Tax Planning for Beginners in 2024

With a new budget every year, there are significant changes in the applicable income tax from time to time. The Budget of 2024 brought about certain significant changes in the income tax rules and the way taxes are calculated.

We are offered a choice of two tax regimes based on our preference and tax planning strategies.

1. New Tax Regime (To be considered as default if no choice declared)
2. Old Tax Regime

Under the new tax regime, the tax rates are lower compared to the old tax regime. However, the new tax regime does not offer the benefit of various exemptions and deductions apart from the standard deduction of Rs 50,000 from salary and Rs 15,000 from family pension.?

You can have the option to choose between the new and the old regime. But which tax regime is better? The new regime or the old regime and how can you optimise tax savings. Let’s find out.

Before choosing a tax regime, you can begin by understanding your investment goals. If you are someone who doesn't necessarily plan too much about your investments, the new regime is better suited for you.?

However, if you are keen on focussing on a longer-term plan with objectives like a retirement plan, then the old regime could prove to be more advantageous. This is because it provides deductions for contributions to various investment tools. Simplicity is a key feature of the new tax regime. Its documentation process is straightforward, eliminating the need to calculate and claim deductions and exemptions.?

In terms of income levels, the new tax regime offers lower tax rates compared to the old regime. This makes it particularly beneficial for individuals with higher incomes.?

According to the 2024 budget, if you are earning Rs 9 lakh annually owe just Rs 45,000 in taxes under the new regime, which is 5% of your taxable income. This is a significant reduction from the Rs 92,500 tax liability they would have faced under the old regime, provided you didn’t invest your money anywhere else.

Here is the tax slabs applicable to your net taxable income as per the new and the old regime:

If you want to know more about how much tax is applicable on your income and where you should invest the sum of your salaries to avail better taxation, you can download the Floatr App and use the advanced tax planner to get a detailed analysis of your income.

Now that you have an idea about the tax regimes, it is evident that for a sustainable long-term plan, you need to choose the old tax regime as it helps you plan your long-term goals. This can be done by saving in appropriate schemes which in turn helps you build a corpus and save tax as well.?

TAX DEDUCTIONS ALLOWED UNDER OLD TAX REGIME

Here is a list of the top 4 income tax sections with various investments allowed for tax deductions. You can invest in them to get the full benefits of the old regime that will help achieve the twin goals of building a corpus as well as saving taxes.??

Section 80C: Deduction for various investments

Section 80C of the Income Tax Act is widely recognised for its significance in tax planning. It offers a broad deduction for various eligible expenses and investments incurred by taxpayers throughout the financial year, capped at Rs. 1,50,000.?

Eligible investments include contributions to EPF, ELSS funds, tax-saving Bank FDs, PPF, NSC, and Sukanya Samridhi Yojana.?

Section 80D: Deduction for medical insurance premiums

Section 80D focuses on deductions related to medical insurance premiums. This section allows you to claim deductions for premiums paid towards health insurance covering self, spouse, children, and parents. The extent of deduction permitted depends on the age of the insured and their dependent parents, with specific criteria outlined for eligibility.

Section 80CCD: Deduction for self-contribution to National Pension Scheme (NPS)

For those interested in saving for retirement, Section 80CCD offers avenues through investment in the National Pension Scheme. Contributions made to NPS qualify for deductions under Section 80CCD. This has two sub-sections- 80CCD(1) and 80CCD(1B) While Section 80CCD(1) allows a maximum deduction of Rs. 1,50,000, Section 80CCD(1B) provides an additional deduction of up to Rs. 50,000.

Please note, total deductions you can claim u/s 80CCD(1) and 80(C) combined is Rs.1,50,000.

Section 80CCD(2): Deduction for employer contributions to NPS

This benefit is available only to salaried individuals. Employers can contribute to NPS, the way they contribute to EPF. This contribution to NPS is allowed as deduction u/s 80CCD(2)

Central government employees can claim deductions of up to 14% of their employer's salary (Basic+DA), while non-government employees can claim a maximum of 10%. Employer contributions are deducted from the employee's payslip and directed to their NPS account. There is an overall limit of Rs 7,50,000 for employer contributions.

TAX DEDUCTIONS ALLOWED UNDER NEW TAX REGIME

If you have opted for New Tax Regime, only one category of deduction is allowed, i.e. Section 80CCD(2). This is employer contribution to NPS as explained earlier.

Conclusion

The new income tax structure caters to those who prefer minimal deductions and wish to avoid the complexities of tax preparation. This demographic can include non-salaried taxpayers.

Both the old and new tax regimes come with their advantages and disadvantages. Before making a decision, you must understand the disparities between them.?

The previous tax structure fosters a habit of saving among taxpayers. In contrast, the new system benefits employees with lower earnings and investments, resulting in fewer deductions and exemptions.?

The new tax system offers increased safety and simplicity with reduced paperwork and lower potential for tax evasion. However, since every individual has unique deductions and exemptions, a comparison between the two regimes is necessary to determine the most suitable option for each person.

Taxpayers can reduce their overall tax liability by fully leveraging tax-saving mechanisms while also making efficient long-term investments conducive to wealth creation.

How to do tax planning?

You can get the Floatr App and use its advanced tax planner. With this, you can look at different kinds of investments and see how much tax you'll need to pay under both the new and old tax systems. You can then pick the tax regime that makes you pay less tax.

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