income tax savings

As the famous saying goes, ‘A penny saved is a penny earned‘. Tax planning is one of the ways that will help you save on taxes and increase your income. The Income Tax Act provides deductions for various investments, savings and expenditures incurred by the taxpayer in a particular financial year. 

We invest in various products that improve our quality of life but can also cause considerable financial distress. The government offers income tax exemptions on direct taxes charged on your whole pay to alleviate this burden. We will discuss some avenues to help you save taxes under the old and new tax regimes.

Budget 2024 Updates

• FM Nirmala Sitharaman has presented the Budget 2024-25 proposing a tax structure for the FY 2024-25 

• Standard deductions under the new tax regime has been increased to Rs.75,000, however for FY 2023-24 the standard deduction will remain the same.
• Family pension deduction of Rs 15,000 has been increased to Rs.25,000
• Deduction on Employers contribution to the pension scheme has been increased to 14% of salary+DA from 10%.
• All the above benefits has been extended to taxpayers opting for new regime. 

Tax Saving Deductions and Exemptions Under the New Tax Regime

Under the new tax regime, only limited tax deductions are available for taxpayers. Hence, opting for the new tax regime is a good option if you have a minimum investment. However, the tax slab rates are concessional compared to the old tax regime. 

Tax Slabs under the new tax regime are as follows;

Now the deductions that are eligible under the new tax regime are as follows.

Increase in Standard Deduction

Budget 2024 has increased the standard deduction available under the head Salary for the taxpayers opting for new tax regime to Rs. 75,000 from FY 24-25.

1. Employer Contribution to NPS u/s 80CCD(2)

Under section 80CCD(2), the deduction is available for the employer’s contribution to NPS. This benefit is available to individuals who receive a salary and not to self-employed individuals. An employer can contribute to the NPS contribution even if they have contributed to the PPF and EPF funds. The contribution made by the employer may be equal to or higher than the contribution made by the employee. 

If you are a central government employee, you can claim a deduction of up to 14% of your employer’s salary(Basic+DA). However, if you are a non-government employee, you can claim a maximum of 10% of your salary (Basic+DA). The deduction limit for non-government employee has also been increased to 14% of  salary (Basic+DA) from FY 24-25.

The amount that your employer contributes will be deducted from your employee payslip and deposited into your NPS account. There is an overall threshold of Rs 750,000 for employer contribution to PF, NPS, and Superannuation. 

2. Amount Paid or Deposited in the Agniveer Corpus Fund under Section 80CCH(2)

The Income Tax Act states that the total amount the applicants and the central government contribute to the Agniveer Corpus Fund will be eligible for deduction under section 80CCH(2).

The act also states that an exemption will be allowed if the applicant or the nominees receive such an income under the Agnipath Scheme.

Soldiers enrolled in this scheme will get all the benefits like ration, risk and hardships, travel, etc. Death and disability compensation is also available for the candidates. This deduction is now available under both regimes. 

3. Deduction Under Section 57(iia)  Of Family Pension Income

Family pension refers to the amount the employer pays to the employee’s family in the event of the employee's death.

A sum equal to ⅓ of the income received by the employee or Rs 15,000, whichever is lower among the two, will be allowed as a deduction under section 57( iia) of the family pension. The upper limit of Rs. 15,000 has been increased to Rs. 25,000 from FY 24-25.

4. Interest On Home Loan On Let-out Property Under Section 24

Under the new tax regime, interest on a home loan for self-occupied property is prohibited under section 24. Whereas interest on a home loan on the let-out property is allowed as a deduction without any upper limit. 

5. Transport Allowance and Conveyance Allowance 

 Transport allowance means the allowance given to the employee by the employer to compensate for the travel expenses incurred for commuting between his place of residence and work. 

The exemption allowed, from FY 2018-19 onwards to the extent of Rs. 3,200 per month. However, this is applicable only for a physically challenged employee commuting from his place of residence to the place of duty.

Conveyance allowance is granted to meet the expenditure incurred during the performance of office duty. However, conveyance allowance is exempt only to the extent of actual expenditure incurred. 

6. Exemptions Allowed under section 10 for the New Tax Regime 

Under the new tax regime, exemptions under section 10 were not allowed. However, certain exemptions are now allowable. Let us discuss the exemptions allowed.

A voluntary retirement scheme is offered by employers so that employees can retire voluntarily. The amount exempt under this section is Rs. 5 lakh. 

Individuals who receive gratuity under section 10(10), if they are government employees and then the gratuity received is fully exempt. Whereas if the employee is in private employment, then exemption on the same depends on whether they are covered under the Payment of Gratuity Act. 

Leave encashment is when the employee encashed all the paid leave at the time of his retirement or resignation. The maximum amount exempt has been increased to Rs. 25 lakhs as per the New Finance Bills, 2023, and the amount exceeding will be taxable. 

Tax Saving Deductions and Exemptions Under the Old Tax Regime

Unlike the new tax regime, deductions and exemptions are allowed under the old tax regime, which gives taxpayers the benefit of paying lower tax liability. Tax slabs under the old tax regime are as follows

Below are the deductions available to save tax under the old tax regime.

