In the Budget for 2024-25, the finance minister introduced a progressive tax structure, where individuals with higher incomes like above 20 lakhs will incur progressively higher taxes. Consequently, effective tax planning is essential, involving thoughtful consideration of your income, savings, and investments to minimize your tax liability.
The Income Tax Act offers various opportunities for taxpayers to avail of deductions and decrease their tax obligations. But the question is: which one to choose between the old tax regime and the new tax regime? In this article, we unravel the complexities of the Old vs New Tax Regime, providing a clear roadmap for those seeking tax-saving strategies in the high-income realm.
Let’s discover tips and smart financial moves tailored for those earning above 20 lakhs, illuminating the path to a more tax-efficient and financially savvy future. Before diving into the topics let’s know about the income tax slab rates for both the old tax regime and the new tax regime.
Old Tax Regime
The old tax regime follows the traditional income tax slabs with various deductions and exemptions. Under the old regime, taxpayers can avail themselves of various tax exemptions and deductions under sections such as 80C, 80D, 24(b), etc. These deductions help reduce the taxable income, resulting in lower tax liability. Taxpayers can claim House Rent Allowance (HRA), Leave Travel Allowance (LTA), and other allowances to reduce taxable income.
Old Tax Regime - Income Tax Slab Rates for FY 2024-25
| Income Tax Slabs |
Individuals below the age of 60 Years |
Resident Senior Citizens Between 60 Years to 80 Years |
Resident Super Senior Citizens Above the age of 80 Years |
| Up to Rs. 2,50,000 |
Nil |
Nil |
Nil |
| Between Rs. 2,50,001 to Rs.3,00,000 |
5% |
Nil |
Nil |
| Between Rs. 3,00,001 to Rs.5,00,000 |
5% |
5% |
Nil |
| Between Rs.5,00,001 to Rs. 10,00,000 |
20% |
20% |
20% |
| Above Rs.10,00,000 |
30% |
30% |
30% |
New Regime
The new tax regime offers lower and simplified tax rates but eliminates most deductions and exemptions. Taxpayers opting for the new regime cannot claim deductions under sections such as 80C, 80D, 24(b), etc. While deductions are not allowed, taxpayers can claim the standard deduction and certain exemptions on specific allowances.
New Tax Regime - Income Tax Slab Rates for FY 2024-25
| Income Tax Slabs |
Tax Rates |
| Up to Rs.3,00,000 |
Nil |
| Between Rs. 3,00,001 to Rs.6,00,000 |
5%( tax rebate u/s 87A is available) |
| Between Rs.6,00,001 to Rs. 9,00,000 |
10%( tax rebate u/s 87A is available up to 7 Lakhs) |
| Between Rs.9,00,001 to Rs. 12,00,000 |
15% |
| Between Rs.12,00,001 to Rs. 15,00,000 |
20% |
| Above 15 Lakhs |
30% |
Income Tax on 20 Lakhs Salary
If your annual income is Rs. 20 Lakhs, you would fall into the 30% tax bracket. Additionally, a cess of 4% (health and education cess) applies to the income tax amount.
Old Regime Vs New Regime: Tax Calculation for Above 20 Lakhs Salary
| |
Old Regime |
New Regime |
| Gross Income |
Rs.20 Lakhs |
Rs.20 Lakhs |
| Standard Deduction |
Rs.50000 |
Rs.50000 |
| Total Deduction |
Rs.0 |
Rs.0 |
| Taxable Income |
Rs.19.5 Lakhs |
Rs.19.5 Lakhs |
| Net Tax Payable |
Rs. 4,13,400 (without investment planning) |
Rs. 2,96,400 |
In the above example tax calculation, the new regime is better compared to the old regime but if you plan investment strategically, the old regime is the best option to save more on taxes because there are various deductions and exemptions available in the old tax regime. Because the old regime offers taxpayers to avail themselves of various tax exemptions and deductions under sections such as 80C, 80D, 24(b), etc. These deductions help reduce the taxable income, resulting in lower tax liability. In the new regime, there are no tax deductions under sections such as 80C, 80D, 24(b), etc.
