Income Tax FY25:
How to Reduce Tax Liability in a Given Financial Year
It is essential to be proactive in exploring tax-saving options to ensure that you are maximizing your earnings. By taking advantage of tax-saving strategies, you can increase your take-home salary and ultimately improve your financial stability. The Income Tax Act allows deductions for investments, savings, and expenses in a financial year that can reduce tax liability.
Understanding the Importance of Tax Planning
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 maximizing 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 minimize taxable income through tax-efficient structures. One should utilize exemptions, allowances, and deductions from the Income Tax Act to decrease the tax burden effectively.
Key Steps to Reduce Tax Liability
1. Understanding Your Tax Bracket
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.
Tax Brackets Under the Two Regimes:
| Income Range | Old Regime Tax Rate | Income Range | New Regime Tax Rate |
|---|---|---|---|
| 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 minimize 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. Utilizing Deductions and Exemptions Under the Old Tax Regime
Most taxpayers, especially those with high income or those having several tax-saving investments, prefer the Old Tax Regime. 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, allowing a deduction of up to Rs 1.5 lakh for eligible investments.
Common Tax-Saving Investments and Deductions:
- 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 organizations (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.
Conclusion
Proper tax planning is crucial for maximizing your earnings and ensuring financial stability. By understanding your tax bracket, choosing the right tax regime, and utilizing available deductions and exemptions, you can reduce your tax liability and increase your take-home pay. Stay informed about the latest tax regulations and seek professional advice to optimize your tax-saving strategies effectively.
