New Tax Regime vs. Old Tax Regime Individuals and HUFs in India have the option to choose between the new tax regime and the old tax regime. The new tax regime offers lower tax rates, but it eliminates various exemptions and deductions available under the old tax regime. Taxpayers must carefully evaluate their income, investments, and tax-saving options before making a decision. The income tax slabs for both regimes are as follows:
| Income Slabs (Rs) | Tax Rate (Old Regime) | Tax Rate (New Regime – devoid of exemptions & deductions) |
|---|---|---|
| Up to 2.5 lakh | Nil | Nil |
| 2.5 – 5 lakh | 5% | 5% |
| 5 – 7.5 lakh | 20% | 10% |
| 7.5 – 10 lakh | 20% | 15% |
| 10 – 12.5 lakh | 30% | 20% |
| 12.5 – 15 lakh | 30% | 25% |
| Above 15 lakh | 30% | 30% |
While the new tax regime may appear appealing due to lower tax rates, taxpayers should carefully assess the impact of foregoing various exemptions and deductions before making a decision.
Individual Tax Saving Options:
#1. Public Provident Fund (PPF) – PPF is a long-term savings scheme with a lock-in period of 15 years. It offers tax-free interest, and the contributions made to PPF are eligible for deductions under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per financial year.
#2. Employee Provident Fund (EPF) – EPF is a mandatory savings scheme for salaried employees. Employee contributions to EPF are eligible for tax deductions under Section 80C. The interest earned and the maturity amount are tax-free, provided the individual completes five years of continuous service.
#3. National Savings Certificate (NSC) – NSC is a fixed deposit scheme offered by the Indian government. The investment made in NSC qualifies for tax benefits under Section 80C. The interest earned on NSC is taxable, but it is deemed reinvested and eligible for a tax deduction under Section 80C.
#4. Tax-saving Fixed Deposits – These are fixed deposits with a lock-in period of five years offered by banks. The invested amount up to Rs. 1.5 lakh per financial year is eligible for tax deduction under Section 80C.
#5. Equity-Linked Saving Schemes (ELSS) – ELSS are mutual funds that invest predominantly in equity markets. Investments in ELSS are eligible for tax deductions under Section 80C, with a lock-in period of three years. ELSS also offers the potential for higher returns compared to other tax-saving options.
#6. Unit Linked Insurance Plans (ULIPs) – ULIPs are insurance-cum-investment products. The premiums paid towards ULIPs qualify for tax deductions under Section 80C. ULIPs offer the dual benefit of insurance coverage and investment returns.
#7. Sukanya Samriddhi Yojana (SSY) – SSY is a savings scheme aimed at promoting the welfare of the girl child. Contributions made to SSY accounts are eligible for tax deductions under Section 80C. The scheme offers a higher interest rate and tax-free maturity proceeds.
#8. Senior Citizens’ Savings Scheme (SCSS) – SCSS is a savings scheme available to senior citizens. It offers a higher interest rate and tax benefits under Section 80C on investments made. The scheme has a lock-in period of five years.
#9. Health Insurance Premium (Section 80D) – Premiums paid for health insurance policies for self, spouse, children, and parents are eligible for tax deductions under Section 80D. Individuals below 60 years can claim a deduction of up to Rs. 25,000, while senior citizens can claim up to Rs. 50,000.
#10. Additional Deduction on Home Loan Interest (Section 24B) – First-time homebuyers can avail an additional deduction of up to Rs. 50,000 on home loan interest under Section 24B, over and above the existing limit of Rs. 2 lahks under Section 24.
#11. Medical Insurance for Parents (Section 80D) – If an individual pays for the medical insurance of their parents, they can claim an additional deduction of up to Rs. 25,000 (Rs. 50,000 if parents are senior citizens) under Section 80D.
#12. Tax Savings on Additional Contribution to NPS (Section 80CCD(1B)) – By contributing an extra amount of up to Rs. 50,000 to the National Pension System (NPS), taxpayers can avail of an additional tax deduction under Section 80CCD(1B). This is in addition to the deduction available under Section 80C.
#13. Money Received From Provident Funds (Section 10(11) & 10(12)) – Withdrawals from recognized Provident Funds after completing five years of continuous service are tax-free. Additionally, the contributions made by employees to the Provident Fund are eligible for tax deductions under Section 80C.
#14. Tax Saving From Home Loan (Section 24 & Section 80EEA) – Homeowners can claim deductions on both the principal amount (under Section 80C) and the interest paid (under Section 24) on the home loan. First-time homebuyers can avail an additional deduction on home loan interest up to Rs. 1.5 lakh under Section 80EEA.
