A new financial year (FY) has begun, and with it comes the opportunity to strategically manage your taxes. In other words, it’s the right time to think about reducing your tax burden and freeing up resources to achieve your financial goals through efficient tax planning. After all, we make money to spend it, save it, or invest it. Why not do these in a tax-efficient way that maximises your tax savings and minimises your tax liability?
Moreover, understanding tax concepts can often feel like deciphering a complex puzzle. The world of taxation is filled with concepts and terminologies that can leave even the most financially savvy individuals scratching their heads. So, grasping some basic tax concepts is crucial for making informed financial decisions.
In this article, we’ll delve into the importance of early tax planning, explore some fundamental tax concepts and terminologies to help you navigate the world of taxes with confidence and ease, and finally discuss a few strategies to help you make informed financial decisions that enhance tax efficiency. As individuals form the major chunk of the overall taxpayers in India, this article is more focused on the taxation of the income of individuals, specifically salaried employees.
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Whether you’re a young employee just entering the workforce or a seasoned professional looking for some tax planning ideas, this guide aims to offer eight points that may help you make informed tax decisions.
Understand the fundamentals of FY and AY
From an income tax perspective, any income you generate during the current FY will be assessed for taxation purposes in the following assessment year (AY). The current FY 2024-25 starts on 1st April 2024 and ends on March 31st 2025. The AY (2025-26) is the year in which your previous year’s income will be assessed for taxation purposes. In other words, for the income that you will be generating during this FY 2024-25, you will be filing your income tax returns in the AY 2025-26.
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Get clarity on tax planning vs. tax compliance
Planning your taxes at the end of the financial year, usually during January or February each year, is not only a delayed strategy but also can be a pressuring experience. If you remember, that’s when employees are asked to submit their investment proofs and other documents. To be precise, this year-end tax process is part of tax compliance and not tax planning!
Tax planning, however, is about exploring strategies to reduce your tax liabilities, understanding the various tax-saving instruments, implementing structured savings plans and taking steps to make those tax savings happen.
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Decide which tax regime is beneficial for you
Tax planning and financial planning go hand-in-hand. Tax planning is a round-the-year exercise; ideally, it should begin at the start of a financial year. The first step of tax planning is to decide on the tax regime to opt for based on your tax situation, including your income, expenses, exemptions, and deductions. This will help you get an idea about your tax liability and help you identify avenues where you can reduce your taxes legitimately.
A salaried individual can choose a tax regime that they think is beneficial to them during the financial year. They can even change the chosen tax regime at the time of filing their income tax return (ITR). While this action is easy, choosing between the two is often challenging – more specifically, choosing the one that reduces the tax liability. So, comparing the income tax payable in both tax regimes is critical before choosing the one.
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With proper tax planning, one can significantly reduce their tax liability or even bring it to zero. However, this depends upon an individual’s specific tax situation (such as salary, taxable income, type of income, exemptions and deductions claimed, choice of tax regime, and other factors).
For example, let’s say a person’s net taxable income is 7.5 lakhs. Under the new tax regime, this person’s tax liability will be zero (even without the option to claim any deductions available under Section 80C). However, under the old tax regime, for the same person with 7.5 lakhs taxable income, a tax of ₹23,400 would be applicable even if the person claims deductions to the tune of ₹1,50,000 under Section 80C.
So, the new tax regime would benefit someone with a net taxable income of 7.5 lakhs as they will have zero tax liability. This is because the Union Government, in the 2023 Budget, introduced a standard deduction of ₹50,000 and increased the income tax rebate limit from 5 lakhs to 7 lakhs in the new tax regime with effect from FY 2023-24.
Tax rebates help individual taxpayers reduce their income tax liability. As one can see, individual taxpayers opting for the new tax regime with a taxable income of up to 7 lakh can claim a tax rebate of ₹25,000 under Section 87A. Under the old tax regime, a rebate of only 12,500 is allowed for a taxable income of up to ₹5 lakh.
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Choosing the old tax regime will be better if an individual is eligible or planning to claim more deductions. Otherwise, the new tax regime would be efficient if the tax deductions are less. This is because the tax rates under the new tax regime are relatively lower when compared to the old tax regime. For example, the tax rate stands at 15% for a taxable income in the range of 9 lakhs and 12 lakhs. Under the old tax regime, a 30% tax rate is applicable on a taxable income of 10 lakh and above.
Whether the new tax regime makes more funds available for the taxpayer or whether the old tax regime promotes the habit of savings is altogether a different topic.
Focus on maximising the available tax deductions or exemptions
Once you have selected the tax regime that benefits you, plan to utilise the available exemptions or deductions to the maximum extent, keeping in mind your financial plan, tax situation, investment preference, liquidity, and emergency needs.
