The income tax of any employed person is calculated based on his basic salary. Therefore, it is often advised that the basic pay should not exceed 40% of CTC. The inclusion of allowances in the salary structure can be of great help in reducing the net taxable income.
When employees demand a salary increase, they forget that the amount of increase in basic salary goes towards paying income tax. Very few people pay attention to their salary restructuring to reduce their tax liability. It is advised that one opts for tax savings options according to the salary bracket he is in.
Let us look at the basic things that you should keep in mind when you get the opportunity to improve your salary structure for tax savings.
Choose the right tax regime
This new tax system offers more tax-free slabs, with lower tax rates. If you opt for the new tax system to pay income taxes, you’ll not receive the tax advantages that taxpayers enjoy under the previous tax system.
Thus, taxpayers who don’t have savings may choose to go with the new tax structure. Individual taxpayers have been allowed to claim income tax exemption under Section 80C for deductions up to Rs 1.5 lakh, home loan interest, NPS contribution, and other deductions.
Concession is also given on many components of the gallery like House Rent Allowance (HRA), Conveyance Allowance, and Leave Travel Allowance up to a certain limit.
According to the tax filing website Clear, the old tax regime is beneficial for most taxpayers if they take maximum tax exemption under Section 80C and take advantage of the tax exemptions available depending on the salary structure.
Keep these components of salary in mind.
Basic Salary:
It is used to calculate the income tax of a person. It is advised that the basic pay should not exceed 40% of CTC.
Tax-Exempt Investments:
Investors can choose alternatives such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC) as well as the Equity-Linked Savings Scheme (ELSS) which case gives the advantage of a significant tax deduction.
Flexible Benefits: To avail tax benefits, reimbursement of allowances like health insurance, meal vouchers, and car allowance can be taken from the company.
Bonus: Negotiate with the company on performance-based bonuses and non-monetary benefits like company accommodation, vehicle, club membership, etc. This can save you a lot of tax.
Home Loan:
When an individual is applying for a home loan, then tax deductions can be claimed on interest paid to the lender by section 24 under the Income Tax Act.
Salary Splitting: If an individual family member falls in a lower tax bracket, he can explore opportunities to split his income within the legal limit by investing in the name of that member.
New Income Tax Regime in India
Individuals and Hindu Undivided Families can select their tax regime before each financial year. The new income tax regime encourages savings while encouraging long-term wealth accumulation through various tax exemptions and deductions.
The Union Budget 2023 introduced a new income tax regime with many advantages for salaried individuals, such as an increased standard deduction amount. But does this suit you best?
Tax slabs
Income tax slabs and rates remain unchanged for FY 2024-25; however, key changes have been implemented into the new tax regime; among these are the reinstatement of standard deduction for salaried individuals as well as surcharge reduction from 37% to 25% – both measures that could potentially help individuals save significant sums on their taxes.
As a salaried individual or HUF, you must understand all of your options when choosing a new tax regime.
While you have the freedom of choosing between using either the old or new system when filing returns, make your choice explicit when filing. While switching between them throughout the year is possible, prioritizing carefully when making decisions using tools like tax calculators for assessment.
The old tax regime can be more beneficial to investors who invest in tax-saving schemes, while the new one may not be. Furthermore, this depends on your income, deductions, and preferences before selecting either option; consulting a professional tax advisor may also offer more guidance in making their choice. You can find out more about this new system here.
Tax rates
India’s new tax regime was implemented to streamline the process, with lower rates and simplified calculations, but at the expense of limiting deductions and exemptions.
Whether or not this new regime works best for your circumstances and goals will depend on professional advice; consult a financial advisor or tax professional for guidance before making your decision.
The old tax regime enabled taxpayers to claim various deductions on their salaries, such as Public Provident Fund (PPF), National Pension Scheme (NPS), tuition fees, and medical expenses deductions; in contrast, individuals could now make deductions for medical expenses and housing loans as part of the new regime, thus significantly increasing taxable income.
Additionally, the new regime offers a standard deduction of Rs 50,000 that all taxpayers can take advantage of regardless of investments or expenses.
Individuals earning more than 10 lakh per annum can choose between paying taxes in either of the regimes.
Individuals and Hindu undivided families (HUF) can opt in or out of the new regime at any point during the year; those with business/professional income, however, must opt out once and can no longer recommit. Individuals without such income can opt in and out freely.
Tax deductions
An individual’s income tax liability is calculated based on his/her total taxable amount and eligibility for various deductions, exemptions, and losses.
Individuals earning income above certain limits must file income tax returns and pay taxes accordingly; choosing either the old or new tax regime will influence exemption limits and tax rates accordingly.
Selecting the optimal tax regime to maximize your tax savings. Under the old system, there were over 70 deductions and exemptions that helped to lower taxable income significantly – such as Section 80C deductions that helped to decrease your taxable income substantially and reduce tax liabilities significantly.
Conversely, under the new regime, there are six lower-income tax slabs with increased standard deductions that provide substantial tax savings potential.
Changes to the old tax regime include an increased basic exemption limit and rebate under Section 87A, with a standard deduction reestablished at Rs 50000. Furthermore, this new regime offers several advantages for individuals earning salaries like deduction for HRA expenses.
The old regime provided long-term capital gains tax (LTCG) advantages, allowing individuals to claim up to Rs 1.5 lakh as a deduction for debt fund investments that qualified under Section 80A as well as on interest earned on savings accounts or post office deposits.
Tax filing
The old tax regime provides more deductions and exemptions that can help lower your taxable income, such as LTCG benefits from debt funds, Section 80C investments, HRA and LTA deductions, medical expenses and interest income from savings accounts or post office deposits, rebates on long-term capital gains or dividend income and rebates from long-term capital gains and dividend income.
Meanwhile, the new regime comes with its advantages, such as a simpler process and fewer deductions.
Whatever tax system is chosen, those who have gross earnings that exceed the limit of exemption for basic income must file tax returns on their income.
This requirement includes individuals earning salaries, pension income, business or professional earnings, and super senior citizen benefits. Furthermore, it is compulsory that senior and super-senior citizens file income tax returns annually.
Individuals wishing to switch between the old and new tax regimes must inform their employer before the beginning of each financial year. While adjustments can be made during tax filing season, decisions once made cannot be altered afterward.
Tax filing is an integral component of financial planning, and must be done on time to avoid penalties and fines. Verifying your return either manually by attaching your signature to an ITR acknowledgment form or electronically via Aadhaar OTP/EVC is important for filing on time.