How to Save Income Tax in New and Old Tax Regime: Explore Top 6 Ways to Save Tax for F.Y. 2023-2024
Updated: Apr 25
Understanding the complexities of the new tax regime is important for making sound financial decisions. Though the options for deductions under the new tax regime are less compared to the old tax regime, there are strategic ways to save the income tax. In this article, we will explore 6 ways to save income tax for the F.Y. 2023-2024.
From taking benefit of employer contribution to NPS to allowable deductions on let-out property, let’s walk through the effective tax planning strategies that are updated with the latest tax laws. Whether you are a salaried employee, a freelancer, or an investor, these tips will help you to take the benefit of the tax deductions available under the new tax regime.
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How to Save Income Tax in New Tax Regime: 6 Ways for F.Y. 2023-2024
Taxpayers across India are geared up to take advantage of the new tax regime for the F.Y. 2023-2024. Though this regime has advantages of lower tax rates, it offers less options for deductions and exemptions compared to the old tax regime. Many taxpayers are wondering how to save income tax after the implementation of the new tax regime as a default regime. Following are the 6 ways to save income tax for the F.Y. 2023-2024, subject to conditions prescribed in the Act:
Employer’s contribution to NPS can be claimed as a deduction under Section 80CCD(2).
Investment made in Agniveer corpus fund can be claimed as a deduction under Section 80CCH(2).
Interest on home loan obtained for let-out property can be claimed as a deduction.
Physically challenged employees can claim certain deductions under the new tax regime.
Certain special exemptions such as: voluntary retirement scheme, gratuity, and leave encashment, can be claimed under Section 10 even in the new tax regime.
Exemption towards family pension can be claimed under Section 57(iia).
How to Save Income Tax in New Tax Regime: Tax Saving Deductions and Exemptions
The introduction of the new tax regime in India has simplified the tax structure by allowing only fewer deductions, thereby making it a good choice for taxpayers with limited tax saving investments. The new tax regime provides lower and concessional tax rates compared to the old tax regime, which results in significant tax savings for individuals who do not take advantage of deductions.
Tax Slabs under the New Tax Regime for the F.Y. 2023-2024:
The new tax regime offers the following slab rates for the F.Y. 2023-2024:
The simplified tax rates are beneficial for individuals having minimal investments. Since it provides lower tax rates compared to the old tax regime.
Available Deductions under the New Tax Regime for the F.Y. 2023-2024:
Following are the deductions eligible under the new tax regime for the F.Y. 2023-2024:
Deduction under Section 80CCD (2) towards Employer Contribution to NPS:
In the new tax regime, Section 80CCD(2) of the Income Tax Act prescribes a beneficial deduction encouraging retirement savings in the National Pension System (NPS). This section deals explicitly with employer contributions to an NPS account of an employee. Here is the eligibility in detail and the mechanism:
Who can avail of this deduction: This can be availed of only by an individual who is in receipt of salary from his employer and who receives contributions from the employer towards his NPS. Self-employed individuals cannot take advantage of this benefit.
Contribution Limits:
Central Government employees: Can claim a deduction of up to 14% of their salary (including essential and dearness allowance, DA).
For Private Sector Employees: Up to 10% of the Salary (Basic + DA).
NPS and Other Contributions: An essential feature of this deduction is its compatibility with other retirement contributions. Employers can contribute to the NPS even when, in a scenario, they have already contributed to other retirement funds such as Public Provident Fund (PPF) and Employee Provident Fund (EPF).
Calculation and Payment: The employer himself will reduce the contribution from the employee's salary and deposit it in the NPS account of the employee. This shall make the process much more straightforward, and the deduction amounts would go directly towards building the corpus for the employees' retirement.
Annual Limit: There is a total employer contribution to retirement funds (PF, NPS, Superannuation) amounting to INR 7,50,000 per annum. This limit is helpful to manage an excessive deduction of tax by way of these retirement schemes.
Deduction under Section 80CCH(2) towards Agniveer Corpus Fund Contribution:
The Income Tax Act introduced special provisions for those Agnipath Scheme members, specifically those contributions to the Agniveer Corpus Fund. The provisions of section 80CCH(2) have implications for tax treatment in both the old and new tax regimes, showing the support of the Government towards this initiative.
