Before you file your ITR, it is important to brush up on your knowledge regarding the tax benefits offered under the old and new tax regimes. As we all know, in 2020, the government introduced a new tax regime. So, a taxpayer now has the option to choose between new and old tax regimes depending on their income tax requirements.
The government introduced the new income tax slabs with the disclaimer that tax-payers availing of the new tax slabs will have to forgo tax exemptions that they previously availed of. Alternatively, if tax-payers continue to avail themselves of the exemptions, they will not receive the benefits of the new tax slabs. For the average salaried tax-payer, this translates to a choice between two investment paths related to tax planning.
Option 1: Avail of the new income tax slabs
Finance Minister Nirmala Sitharaman announced in Budget 2020 that individual tax-payers could opt for a new system of taxation with reduced income tax rates. For the middle income group, the new tax slabs spell good news. Here are the details:
- Up until an annual income of ₹3,00,000, no income tax is payable.
- Individuals with an annual income of ₹3,00,000 to ₹6,00,000 will need to pay 5% income tax.
- For individuals earning between ₹6,00,000 and ₹9,00,000, a 10% tax is applicable.
- Individuals earning between ₹9,00,000 annually and ₹12,00,000 will need to pay 15% tax on their income.
- Individuals who take home ₹12,00,000 to ₹15,00,000 will need to shell out 20% income tax.
- Similarly individuals with an annual income of more than ₹15,00,000 will need to shell out 30% of their income on income tax.
- For the 2023-24 tax year, the income tax rebate has been increased from the earlier limit of ₹5,00,000 to ₹7,00,000.
Tax-payers who want to avail of the new tax slabs will, however, need to forgo certain tax exemptions and deductions, some of which are as follows:
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Exemptions:
- House Rent Allowance
- Leave Travel Allowance
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Deductions:
Additionally, tax-payers who select the new tax slabs will not be able to claim deductions against losses from house property.
You should certainly weigh these considerations while planning your taxes. Here are some points to consider.
If you can’t show sufficient investments to claim deductions under 80C, you will pay less tax by opting for the new tax slabs as compared to the old tax regime.
Tax-payers who opt for investments that do not qualify for deductions can also benefit from choosing the new tax slabs.
If you invest in the stock market, for instance, you could opt for the new tax slabs to lower your taxes. A good place to start is by downloading the Angel One trading app.
A word of caution is, however, necessary. As tempting as it seems, it is not advisable to avoid or reduce investing in tax saving options to lower your tax payment. These investments aren’t applicable only for tax savings but also to secure your financial future. Tax planning should ideally ensure more strategic investments, not the opposite.
Option 2: Stick with the old tax regime
Tax-payers who choose to stick to the old tax regime will continue to benefit from tax exemptions and deductions.
If you choose to go with this option, you will continue to pay taxes as follows:
- Individuals with an annual income of ₹500,000 to ₹10,00,00 pay 20% income tax
- Annual income between ₹10,00,000 and ₹15,00,000 is taxed at 30% income tax
- Individuals with annual income above ₹15,00,000 will pay 30% as income tax
If you decide to stick with the old tax regime, it is absolutely imperative that you invest smartly in order to grow your money while also reducing your tax burden. There are several options on the market, such as: mutual funds, specifically equity-linked saving schemes, Unit-linked insurance plans, and life insurance, which can help grow your money.
You can claim deductions if you have a home loan or an educational loan for a child. Income tax deductions are also available on the premium paid for medical and health insurance plans.
Conclusion:
Consider all the factors discussed in this guide carefully before choosing which income tax regime you will go with. If your annual income is over ₹15 lakhs, your tax burden will remain unchanged under the old and new regimes. But if your income is less than ₹15 lakh, your choice will determine how much tax you save this year. Now might be an opportune moment to switch from traditional investment methods to stocks. Identify your stock options and read up on how to navigate the stock market on the Angel One app, for example. If you’re sitting on the fence, it is crucial to know that you can make a choice, determine if it works for you this year, and accordingly change or stick with your choice next year.