#15. Tax Savings on LTCG on Sale of House Property (Section 54) – Long-term capital gains (LTCG) arising from the sale of a residential house can be exempted from tax if the proceeds are reinvested in purchasing another residential property within specified time frames. This exemption is available under Section 54.
#16. Tax Saving on Education Loan (Section 80E) – Interest paid on education loans is eligible for deduction under Section 80E. The deduction is available for a maximum of 8 years or until the interest is fully repaid, whichever is earlier.
#17. Medical Treatment of Disabled (Handicapped) Dependent Relative (Section 80DD) – Taxpayers can claim deductions under Section 80DD for expenses incurred on the medical treatment or maintenance of a disabled dependent relative. The maximum deduction amount is Rs. 75,000 (Rs. 1.25 lakh for severe disability).
#18. Medical Expenses of Disabled Individuals (Section 80U) – Disabled individuals can claim deductions for medical expenses incurred on themselves under Section 80U. The maximum deduction amount is Rs. 75,000 (Rs. 1.25 lakh for severe disability).
#19. Medical Treatment of Specified Disease (Section 80DDB) – Expenses incurred on the treatment of specified diseases for oneself or dependent relatives are eligible for deductions under Section 80DDB. The deduction amount varies depending on the age of the individual and the disease being treated.
#20. Donations (Section 80G) – Donations made to eligible charitable institutions and funds are eligible for tax deductions under Section 80G. The deduction percentage varies based on the type of institution and the amount donated.
#21. Donations to Political Parties (Section 80GGC) – Donations made to registered political parties are eligible for tax deductions under Section 80GGC. However, cash donations exceeding Rs. 2,000 are not eligible for deductions.
#22. Interest Paid on Purchase of Electric Vehicle (Section 80EEB) – If a taxpayer has taken a loan to purchase an electric vehicle, the interest paid on the loan is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80EEB.
Tax Savings Tips for Business Persons in India:
#23. Distributed Profit to Partners in Partnership Firms – Partners in a partnership firm can save tax by distributing profits among themselves, considering individual tax slabs.
#24. Travel/Hotel Expenses in Business – Business-related travel expenses and hotel bills can be claimed as deductions, provided proper records and bills are maintained.
#25. Food Expenses in Business – Food expenses incurred during business meetings, conferences, or travel can be claimed as deductions. Proper record-keeping is essential.
#26. Leave Travel Allowance (LTA) – LTA received from an employer for travel expenses can be tax-free if utilized for actual travel expenses within India.
#27. House Rent Allowance (HRA – Part of Salary) – HRA can be partially exempt from tax if the taxpayer lives in a rented house and receives HRA as part of their salary.
#28. HRA (not part of salary) – Even if a taxpayer doesn’t receive HRA as part of their salary, they can still claim deductions for rent paid under Section 80GG.
#29. Income From Gratuity (Section 10(10)) – Gratuity received by employees, either from the employer or a previous employer, is exempt from tax up to a certain limit.
#30. Meal Coupons (Section 10(14)) – Meal coupons provided by employers can be tax-free up to a specific limit per meal.
#31. Standard Deduction (Section 16) – Salaried individuals can claim a standard deduction of Rs. 50,000 from their gross salary income.
#32. Company Leased Car – If an individual receives a company-leased car for personal use, the taxable value is only a portion of the car’s actual cost, thereby reducing their tax liability.
#33. Telephone/Internet Expenses – Telephone and Internet expenses incurred for official purposes can be claimed as deductions.
#34. Rebate Under Section 87A – Individuals with total taxable income up to Rs. 5 lahks can claim a rebate of up to Rs. 12,500 under Section 87A.
#35. Depreciation on Business Assets – Business owners can claim depreciation on assets used for business purposes, such as machinery, equipment, vehicles, etc. Depreciation allows for a deduction for the wear and tear of assets over time.
#36. Investment in Tax-Free Bonds – Tax-free bonds are issued by government enterprises and offer tax-free interest income. Investing in these bonds can be a tax-efficient way to earn interest without incurring tax liability.
#37. Section 44AD (Presumptive Taxation) – Small businesses with turnover up to Rs. 2 crores can opt for presumptive taxation under Section 44AD. They can declare income at a prescribed rate (typically 8% of turnover) and are relieved from maintaining detailed books of accounts.
#38. Section 44ADA (Presumptive Taxation for Professionals) – Professionals with gross receipts up to Rs. 50 lakhs can avail of presumptive taxation under Section 44ADA. They can declare income at a prescribed rate (50% of gross receipts) and are exempted from maintaining detailed books of accounts.