Key Features of Section 80CCH(2) Tax Deduction on Contributions: The contribution made by Agniveers (enrollees in the Agnipath scheme) and any matching contribution made by the Central Government to the Agniveer Corpus Fund qualify for tax deductions. This means that these contributions could be used to reduce the taxable income of the individuals, which would lower his or her total tax liability.
Tax exemption on received benefits: Any income that Agniveers or their nominees from the Agniveer Corpus Fund receive, on being claimed as a part of the Agnipath scheme benefit, shall be exempt from income tax. This assurance covers that the financial benefit accruable from the scheme, possibly within or after the service period, cannot in any manner be taxed upon the beneficiaries.
Comprehensive Benefits for Agniveers: Essential benefits that will accrue to its enrolled members under the Agnipath scheme shall include rations, risk and hardship allowances, travel facilities, and compensation in cases of death or disability. These are some of the provisions to ensure that whoever serves under this scheme is properly remunerated and supported throughout their tenure.
Eligibility under both old and new tax regimes: The deduction of contribution to the Agniveer Corpus Fund under Section 80CCH(2) is one of the rare specified deductions that apply even under the old tax regime and the new tax regime. The human resource provisions extended to all Agniveer members ensure that they reap benefits, irrespective of the tax regime they belong to.
Deduction under Section 57(iia) towards Family Pension:
Under Section 57(iia) of the Income Tax Act, there is an assurance and specific provision handy in mitigating the tax liability accruing to families receiving a family pension. This section provides for a deduction from the income received as a family pension to make it partially tax-free. This can go a long way in reducing the family's overall tax liability receiving the pension.
Amount of Deduction: One-third of the family pension or INR 15,000, whichever is less is allowed as a deduction. That is to say, if a family gets the family pension monthly, then this amount may be deducted each month before paying income tax on it.
Deduction under Section 24 towards Interest on Home Loan on Let-Out Property:
The new tax regime allows the deduction of interest on home loans for properties that are let out. It, therefore, remains a very attractive provision to the property investors and landlords. That is, they can claim the entire amount of interest paid against the rental income as a deduction. This would mean that the net taxable rental income can be reduced very significantly, hence potentially reducing overall tax liability.
Transport Allowance and Conveyance Allowance:
Transport Allowance
Transport allowance is the payment an employer gives an employee against expenses made by an employee while traveling to and fro from home to the place of work. It is meant to compensate for the financial burden of daily travel.
From the financial year 2018-19, a specific exemption has been structured in the tax code for physically challenged employees. They can claim an exemption to the limit of INR 3,200 per month for the transport allowance. The main purpose was to support disabled individuals by reducing the amount of taxable income, bearing in mind that these people have more difficulties in regard to commuting.
Conveyance Allowance
Conveyance allowance, on the other hand, is meant to cover an employee's official duty away from the station. One has to travel to meet clients, visit different company sites or attend external meetings. The conveyance allowance is, in Indian tax laws, liable to full exemption to the extent of the actual expenditure incurred. It basically means the benefit of this exemption could be claimed only when there is proper proof submitted by employees relating to such expenses, like receipts or travel logs. The benefit is, however, flexible and has no fixed monthly limit, but fully exempts actual expenses as they are incurred in the official duty performance, therefore accommodating the realities and demands of the specific job.
Exemptions Allowed under Section 10 under New Tax Regime:
Even in the new tax regime, which reduces the number of exemptions and deductions to simplify the tax-filing process and potentially lower tax liabilities, there are several critical exemptions that remain under Section 10. These exemptions are designed to ease the financial transition for employees entering retirement or undergoing significant life changes. Let's delve into these important exemptions:
Voluntary Retirement Scheme (VRS): Under the new tax regime, employees opting for voluntary retirement can claim an exemption up to INR 5,00,000 under Section 10(10C). This provision provides a safety net for individuals retiring early, offering financial support as they transition away from active employment. This exemption applies universally, regardless of whether the employment was in the government or private sector.
Gratuity: Gratuity received by the employees have different tax treatments depending upon the type of employees and the employment sector.
Government Employees: Gratuity received by government employees is fully exempt from income tax, providing substantial benefits to public sector employees.