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For example, assume that you have selected the old tax regime because your analysis showed that the old regime would work better for you as you can claim higher tax deductions. Then, aim to maximise your tax deduction by exploring various tax-saving investments that you can invest by March 31, 2025 to save tax. For example, under section 80C, by investing in options like PPF and ELSS, you can bring down your taxable income by ₹1.5 lakhs.
Stay knowledgeable about various tax saving options
While Section 80C is well known among taxpayers, there are various other tax-saving options to take advantage of when it comes to the old tax regime.
For example, you can go beyond the ₹1.5 lakh limit offered by Section 80C by leveraging Section 80CCD (1B) in the form of your NPS contribution, which gives you an additional tax deduction for investments up to ₹50,000.
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Similarly, you can consider investing in health insurance for yourself and your family (under Section 80D). Similar to health insurance premiums, you can also claim a tax deduction when you fund your parents’ medical expenses. Or, you can go for a preventive health check-up (up to ₹5000 is allowed as part of 80D).
Even the income you will earn from interest on savings accounts (excluding FDs and RDs) can offer a tax deduction of up to ₹10,000 in a financial year. This deduction comes under the Section 80TTA.
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Then there is another deduction pertaining to the interest paid for loans used for purchasing electric vehicles (EVs), subject to meeting certain conditions. The section offers individual taxpayers to claim a deduction of up to 1.5 lakh provided that the loan is approved between 1 January 2019 and 31 March 2023. If you have purchased an EV during this period through a loan and you are still repaying the loan, you can consider using this deduction.
Keep track of any changes in tax laws that may impact you
With effect from the previous financial year, i.e., FY 2023-24, the new income tax regime is set as the default tax regime for income tax assessment purposes.This means that if a taxpayer doesn’t indicate their preferred tax regime, the new tax regime will be considered the default approach to assessing their income. However, individual taxpayers can still switch between the two regimes.
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The frequency of switching from one tax regime to another depends on the individual taxpayer’s income type. Salaried individuals can choose the regime for each financial year. For example, a salaried individual can choose the old tax regime in one financial year and the new tax regime in another year and vice versa.
No changes have been announced in the income tax slab rates in the interim Budget 2024. As such, the existing income tax slabs, income tax rates, and surcharge rates remain unchanged in the current financial year FY 2024-25 (AY 2025-26).
Recently, the Ministry of Finance, in its clarification regarding the applicability of the new tax regime and the old tax regime, dated 31 MAR 2024, has confirmed that there is no new change which is coming in from 1st April 2024.
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Check if advance tax is applicable for you
In most cases, salaried individuals whose TDS (Tax Deducted at Source) is deducted don’t have to pay any advance tax. However, if your tax liability is ₹10,000 or more after paying TDS for any given financial year, you need to pay advance tax following specified four instalments to avoid penalties. If you estimate that your tax liability in the form of capital gains exceeds ₹10000 for the entire financial year, then you need to pay advance taxes as per the schedule specified by the IT department (in June, September, December, and March).
For example, If you are planning to sell property, you can consider seeking advice from your tax advisor to understand how much tax you will likely need to pay and whether any strategies can be implemented (such as selecting a time to sell the asset) to optimise your tax position.
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Although it is challenging to make an estimate of income from capital gains or dividends in advance, some tax experts suggest that advance tax on such income can be made on the instalment due date only after receiving the income receipt. If there is no instalment due, then the taxpayer can pay the tax by the end of March of the applicable financial year.
Early tax planning makes one aware of taxable income from capital gains. This helps to pay advance tax in a timely manner and ensures avoidance of the interest at 1% penalty under section 234B of the Income Tax Act. The goal is to save every rupee you make.
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Keep accurate financial records
One of the keys to making your tax planning efficient and successful is organising and maintaining accurate financial records. Proper accounting for all the income sources, expense receipts, and investment transaction records helps in providing a clear financial picture. These records can also come in handy when you seek a tax expert’s help while filing returns. These records can help them easily identify tax deductions and other tax-saving opportunities.
In conclusion, tax planning maximises your deductions and exemptions as you have more time to identify all eligible tax deductions, significantly reducing your taxable income. Early planning also gives you sufficient time to implement your tax-saving strategies, which often take time to set up and execute effectively.
Planning ahead also ensures a smooth cash flow as it helps you to estimate your tax liability fairly accurately. This allows you to set aside funds throughout the year to meet your tax obligations, thus avoiding last-minute tax planning hassle. As early tax planning provides a proactive approach to managing your tax affairs, it helps you avoid penalties or interest for late payments.
