosecution, or imprisonment. Therefore, you should follow the tax rules and regulations and pay your taxes honestly and on time. You should also keep yourself updated with the latest changes and developments in the tax laws and comply with them accordingly.

1. How can I save tax on my salary income?

You can save tax on your salary income by claiming various deductions and exemptions that are available to salaried employees, such as:

• House rent allowance (HRA): If you are living in rented accommodation, you can claim HRA as an exemption from your gross income, subject to certain conditions and limits.
• Leave travel allowance (LTA): If you are travelling within India for vacation, you can claim LTA as an exemption from your gross income, subject to certain conditions and limits.
• Standard deduction: You can claim a standard deduction of Rs. 50,000 from your gross income, irrespective of your actual expenses.
• Professional tax: You can claim a deduction of the professional tax paid by you from your gross income.
• Section 80C: You can claim a deduction of up to Rs. 1.5 lakh for investing in certain instruments, such as the public provident fund (PPF), equity-linked savings schemes (ELSS), life insurance premiums, tuition fees, etc.
• Section 80D: You can claim a deduction of up to Rs. 25,000 for paying health insurance premiums for yourself, your spouse, and your dependent children. If you are a senior citizen, the limit is increased to Rs. 50,000. You can also claim an additional deduction of up to Rs. 25,000 for paying health insurance premiums for your parents and Rs. 50,000 if they are senior citizens.
• Section 80G: You can claim a deduction of up to 10% of your gross income for making donations to certain funds and charitable institutions, such as the Prime Minister’s Relief Fund, the National Defence Fund, etc. The deduction can be either 50% or 100% of the donation amount, depending on the eligibility of the fund or institution.

2. How can I save tax on my capital gains?

You can save tax on your capital gains by investing them in certain instruments that offer tax exemptions or tax benefits, such as:

• Section 54: If you sell a residential property and make a long-term capital gain, you can claim an exemption by investing the gain in another residential property, subject to certain conditions and limits.
• Section 54F: If you sell any asset other than a residential property and make a long-term capital gain, you can claim an exemption by investing the net sale consideration in a residential property, subject to certain conditions and limits.
• Section 54EC: If you sell any asset and make a long-term capital gain, you can claim an exemption by investing the gain in certain bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC), subject to certain conditions and limits.
• Section 10(38): If you sell equity shares or equity-oriented mutual funds and make a long-term capital gain, you can claim an exemption from tax, provided you have paid securities transaction tax (STT) on the transaction.

3. How can I save tax on my interest income?

• Section 80TTA: You can claim a deduction of up to Rs. 10,000 for the interest income earned from your savings bank account, post office savings account, or co-operative society bank account.
• Section 80TTB: If you are a senior citizen, you can claim a deduction of up to Rs. 50,000 for the interest income earned from your savings bank account, post office savings account, co-operative society bank account, fixed deposits, recurring deposits, or any other specified income.
• Section 10(15): Tax exemption can be claimed for the interest income earned from certain instruments, such as tax-free bonds, notified savings certificates, etc.

4. How can I save tax on my dividend income?

• Section 10(34): You can claim an exemption from tax for the dividend income received from an Indian company, up to Rs. 10 lakh per year.
• Section 10(35): You can claim an exemption from tax for the dividend income received from an equity-oriented mutual fund, without any limit.
• Section 115BBDA: If you are a resident individual or a Hindu undivided family (HUF), and your dividend income from an Indian company exceeds Rs. 10 lakh per year, you have to pay tax at the rate of 10% on the excess amount.

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