Private Employees: For private sector employees, the exemption on gratuity depends on whether the employee is covered under the Payment of Gratuity Act. For those covered, the exemption is the least of the following:
Fifteen days' salary based on the last drawn salary for each year of service
INR 20 lakh (as per the enhanced limit effective from March 29, 2018)
The actual gratuity received
This structured approach ensures that private sector employees also receive significant tax relief on gratuity payments, especially those with long service periods.
Leave Encashment: Under the new provisions, employees encashing their accumulated paid leave upon retirement or resignation are eligible for an exemption. The exemption limit for leave encashment has been increased to INR 25 lakh to better accommodate the rising cost of living and inflation. This uniform benefit applies to all employees, thereby standardizing the tax relief afforded by this exemption.
Tax Saving Deductions and Exemptions in Old Tax Regime
Unlike the New Tax Regime, the Old Tax Regime allows for deductions and exemptions which can be claimed by the taxpayers to reduce their tax liabilities.
Tax Slabs under the New Tax Regime for the F.Y. 2023-2024:
The new tax regime offers the following slab rates for the F.Y. 2023-2024:
Available Deductions under the Old Tax Regime for the F.Y. 2023-2024:
Following are the deductions and exemptions eligible under the old tax regime for the F.Y. 2023-2024:
Deduction towards Home Loan and Interest Payment:
If you have availed a home loan, get tax benefits under Section 80C and Section 24(b).
Homeownership is one of the most supreme milestones in life, and in India, homeowners are heavily rewarded with tax benefits, which go a long way in easing some of the financial pressures that one would have in property acquisition. The government has initiated schemes like the Pradhan Mantri Awas Yojana (PMAY) and Delhi Development Authority (DDA) Housing Scheme to make housing affordable and at the same time, encourage individual ownership of a home.
Deduction under Section 80C: Principal Payment of Home Loan: When you buy a home and start repaying the loan, the principal repaid towards the loan repayment qualifies for a deduction under Section 80C. In simple words, this section allows you a deduction up to INR 1,50,000 annually, which can help reduce your taxable income to quite an extent.
Deduction under Section 24(b): Interest Payment on Home Loan: Further, Section 24(b) provides for a deduction on the interest component of a home loan up to INR 2,00,000 per annum for self-occupied property. If the property is to be rented out, there is no ceiling on the amount of deduction that can be claimed against rental income. However, the loss that can be set off against other heads of income is limited to INR 2,00,000.
Deduction under Section 80EEA: Additional Deduction towards Interest Payment: The other benefit in the case of first-time homebuyers arises under Section 80EEA, where an additional deduction of interest paid is allowed, subject to certain conditions. This is over and above the limits under Section 24(b) and Section 80C, making the first home purchase affordable.
Deduction under Section 80C: Tax Saving Schemes of Government:
The Government of India provides a number of saving schemes that not only ensure your future is safe but also allow you to claim tax benefits. Under Section 80C, the maximum limit for all investments is INR 1,50,000 in a year.
The interest rate is higher under the Senior Citizen Savings Scheme (SCSS) and the Sukanya Samriddhi Yojana (SSY) scheme.
The Public Provident Fund (PPF) and National Pension System (NPS) provide returns that are safe over a long period.
Some other popular options include the 5-Year Bank Fixed Deposit, National Savings Certificate (NSC), and ELSS Funds.
Deduction under Section 80C: Life Insurance Policy:
Life insurance does not only secure the financial future of one's family but also comes with several tax benefits. The premium paid is deductible under Section 80C, and the proceeds of the policy under Section 10(10D) are tax-free provided the annual premium does not exceed the prescribed limits.
Other Investment Options under Section 80C:
Following the most popular tax-saving investment options available under Section 80C of the Income Tax Act in India:
Deduction under Section 80D towards Premium Paid for Health Insurance Policy:
The tax deductions available under Section 80D for health insurance for the F.Y. 2023-2024 are as follows:
Coverage for Self and Family:
A deduction of up to INR 25,000 is allowed for the premium paid for the medical insurance of the taxpayer and the family (spouse and dependent children).
If the taxpayer or any family member covered under the policy is a senior citizen (aged 60 years or above), the deduction amount increases to INR 50,000.
Coverage for Parents:
An additional deduction for insurance of parents (father or mother or both, whether dependent or not) is available up to INR 25,000, which increases to INR 50,000 if the parents are senior citizens. This deduction is over and above the deduction for self and family.
