Tax Planning For Salaried Employees In India 2024-25

During a Budget 2024 speech, Finance Minister Nirmala Sitharaman said there is no change in the income tax rates for FY 2024-25, the new income tax regime is now the default income tax regime and if taxpayers still want to opt for the old tax regime, then they can choose at the time of filing an income tax return. But the question is which one to choose to save tax - old regime vs new regime? What is the best tax planning for salaried employees?

Earning a high salary undoubtedly brings satisfaction, yet it also invites a heavier income tax burden, diminishing a part of that satisfaction. The good news is, a strategic tax planning for salaried employees can act as a remedy.  The key lies in understanding the various aspects of tax planning and exploring the array of options provided under provisions of the Income Tax Act, of 1961. However, with the right knowledge and strategies, you can not only minimize your tax liability but also optimize your financial well-being.

In this article, we unveil the secrets to maximizing your paycheck and minimizing your tax burden, offering you a roadmap to financial empowerment in the complex landscape of Indian taxation. Get ready to unlock the potential of your earnings as we dive into tax savings tips tailored for salaried professionals.

What is an Income Tax Slab?

Income tax is a direct tax imposed by the government on the income earned by individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities in India. The tax is levied based on individual total income, which includes earnings from various sources such as salaries, business profits, capital gains, house property, and other forms of income. The Income Tax Act, of 1961, is the primary legislation that governs the provisions related to income tax in India.

Income tax slabs refer to the categorization of an individual’s taxable income into different ranges or slabs, each with a corresponding tax rate. The government periodically revises these slabs and rates through the Union Budget. Taxpayers are taxed at different rates based on the income they earn during a specific financial year which means individuals with higher incomes will have to pay more taxes. Here are three categories under which income tax is divided:-

  • Individuals below the age of 60
  • Resident Senior Citizens (60 years or more but less than 80 years)
  • Resident Super Senior Citizens (80 years or more)

Old Regime

  • Applicability: The old tax regime follows the traditional income tax slabs with various deductions and exemptions.
  • Tax Slabs and Deductions: 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.
  • HRA, LTA, and Other Allowances: Taxpayers can claim House Rent Allowance (HRA), Leave Travel Allowance (LTA), and other allowances to reduce their taxable income.

Old 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

  • Flat Tax Rates: The new tax regime offers lower and simplified tax rates but eliminates most deductions and exemptions.
  • No Deductions: Taxpayers opting for the new regime cannot claim deductions under sections such as 80C, 80D, 24(b), etc.
  • Standard Deduction and Other Allowances: 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%

Old Tax Regime Vs New Tax Regime - Comparison of Tax Rates for FY 2024-25

  Old Regime   New Regime
Slabs Individuals Aged<60 years & NRIs Resident Senior Citizens Aged>60 to <80 years Resident Senior Citizens Aged>80 years FY 2024-25
Up to Rs. 2.5 Lakhs Nil Nil Nil Nil
Rs. 2.5 Lakhs to Rs. 3 Lakhs 5% Nil Nil Nil
Rs. 3 Lakhs to Rs.5 Lakhs 5% 5% (tax rebate u/s 87A is available) Nil 5%
Rs.5 Lakhs to Rs.6, Lakhs 20% 20% 20% 5%
Rs.6 Lakhs to Rs.7.5 Lakhs 20% 20% 20% 10%
Rs.7.5 Lakhs to Rs.9 Lakhs 20% 20% 20% 10%
Rs.9 Lakhs to Rs.10 Lakhs 20% 20% 20% 15%
Rs.10 Lakhs to Rs.12 Lakhs 30% 30% 30% 15%
Rs.12 Lakhs to Rs. 15 Lakhs 30% 30% 30% 20%
>15 Lakhs 30% 30% 30% 30%

Example Tax Calculation for Old Regime vs New Regime

Let’s see an example income tax calculation for both old and new regime

  • Age: 26 Years
  • FY: 2023-24
  • Income: Rs.10 Lakhs
  Old Regime New Regime
Gross Income Rs.10 Lakhs Rs.10 Lakhs
Standard Deduction Rs.50000 Rs.50000
Total Deduction Rs.0 Rs.0
Taxable Income Rs.9.5 Lakhs Rs.9.5 Lakhs
Net Tax Payable Rs.1,06,600 Rs.54,600

In the above example tax calculation 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 under sections such as 80C, 80D, etc. are available in the old tax regime.

Therefore, individuals must analyze their income, deductions, and tax-saving investments before choosing between the old and new tax regimes. Additionally, the decision should align with long-term financial planning objectives. The right investment strategy will help you not only grow your wealth but also optimize your tax liability.

After investment planning the tax calculation will be:-

  Old Regime New Regime
Gross Income Rs.10 Lakhs Rs.10 Lakhs
Standard Deduction Rs.50000 Rs.50000
Total Deduction Rs.4 Lakhs Rs.0
Taxable Income Rs.5.5 Lakhs Rs.9.5 Lakhs
Net Tax Payable Rs.26000(Approx.) Rs.54,600

Investment Plans - Tax Planning Options for Salaried Employees

Here are the tax planning investment plan options for salaried employees:

Section 80C:

Under Section 80C of the Income Tax Act in India, salaried employees can avail deductions for various investments and expenditures. Here are popular investment plans and tax-saving options:

  • Life Insurance Premium: Insurance Premiums paid towards term life insurance policies for yourself, spouse, or children are eligible for deductions under Section 80C, subject to a maximum limit of Rs.1.5 lakh.
  • Unit Linked Insurance Plans: Unit Linked Insurance Plans (ULIPs) are insurance-cum-investment products. The premium paid on ULIPs qualifies for deductions under Section 80C, subject to the overall limit of Rs.1.5 lakh.
  • Equity-Linked Savings Schemes (ELSS): ELSS is a type of mutual fund with a lock-in period of three years. Investments up to Rs. 1.5 lakh in ELSS are eligible for deductions under Section 80C.
  • Public Provident Fund (PPF): PPF is a long-term savings scheme with a maturity period of 15 years. Contributions to PPF qualify for deductions under Section 80C, and the interest earned is tax-free.
  • Employee Provident Fund (EPF): Contributions to EPF by both the employer and the employee are eligible for deductions under Section 80C.
  • National Pension System (NPS): Employee contributions to NPS are eligible for deductions under Section 80CCD(1), and an additional deduction of up to Rs.50000 is available under Section 80CCD(1B).
  • Tax-Saving Fixed Deposits: Fixed deposits with a lock-in period of five years are eligible for deductions under Section 80C. However, the interest earned is taxable.
  • Sukanya Samriddhi Yojana (SSY): SSY is a savings scheme for the girl child, and contributions made to the account are eligible for deductions under Section 80C.
  • National Savings Certificate (NSC): NSC is a fixed-income investment with a lock-in period of five years. The interest earned is reinvested and qualifies for deductions under Section 80C.
  • Home Loan Principal Repayment: The principal repayment of a home loan is eligible for deductions under Section 80C.

Section 80D:

  • Health Insurance Premiums: Premiums paid for health insurance policies for yourself, your spouse, children, and parents are eligible for 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.

Section 24(B)

  • Home Loan Interest Deduction (Section 24(b)): Under Section 24(b), salaried individuals can claim a deduction on the interest paid on a home loan. The maximum deduction allowed is Rs.2 lakh for a self-occupied property. For a property that is not self-occupied, there is no upper limit on the interest deduction.

Tax Saving and Tax Planning Tips for Salaried Employees

Effective tax planning for salaried employees involves strategic financial decisions that help minimize tax liabilities within the legal framework. Here are some key tax planning tips for salaried employees:

  • Understand Salary Components: Understand the various components of your salary, including basic salary, HRA (House Rent Allowance), special allowances, and bonuses. This understanding will help you optimize tax-saving opportunities.
  • Optimize HRA and Rent Payments: If you receive HRA, ensure that you take advantage of it by submitting rent receipts and other required documents to claim the exemption. If you live in your own house, consider renting it to family members to avail HRA benefits.
  • Utilize Standard Deduction: Salaried individuals are eligible for a standard deduction on their income. Ensure that you claim this deduction, as it reduces your taxable income.
  • Invest in Provident Funds (PF): Contribute to Provident Fund (PF) accounts like EPF (Employees' Provident Fund) is eligible for deductions.
  • Explore National Pension System (NPS): Consider contributing to NPS for an additional deduction under Section 80CCD(1B) up to Rs. 50,000. NPS provides a long-term investment option for retirement planning.
  • Invest in Equity-Linked Savings Schemes (ELSS): ELSS mutual funds offer tax benefits under Section 80C. These funds have a shorter lock-in period of three years compared to other tax-saving instruments.
  • Utilize Home Loan Benefits: If you have a home loan, make the most of deductions on the principal repayment (Section 80C) and interest paid (Section 24). Additionally, first-time homebuyers can claim an additional deduction under Section 80EEA.
  • Health Insurance Premiums: Invest in a health insurance policy for yourself and your family. Premiums paid are eligible for deductions under Section 80D. Additionally, premiums paid for parents are eligible for an additional deduction.
  • Education Loan Interest: If you have taken an education loan, the interest paid on the loan is eligible for deductions under Section 80E. This can be beneficial for higher education expenses.
  • Consider Term Insurance: Invest in a term insurance plan to secure your family’s financial future. Premiums paid for term insurance are eligible for deductions under Section 80C.
  • Stay Informed About Tax Laws: Regularly update yourself on changes in tax laws, slabs, and exemptions. This will help you make informed decisions and adapt your tax planning strategies accordingly.
  • Submit Investment Proofs Timely: Ensure timely submission of investment proofs and other required documents to your employer for salary structuring and TDS (Tax Deducted at Source) calculation.

Conclusion

The decision between opting for the old tax regime and the new tax regime for salaried employees requires careful consideration of individual financial circumstances, goals, and preferences. Each regime comes with its own set of advantages and considerations, making it essential for taxpayers must analyze their income, deductions, and tax-saving investments before choosing between the old and new tax regimes.

The Old Tax Regime allows for a variety of deductions and exemptions under different sections, such as 80C, 80D, and others. This regime is beneficial for those who have substantial deductions, such as home loan interest, life insurance premiums, and various eligible investments. Salaried employees with a well-structured portfolio of tax-saving investments may find the old regime advantageous, as it allows them to maximize deductions and reduce their overall taxable income.

On the other hand, the New Tax Regime offers simplicity and lower tax rates but eliminates most deductions and exemptions. This regime might be attractive for individuals who do not have significant deductions or prefer a straightforward tax structure. It provides a fixed tax rate based on income slabs, making it easier to calculate and predict tax liabilities.

Ultimately, the choice between the old and new tax regimes is subjective and should align with individual financial goals.

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