Tax Calculation Example after Investment Planning
| |
Old Regime |
New Regime |
| Gross Income |
Rs.20 Lakhs |
Rs.20 Lakhs |
| Standard Deduction |
Rs.50000 |
Rs.50000 |
| Deduction:- |
|
|
| HRA |
Rs. 1.9 Lakhs |
- |
| LTA |
Rs. 30000 |
- |
| Children's Education and Hostel Allowance |
Rs. 5000 |
- |
| Section 80C |
Rs. 1.5 Lakhs |
- |
| Section 80CCD(1B) |
Rs. 50000 |
- |
| Section 80D |
Rs. 50000 |
- |
| Section 80E |
Rs. 25000 |
- |
| Net Taxable Income |
Rs.14.5 Lakhs |
Rs.16.5 Lakhs (after basic exemption limit) |
| Tax Payable |
Rs. 2.4 Lakhs (Approx.) |
2.85 Lakhs (Approx.) |
Note: To get the exact tax payable amounts, use an Income Tax calculator online. Entering all deductions, savings, and investments will show the correct tax amount.
How to Save Tax for 20 Lakh Income
When aiming to save taxes on a salary above 20 lakhs, it’s important to understand the various provisions of the Income Tax Act in India and explore legitimate avenues for tax planning. Here are Factors to be considered in Tax Planning for Salary above 20 Lakhs
- Utilize Section 80C Deductions: In this section, we can avail deductions up to Rs. 1.5 Lakhs.
- Provident Fund (PF)
- Life Insurance Plans
- Equity-Linked Savings Schemes (ELSS)
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- National Pension System (NPS)
- Tax-Saving Fixed Deposits
- Sukanya Samriddhi Yojana (SSY)
- National Savings Certificate (NSC)
- Home Loan Principal Repayment, etc.
- Maximize Section 80D for Health Insurance: Invest in health insurance policies for yourself, your family, and your parents to avail deductions under Section 80D. Deductions are available up to Rs.25000 for individuals and their families. An additional deduction of Rs.25000 is available for premiums paid for parents. If parents are senior citizens, the limit increases to Rs.50000.
- Optimize NPS Contributions: Contribute to the National Pension System (NPS) to avail deductions under Section 80CCD(1) up to Rs.1.5 lakh and an additional Rs. 50,000 under Section 80CCD(1B).
- Consider Home Loan Benefits: If you have a home loan, maximize the deduction on the interest paid under Section 24(b) and the principal repayment under Section 80C.
- Explore Other Allowances: Understand various allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and standard deduction to optimize tax savings.
- Explore Tax-free Allowances: Certain allowances like children’s education allowance and hostel allowance are tax-free up to certain limits.
- Invest in Tax-saving FDs: Consider investing in tax-saving fixed deposits with a lock-in period of 5 years to avail deductions under Section 80C.
- Optimize Deductions for Education Loan Interest: If you have an education loan, claim deductions on the interest paid under Section 80E.
- Explore Life Insurance Plans: Understand the tax benefits of life insurance plans such as term life insurance, Unit-linked insurance plans, and more.
- Plan for Retirement: Explore retirement planning options, such as the National Pension System (NPS) or voluntary contributions to EPF, to secure your financial future and avail tax benefits.
Also Read: Tax planning for salaried Employees
Old Vs New Tax Regime - Which Tax Regime Is Better For 20 Lakhs
The choice between the old and new tax regimes depends on individual circumstances and preferences. The old regime offers various deductions and exemptions, allowing for potential tax savings based on specific financial activities, while the new regime provides lower tax rates but eliminates most deductions.
Understanding how to efficiently optimize tax savings for a 20 lakh salary is crucial for effective financial planning. The provided tax-saving strategies have proven highly effective for individuals with substantial incomes, aiding in the reduction of tax liabilities while ensuring compliance with legal requirements. Additionally, if you are confused about choosing between the old and new tax regimes, carefully evaluate your deductions and net taxable income; choose the new regime if deductions are minimal, otherwise, stick to the old regime.
However, it’s crucial to consult with a tax professional or financial advisor to create a customized tax-saving plan based on your specific financial situation, goals, and the latest tax regulations. Staying informed about changes in tax laws is also essential for effective tax planning.