Preventive Health Check-ups:
A deduction for expenses incurred on preventive health check-ups is capped at INR 5,000. This limit is not additional but is included within the overall limit of INR 25,000 or INR 50,000 as applicable.
Medical Expenditure for Parents not having any Health Insurance:
If the taxpayer's parents are senior citizens and are not covered under any health insurance policy, the taxpayer can claim a deduction up to INR 50,000 towards medical expenditure incurred.
Tax Saving Options Beyond Section 80C:
Following are the options to maximize your tax savings in income tax through other sections apart from Section 80C:
Plan your Tax-Savings Investment for the F.Y. 2024-2025:
Below are the suggestions on how to plan your tax-saving investments effectively, to optimize your returns and minimize stress throughout the financial year 2024-2025:
Start Early: Initiate your tax planning at the beginning of the financial year. This strategy allows your investments more time to grow and reduces the need for rushed decisions later.
Evaluate Existing Deductions: Assess any ongoing tax-saving expenses such as insurance premiums, children's tuition fees, Employee Provident Fund (EPF) contributions, and home loan repayments. This will help you understand how much of your deduction limit is already being utilized.
Choose the Right Tax Regime: Determine which tax regime, old or new, is more beneficial for your specific financial situation. Utilize tools like tax calculators to aid in projecting which regime could offer more savings.
Calculate Your Investment Needs: After considering existing deductions from the INR 1,50,000 limit under Section 80C, figure out how much more you need to invest. You may find that you don't need to use the entire limit if your current expenses already cover a significant portion of it.
Align Investments with Financial Goals: Choose tax-saving investments that match your financial goals and risk tolerance. Options include ELSS, PPF, NPS, and fixed deposits.
Consider the Benefits of the Old Regime: If the old tax regime is more beneficial based on your deductions, stick with it, especially if the investments you are considering do not offer deductions under the new regime.
Spread Out Investments: To reduce end-of-year pressure and make better-informed decisions, distribute your investments throughout the year. This approach also helps in managing cash flows more effectively.
FAQ
Q1. What is the new tax regime?
The new tax regime offers lower slab rates but eliminates many deductions and exemptions available under the old regime, providing a simplified tax structure.
Q2. Can I switch between the old and new tax regimes each year?
Yes, individuals and HUFs have the option to switch between the old and new tax regimes each financial year based on their income structure and expected tax savings.
Q3. Are there any deductions available under the new tax regime?
Under the new tax regime, most deductions and exemptions are not available, except for a few like the employer’s contribution to NPS under section 80CCD(2).
Q4. How can I save tax on employer contributions under the new regime?
Employer contributions to NPS up to 10% of the basic salary plus DA are deductible under section 80CCD(2), which is still available under the new tax regime.
Q5. Can I claim the standard deduction under the new tax regime?
No, the standard deduction applicable for salaried employees and pensioners is not available under the new tax regime.
Q6. Is interest on home loans deductible under the new tax regime?
Interest on home loans for self-occupied property is not deductible under the new regime. However, for let-out property, the interest can still be claimed against rental income without a cap.
Q7. Can I claim deductions for health insurance premiums under the new regime?
Deductions under Section 80D for health insurance premiums are not available under the new tax regime.
Q8. What happens to my investments in PPF, ELSS, and other 80C instruments under the new regime?
Investments in PPF, ELSS, and other Section 80C instruments will not count towards tax deductions in the new tax regime. However, these can still be beneficial for savings and investment growth.
Q9. Is there any benefit in the new regime for first-time homebuyers?
Yes, first-time homebuyers can still avail benefits under section 80EEA, allowing additional deductions on home loan interest, subject to certain conditions.
Q10. Can I still claim deductions for educational loans in the new regime?
No, deductions for interest on educational loans under Section 80E are not available under the new tax regime.
Q11. How does the new tax regime impact senior citizens?
Senior citizens may find fewer tax relief options in the new regime as deductions like those under Section 80TTB are not available. However, they benefit from higher exemption limits before
tax slabs apply.
Q12. What should I consider before opting for the new tax regime?
Consider your income level, available deductions under the old regime, and your financial goals. Calculate potential tax liabilities under both regimes and decide which one offers lower tax or suits your financial planning better. Consulting a tax professional may also be beneficial.
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