Tax Planning For Salaried Employees (2024)

The Concept of Taxable Income and Tax Slab

Before you understand what tax planning is, you need to understand the concept of taxable income and the tax slab.

• Taxable Income: Taxable income is the portion of your total income that the government taxes. It's calculated by subtracting all the eligible deductions and exemptions from your gross income, which includes your salary, wages, interest income, rental income, and other earnings. Deductions and exemptions are essentially categories of income that you're allowed to subtract from your gross income before calculating your tax liability.
• Tax Slabs: Tax slabs are spans of taxable income that are taxed at different rates. The concept is to form an adequate system where people with higher incomes pay a larger portion of their earnings in taxes. The income tax slabs and rates are revised periodically, generally during the annual budget announcement. There are two main tax regimes to choose from: the old tax regime and the new tax regime. Each regime has its own set of tax slabs and rates.

How Tax is Calculated Based on Income Slabs

Let's understand how tax is calculated based on income slabs through example; here are the New tax regime income tax slab rates as follows:

New Tax Regime Slab Rates (FY 2023-24 & AY 2024-25):

• Up to Rs. 3,00,000: 0% tax
• Rs. 3,00,001 to Rs. 5,00,000: 5% tax
• Rs. 5,00,001 to Rs. 7,00,000: 10% tax
• Rs. 7,00,001 to Rs. 10,00,000: 15% tax
• Rs. 10,00,001 and above: 30% tax

Suppose your taxable income is ₹8,50,000. Here is how your tax would be calculated based on the new tax regime slab.

• You wouldn't pay any tax on the first Rs. 3,00,000 (income in the 0% tax slab).
• On the next Rs. 2,00,000 (Rs. 5,00,000 - Rs. 3,00,000), you'd pay 5% tax. So, the tax on this portion would be Rs. 10,000 (5% of Rs. 2,00,000).
• For the remaining Rs. 1,50,000 (Rs. 8,50,000 - Rs. 7,00,000), you'd pay 15% tax. The tax on this portion would be Rs. 22,500 (15% of Rs. 1,50,000).

Therefore, your total tax liability in this scenario would be Rs. 32,500 (Rs. 10,000 + Rs. 22,500).

This clarifies how each portion of your income within a specific tax slab is taxed at the corresponding rate, resulting in your total tax amount. Remember, these are the slab rates for the new tax regime. You can choose between the old and new tax regimes based on your specific circ*mstances and the deductions available. Consulting a tax advisor for personalized guidance is always recommended.

How to Calculate and Claim HRA

HRA, or House Rent Allowance, is a component of your salary that helps reduce your taxable income. You can claim exemption on HRA if you meet the following eligibility criteria:

• This benefit is applicable to salaried individuals only.
• You must be paying rent for a qualified residential accommodation. Paying rent to a close relative (like parents, spouse's parents, siblings, etc.) generally doesn't qualify.
• You need to have rent receipts mentioning your name, landlord's name, PAN (if rent exceeds Rs. 1 lakh annually), address, and rent amount for the financial year.

HRA Exemption Calculation:

There are three factors that determine the amount of HRA you can exempt:

1. HRA amount in your salary slip: This is the amount your employer provides as HRA.
2. 50 or 40% of your basic salary + DA: DA stands for Dearness Allowance. (For metro cities, it’s 50% of your basic salary plus DA, and for non-metro cities, it’s 40%.)
3. Actual rent paid minus 10% of your basic salary + DA: This is the minimum amount you should be paying as rent to claim the full HRA exemption.

The least of these three amounts is the HRA exemption you can claim.

Popular Tax-Saving Investment Options under Section 80C

Section 80C of the Income Tax Act allows you to deduct various investments and expenses from your taxable income, thereby reducing your tax liability. The maximum limit for deductions under Section 80C is Rs. 1,50,000 for the financial year 2023-24 (subject to change in future budgets). Here are some popular investment options under Section 80C:

• Employee Provident Fund (EPF): A mandatory contribution from your salary towards your retirement corpus. Your employer also contributes a matching amount.
• Public Provident Fund (PPF): A long-term saving scheme backed by the government with attractive interest rates and tax benefits.
• Equity Linked Savings Scheme (ELSS): A type of mutual fund that invests in stocks. ELSS offers good growth potential but also carries market risk.
• National Pension System (NPS): A voluntary pension scheme where you contribute towards your retirement corpus. Offers tax benefits and market-linked returns.
• Unit Linked Insurance Plans (ULIPs): A combination of insurance and investment product. Invest carefully as they may have high charges.

Deductions Above HRA and 80C

Besides HRA and Section 80C, here are some other common deductions you can claim while filing your income tax return:

• Health Insurance Premiums (Section 80D): Premiums paid for health insurance for yourself, spouse, dependent parents, and children.
• Interest on Education Loan (Section 80E): Interest paid on education loan taken for higher education of yourself, spouse, children, or a legal ward.
• Home Loan Repayments (Section 24): Interest paid on a home loan for a self-occupied property. There's a limit on the deductible amount.

Why is Tax Planning in Advance Essential?

Many people scramble to make tax-saving investments near the end of the financial year. This often leads to rushed decisions and missed opportunities. Here's why you should embrace advance tax planning:

• Spreading Out Investments: Tax-saving investments throughout the year can help with budgeting and potentially benefit from rupee-cost averaging (investing a fixed amount regularly). This approach averages out the cost per unit you purchase over time, which can be beneficial in volatile markets.
• Informed Decisions: By planning ahead, you have ample time to research different investment options under Section 80C and other relevant sections. You can compare features, risks, and returns to choose investments that match your financial goals and risk tolerance.
• Discipline and Habit Building: Regular tax planning instills financial discipline and helps you build the habit of consistent investing.

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