How to Save Tax in India for FY 2024 - 2025

Tax planning is an important aspect of financial management. It helps to reduce the burden of heavy taxes levied on your finances and earnings by looking for tax-saving opportunities while complying with tax laws. In this blog, we will explore various options to save tax under both regimes, along with some essential tips to minimize tax on salary and capital gains.

In India, the Income Tax Act offers various provisions and deductions under old and new tax regime to taxpayers to reduce their tax liabilities in a particular financial year. With the introduction of a new tax regime in 2020, taxpayers now have an option to choose between the old and new tax regime based on their annual income and incurred tax liability through the year.

Understanding the Old and New Tax Regimes

Old Regime

The old tax regime was structured in a way to provide tax relief through various exemptions and deductions such as Sections 80C, 80D, and other sections that help in reducing taxable income. This system is appropriate for people with sizable investments and tax-deductible spending.

Key Features of the Old Regime:

• Tax-saving deductions: This regime includes many tax-saving deductions to lower the taxable income.

  • Section 80C Deductions: This is the most well-received section, allowing deductions up to Rs.1.5 lakh for investments in PPF, ELSS, ULIP, EPF and other insurance premiums.

  • Section 80D: This section allows deductions on medical insurance premiums up to Rs.50,000 for self, spouse, parents and children. The limit is increased to an additional Rs.75,000 (Rs.25,000 additional if parents are senior citizens).

• House Rent Allowance (HRA): This regime offers HRA to reduce taxable income if you are living in a rented space.

• Standard Deduction: A standard deduction of Rs.50,000 is available to salaried individuals.

New Tax Regime

The Government of India introduced the new regime tax in the Union budget 2020 that is more focused on lower tax rates without any major deductions or exemptions. This regime is simpler and explicit, and it is suitable for individuals who do not own significant investments and have much tax-deductible expenses.

Key Features of the New Regime:

• Default Option: New tax regime is the default option for taxpayers unless you specifically opt for the old tax regime.

• Lower Tax Rates: This regime provides reduced tax rates compared to the old regime for different income slabs. For example, income up to Rs.3 lakh is non-taxable under the new regime while the same is taxed at 5% under the old regime.

• No Deductions/Exemptions: This regime does not include the popular deductions like Section 80C, 80D, or HRA under the new regime.

• Higher Exemption Limit: The basic exemption limit in the new tax regime is increased to Rs.3 lakhs compared to Rs.2.5 lakhs in the old tax regime slab. 

How to Save Tax Under the Old Regime

1. Maximizing Section 80C Deductions: Invest in Unit Linked Insurance Plan (ULIP), Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Savings Certificate (NSC), fixed bank deposits and other eligible schemes to avail of the maximum deduction of Rs.1.5 lakh. For salaried employees, the contributions made to the EPF from their monthly salary are eligible for deduction under Section 80C.

2. Section 80D: Buy health insurance premiums for yourself, family, and parents to claim deductions upto Rs.50,000 and an additional benefit of Rs.20,000 for senior citizens' parents under this section.

3. House Rent Allowance (HRA): All salaried employees can claim HRA deduction if you are living in a rented house. The exemption amount depends on the HRA received, rent paid, and your basic salary.

4. Section 24(b): If you have bought a home on a bank loan, you can benefit from claiming tax-deduction on interest on home loans as a deduction under Section 24(b) upto Rs.2 lakh per year.

5. Section 80E: For students opting for educational loan for higher education can claim the interest paid on the loan as a deduction under Section 80E. 

6. Section 80EEB: If you own a electrical vehicle bought on bank loan, the interest paid for the loan is tax-deductible under Section 80EEB.

7. Donations: If you are contributing to NGO relief funds and charity organizations, the donations are eligible for deduction under Section 80G.

Read our latest blogs “ULIP vs Mutual Fund” and “Mutual Fund vs PPF”

How to Save Tax Under the New Regime

1. Increase in Standard Deduction: In the latest Budget 2024, the standard deduction has been increased from Rs.50,000 to Rs.70,000 for taxpayers opting for the new tax regime from FY 24-25.

2. Deduction under Section 80CCD(2): The salaried employees can claim a deduction upto 10% for employer’s contribution to employee’s NPS savings. For central government employees, this deduction is upto 14% of salary. 

3. Deduction for Interest on Let-Out Property: If you have bought a home on bank loan and have let it out, you are eligible for tax benefit of upto Rs.2 lakhs on the interest paid for the loan.

4. Deduction Under Section 57(iia): Family pension is provided as a benefit by an employer to the employee's family in the event of the employee's death. The family member is eligible for deduction of 33.33% or Rs 25,000, whichever is less, on the family pension.

How to Save Tax on Salary

Income tax is a tax imposed on salaried employees by the government on the income earned by them. A salaried employee can enjoy tax benefits on the income tax by taking advantage of the various deductions offered by the government. Let’s understand how to save income tax on salary:

1. Look for Investment Opportunities: Employees can choose multiple investment options to bring the taxable salary to the lower tax slab. Section 80C offers deduction upto Rs.1.5 lakhs by investing in ULIP, PPF, ELSS. Section 80D provides tax benefit on health insurance premium for self, family and parents. 

2. Invest in Government Schemes: Employees can look to invest in government-backed schemes such as NPS, Sukanya Samriddhi Yojana (SSY), Senior Citizens Savings Scheme (SCSS) etc.

3. Opt for salary-linked benefits: There are multiple employee benefits which are usually a part of salary structure such as HRA, Leave Travel Allowance (LTA), Travel and Transport Allowance, Food Coupons that are either partially or fully tax exempted.

4. Employer Reimbursements Policies: There are various expenses that are mostly covered by employers such as internet bills, telephone bills, car-lease policies that can be claimed as tax-free reimbursements.

How to Save Income Tax on Capital Gains

In India, the government has imposed taxes on the profit earned from sale of capital assets such as stocks, bonds, property, or other investments. This tax is applicable on both individuals and businesses.

Below are a few important exemptions if you are looking to reduce your tax liability on capital gains.

1. Exemptions under Section 54EC: This section offers exemption of long term capital gain (LTCG) earned from the sale of property other than residential property, For claiming the exemption, you have to invest the entire sale amount in government bonds within 6 years of sale of property,  the bonds must be held for typically 5 years until maturity.

2. Exemptions under Section 54: The LTCG received from selling residential property can be tax-exempt if it is used to re-invested into purchasing another residential property. The repurchase should be done within 2 years after sale of property, 

3. Capital Gains Account Scheme (CGAS): This scheme is beneficial  for poeple who are unable to reinvest the capital gains in new property within the specified time period. Under this scheme, you can deposit the amount in CGAS approved bonds within 6 months of selling the property to avail of tax exemption.

Conclusion

Tax saving is essential for minimizing the financial liability while ensuring compliance with legal requirements. Choosing the tax regime is based on multiple factors such as income, investments and available deductions. When choosing a tax regime, it's very important to understand the tax-saving options available to make the correct choice. This blog provides a comprehensive overview of how to save tax in India under both old and new regimes that will definitely help you to take an informed decision.