1. Buy a Home Loan and Enjoy Tax Benefits Under Section 80C

Numerous government-mandated programs, such as the PMAY (Pradhan Mantri Awas Yojana) and DDR (Delhi Development Authority) Housing Scheme, aim to make housing more accessible in India. At the same time, Sections 80C and 24(b) minimize monetary liability through lower tax burdens.

Whole annual income spent on repayment of the principal borrowed amount is eligible for Section 80C deductions of up to 1.5 lakh. Section 24(b) allows for tax exemption on the interest portion of a house loan up to Rs 2 lakh per year.

Furthermore, if you rent out the newly purchased home, the entire interest component is deductible from your rental income. However, to set off losses against other heads of income will be limited to Rs. 200,000.

Section 80EEA allows you to claim an additional deduction in your annual tax liability if you are a first-time homeowner and satisfy the other conditions underlying the same. 

2. Buy a Health Insurance Policy

People can claim tax deductions under Section 80D for the portion of their annual taxable income spent on premium payments. Depending on the age of the covered, different sums are exempt from such income tax computations.

Section 80D deduction limits are as follows:

3. Park Your Money In Government Schemes

Numerous government-mandated schemes offer high returns on total investments along with tax waivers. Individuals can claim up to Rs 1.5 lakh spent on such investments as tax waivers on total annual income under Section 80C of the Income Tax Act.

Tax exemptions can be availed by investing in the following tools:

• Senior Citizen Savings Scheme (SCSS)
• Sukanya Samriddhi Yojana (SSY)
• National Pension Scheme (NPS)
• Public Provident Fund (PPF)
• National Pension Scheme (NPS)

4. Buy Life Insurance Plans

Section 80C of the Income Tax Act provides for premium payments, and Section 10(10D) provides for the sum promised received at maturity or early death of the insured, whichever occurs first.

Yet, if the insurance is bought after 1st April 2012, tax benefits of up to Rs 1.5 lakh paid on annual premiums can be claimed under Section 80C, provided it is less than 10% of the entire sum assured.

If the policy was purchased before April 1, 2012, claims under Section 80C can be filed as long as the total premium payments do not exceed 20% of the sum guaranteed.

As per the Finance Act 2021, in the case of ULIP exemption, u/s 10(10D) is applicable only if the premium is less than Rs. 250,000 per year.

As per the Finance Act 2023, in the case of any other insurance policy (Other than ULIP), exemption u/ 10(10D) is applicable only if the premium is less than Rs 500,000 per year.

Acquisition or renewal of life insurance coverage, as well as annuity payments on such plans made through monthly salary, are also eligible for tax exemptions of up to Rs 1.5 lakh under Section 80CCC.

Only certain pension funds under section 23AAB are eligible for exemptions of up to Rs 1.5 lakh under section 80CCD(1).

5. Investment Options Under Section 80C

The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act, Section 80C includes various investments and expenses you can claim deductions on – up to the limit of Rs. 1.5 lakh in a financial year.

Other Tax Saving Options Beyond Section 80C

Apart from the 80C deductions, there are various deductions under Section 80 you can use to save on income tax. Tax benefits on health insurance premiums and home loan interest are a few-

• Interest paid on a home loan can be claimed as a deduction under section 24 up to Rs 2 lakh. Section 80EE and Section 80EEA also allow you to claim a deduction of up to Rs 50,000 on home loan interest subject to underlying conditions, which is over and above the limit of Section 24. 
• Any charity that is made to institutions or funds can be claimed as a deduction under section 80G.
• Interest paid on education loans is allowed as a deduction under section 80E
• Employer contribution to NPS is eligible for deduction u/s 80CCD(2) with an overall threshold of Rs 750,000 (Including Employer contribution to PF).
• Individual contributions to NPS are eligible for deduction u/s 80CCD(1B) with a limit of Rs 50,000 a year.
• Section 80GG provided a deduction for non-salaried individuals to claim a deduction of up to Rs 60,000 per annum for the rent being paid on accommodation.
• Section 80TTA provided a deduction of up to Rs 10,000 on Saving bank interest for ages less than 60. For senior citizens, section 80 TTB provides deductions up to Rs 50,000 on all interest incomes.

How to Plan Your Tax-Saving Investments for the Year?

The best time to start planning your tax-saving investments is at the beginning of the financial year.

Most taxpayers procrastinate till the last quarter of the year, resulting in hurried decisions. Instead, if you plan at the start of the year, your investments can compound and help you achieve long-term goals. Remember, tax saving should be an additional perk and not a goal in itself.

Use the following pointers to plan your tax-saving for the year:

• Check the tax-saving expenses you already have – insurance premiums, children’s tuition fees, EPF contribution, home loan repayment etc.
• Check which is the best tax regime for you, the New tax regime and the old tax regime. Use a cleartax calculator for such projection.
• Deduct this amount from Rs 1.5 lakh to figure out how much to invest. You needn’t invest the entire amount if expenses are covering the limit.
• Choose tax-saving investments based on your goals and risk profile. ELSS funds, PPF, NPS and fixed deposits are some of the popular options.
• Only if the old tax regime is more beneficial on the basis of current and projected deductions, then you can proceed with the future investment. This is because if you opt for the new tax regime while filling ITR, the investment that you have made will not result in any tax savings.

It is best to begin investing in the first quarter of the financial year so that you can spread the investments over the year. Doing this won’t burden you at the end of the year and will also allow you to make informed investment decisions.

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