#39. Section 44AE (Presumptive Taxation for Goods Carriage) – Owners of goods carriages can choose presumptive taxation under Section 44AE and declare income based on the number of vehicles owned.
#40. Section 44ADA (Presumptive Taxation for Retail Traders) – Retail traders with turnover up to Rs. 2 crores can opt for presumptive taxation under Section 44AD. They can declare income at a prescribed rate (6% of turnover for non-digital transactions) and are relieved from maintaining detailed books of accounts.
#41. Section 44ADA (Presumptive Taxation for Commission or Brokerage Income) – Individuals earning income from commission or brokerage (up to Rs. 50 lakhs) can opt for presumptive taxation under Section 44ADA and declare income at a prescribed rate (6% of gross receipts).
#42. Section 10AA (Special Economic Zone Deductions) – Business income earned from units operating in Special Economic Zones (SEZs) can avail of a deduction under Section 10AA for 15 consecutive assessment years.
#43. Section 10(14) (Allowances for Specific Professions) – Specific allowances for professions such as doctors, lawyers, and chartered accountants can be exempt from tax up to certain limits.
#44. Section 10(14) (Conveyance Allowance) – Conveyance allowance received by employees for commuting between residence and workplace can be tax-free up to a specified limit.
#45. Section 10(14) (Helper Allowance) – Employees receiving a helper allowance can claim tax exemption for the expenses incurred on the helper, subject to certain conditions.
#46. Startup Tax Benefits – Startups in India may be eligible for various tax benefits under the Startup India initiative, such as a three-year tax holiday, exemptions on capital gains, etc.
#47. R&D Tax Benefits – Companies engaged in research and development activities can avail of tax deductions under Section 35(2AB) of the Income Tax Act.
#48. Tax Savings on Export Income – Income earned from exports can be eligible for various tax benefits, exemptions, or deductions under the Income Tax Act.
#49. Tax Benefits for Senior Citizens – Senior citizens are eligible for higher basic exemption limits and additional tax benefits on certain investments like the Senior Citizens’ Saving Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY).
#50. Tax Savings on Repayment of Education Loan – Taxpayers can claim deductions on the interest paid on education loans under Section 80E for themselves, their spouse, or children.
Remember, tax-saving strategies should always align with individual financial goals, risk tolerance, and prevailing tax laws. It is essential to consult with a qualified tax advisor or financial planner to optimize tax savings in a lawful manner and make informed financial decisions. Additionally, staying updated on any changes in tax laws and regulations is crucial for effective tax planning.
Conclusion
Understanding and effectively utilizing tax-saving methods is crucial for individuals and businesses in India to optimize their tax liabilities while complying with the Income Tax Act. By taking advantage of various deductions, exemptions, and rebates provided under tax laws, taxpayers can significantly reduce their tax burden and increase their savings. Some popular tax-saving methods for individuals include investments in PPF, ELSS, NPS, and EPF, along with deductions for health insurance premiums, home loan interest, and charitable donations. For businesses, deductions for employee contributions, charitable contributions, and investments in specific sectors offer substantial tax benefits. However, it is essential to stay informed about the latest tax regulations and consult with tax experts for personalized advice.
FAQs (Frequently Asked Questions):
1. Can I claim tax deductions for both EPF and NPS contributions? Yes, as an individual taxpayer, you can claim deductions for contributions to both EPF (Employee Provident Fund) and NPS (National Pension System) under separate sections of the Income Tax Act. EPF contributions are eligible for deduction under Section 80C, while NPS contributions are eligible for an additional deduction of up to Rs. 50,000 under Section 80CCD(1B).
2. Are long-term capital gains from equity investments exempt from tax? As per the current tax regulations, long-term capital gains (LTCG) from equity investments exceeding Rs. 1 lakh are taxable at 10% without indexation benefit. However, gains up to January 31, 2018, are grandfathered, and the cost of acquisition is calculated using the fair market value as of that date.
3. Can I claim deductions for both tuition fees and the education loan taken for my child’s education? No, as per the Income Tax Act, you cannot claim deductions for both tuition fees (Section 80C) and the interest paid on an education loan (Section 80E) for the same child’s education. However, you can claim deductions under these sections separately, provided you meet the respective eligibility criteria.
4. What are the tax-saving options for senior citizens in India? Senior citizens in India can avail of additional tax benefits, such as higher deductions on health insurance premiums (Section 80D) and higher interest income exemption on fixed deposits (Section 80TTB). They can also invest in the Pradhan Mantri Vaya Vandana Yojana (PMVVY) to earn regular pension income while enjoying tax benefits.