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How to Save Income Tax in India On New & Old Tax Regime

How to Save Income Tax in India On New & Old Tax Regime

Updated on: 01 Aug, 2024 12:09 AM

Tax season in India can be daunting, but it doesn't have to be! The Indian government offers two distinct tax regimes: the familiar old regime and the simplified new regime. Each caters to different financial situations and unlocks unique tax-saving options.

The traditional old regime provides a wider net for tax deductions and exemptions. From investments in PPF and ELSS to medical expenses and education costs, claiming these deductions can significantly reduce your taxable income.

On the other hand, the new regime, introduced in 2020, boasts a refreshingly simple structure. With lower tax rates than the old regime, it can be particularly attractive for individuals with straightforward income sources like salaries. The new regime eliminates most deductions and offers a standard deduction instead, making tax filing a less time-consuming process. However, this trade-off for simplicity might mean sacrificing significant tax benefits available under the old regime if you utilize them extensively.

Deduction and exemptions under the old tax regime
Saving Tax under the New Tax Regime
FAQs

Deduction and exemptions under the old tax regime

The old tax regime offers a wider range of deductions and exemptions compared to the new regime. By strategically utilizing these benefits, you can significantly minimize your taxable income and lower your tax burden.

A. Deductions under Section 80C (and sub-sections)

Section 80C is the powerhouse of tax savings in the old regime. It allows you to claim a deduction of up to Rs. 1.5 lakh per financial year for various investments and expenses. Here are some popular tax-saving options that fall under Section 80C:

Public Provident Fund (PPF): A long-term government-backed savings scheme that offers appealing interest rates and tax benefits.
Equity Linked Savings Schemes (ELSS): Mutual fund schemes that invest in the stock market. They offer the potential for high returns along with tax benefits.
National Pension System (NPS): A retirement savings scheme that lets you invest in a mix of equity and debt instruments. Contributions to NPS qualify for deduction under Section 80C, with an additional deduction available under Section 80CCD(1B).
Unit Linked Insurance Plans (ULIPs): These life insurance policies offer a variety of insurance coverage and investment. However, only a portion of the premium paid towards ULIPs qualifies for deduction under Section 80C.

Note: The combined deduction for all investments and expenses under Section 80C cannot exceed Rs. 1.5 lakh in a financial year.

B. Other Deductions and Exemptions

The old regime offers additional deductions and exemptions beyond Section 80C that can further reduce your tax burden:

House Rent Allowance (HRA): If you pay rent for your accommodation, you can claim a deduction for HRA received from your employer. The deduction amount is subject to certain conditions based on your city of residence and your salary structure.
Leave Travel Concession (LTA): Salaried individuals can claim a deduction for travel expenses incurred for themselves and their family while on leave. The eligibility and amount of deduction depend on the mode of travel and the frequency of travel.
Medical Insurance Premiums (Section 80D): Premiums paid for health insurance policies for yourself, spouse, dependent parents, and children qualify for deduction under Section 80D. The deduction amount varies depending on the type of insurance and the age of the insured person.
Interest on Home Loan (Section 24): If you have taken a home loan to buy or construct a residential property, you can claim a deduction for the interest paid on the loan amount under Section 24. The deduction limit is subject to certain conditions based on the loan amount and property type.

Note: Carefully review the specific conditions and eligibility criteria for each deduction and exemption before claiming them in your tax return. Consulting a tax advisor while filing Income Tax Returns can help you maximize your tax benefits under the old regime.

Saving Tax under the New Tax Regime

The new tax regime, introduced in 2020, offers a simpler approach to filing taxes with lower tax rates compared to the old regime. However, this simplicity comes at the cost of limited deductions and exemptions.

A. Limited Deductions and Exemptions

The new regime significantly restricts the deductions and exemptions available under the old regime. Most commonly claimed deductions, including those under Section 80C (PPF, ELSS, etc.), HRA, LTA, and medical insurance premiums, are not allowed under the new regime.

There are, however, a few exceptions:

Employer's Contribution to NPS: Contributions made by your employer towards your National Pension Scheme (NPS) account qualify for deduction under Section 80CCD(2) even under the new regime.
Interest on Home Loan for Let-Out Property: If you own a property that you have rented out, the interest paid on the home loan for that property can still be claimed as a deduction under the new regime.

B. Focus on Standard Deduction

While the new regime eliminates most deductions, it introduces a standard deduction to compensate partially. The standard deduction is a fixed amount that is automatically deducted from your gross salary before calculating your taxable income. This simplifies the filing process and eliminates the need for meticulous record-keeping associated with claiming multiple deductions.

Advantage of Standard Deduction in the New Regime

The standard deduction offered under the new regime can be particularly advantageous for individuals with:

Straightforward Income Sources: If your income primarily consists of salary with minimal additional income streams, the standard deduction might be sufficient to cover basic tax-saving needs.
Limited Investment Opportunities: For individuals who don't have many tax-saving investment options, the standard deduction eliminates the complexity of claiming deductions under various sections.

Making an Informed Decision

The choice between the old and new regimes depends on your individual circumstances. If you have a high income and utilize various tax-saving investments extensively, the old regime might offer greater tax benefits. However, the new regime's simplicity and lower tax rates can be attractive for those with straightforward income sources and limited investment opportunities.

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Frequently Asked Questions

Q- Will you save more tax in the new regime or old?

While the new tax regime allows for tax-free income up to Rs 7.5 lakh and lower tax rates for higher incomes, the old tax regime presents greater opportunities for tax savings through various deductions and exemptions.

Q- Can I go from new tax regime to old tax regime?

As a salaried individual, you have the option to switch between the new and old tax regimes each financial year. Even if you've chosen the new tax regime for TDS throughout the year, you can still change your preferred tax regime when filing your ITR. This flexibility allows you to adapt your tax strategy to your changing financial circumstances.

Q- Is standard deduction of 50000 applicable in new tax regime?

In the budget 2023 amendment, the provision to claim a standard deduction of Rs 50,000 was extended to the new tax regime. This means you can claim the standard deduction of Rs 50,000 under both the new and old regimes. A standard deduction decreases your taxable income, thereby potentially lowering your tax liability.

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