Pick the right tax regime
One of the first things to do is to figure out which of the tax regimes are beneficial. The new tax regime is different in two ways from the old one.Firstly, it has more slabs with lower tax rates. And secondly, all the major exemptions and deductions available to taxpayers in the existing (old) tax regime are not allowed if the new tax regime is chosen.
" If the advantage of lower rates in the new tax regime outruns the benefit of the exemptions and deductions available under the old tax regime, the taxpayer can then choose the new tax regime.To know which tax regime is better, the taxpayer should calculate the income tax liability at the applicable normal tax rates, i.e. at old tax slab rates, after availing all the eligible exemptions and deductions from their income," said Archit Gupta, CEO and founder of Clear.
For example, salaried individuals can claim the exemption for LTA, HRA, standard deduction of Rs 50,000.
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Also, individuals are allowed to claim deduction under Section 80C up to Rs 1.5 lakh, the deduction for interest on housing loans, NPS contribution, etc.
Further, the taxpayer should calculate the income tax liability as per the tax slab rates of the new tax regime.
Now they can compare and choose the tax regime best suitable to them.
"There is no fixed category of taxpayers for whom you can specify which tax regime is better. It will vary depending on the deduction or exemption the taxpayer can claim in the particular year. Hence, the decision to opt for a new tax regime or an old tax regime depends taxpayer wise," added Gupta.
Most taxpayers benefit from old regime when they maximise Section 80C
Clear has observed that most taxpayers benefit from being in the old regime when they maximize section 80C and go for tax deductions and benefits available in their salary structure, such as claiming HRA, receiving a part of CTC as reimbursements etc. Only 15% of total filers on Cleartax benefited from being in the new regime and opted for it.Those who don't invest in any tax saving instruments can choose new regime
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The Basic Salary should not be more than 40% of CTC
The Income Tax Act prescribes certain allowances like HRA, DA, Travel allowance etc, for all salaried individuals, which are exempt at source. Therefore, negotiating a lower basic salary and higher allowances, will help an individual minimise his/her tax liability.
Certain expenses are exempt from tax
"Employers can include various components in the salary of their employees like company-paid accommodation, allowances for uniforms, meal coupons, conveyance, telecommunications like Wi-Fi and mobile, periodicals, car lease / maintenance and driver's salary etc. to reduce their taxable salary." said Sandeep Bajaj, Advocate, Supreme Court of India.
Certain expenses like telecommunication and internet charges are exempt from taxation. Consequently, individuals can effectively decrease their tax liability by retaining records of their telephone and internet bills. Furthermore, provisions within the Income Tax Act allow for deductions related to conveyance costs. Hence, employers can offer a conveyance allowance to their employees to effectively mitigate their tax liability.
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"Another example can be meal allowances in the form of Sudexo Vouchers or other alternates thereof to reduce their tax burden. However, it should be kept in mind that meal allowances are subject to a maximum limit of Rs. 50 per meal. Consequently, employers can pay their employees in the form of meal vouchers which can be utilized to provide for the daily meals of the employees and to minimize their tax liability. Additionally, employees have the opportunity to claim a standard deduction of Rs. 50,000 from their overall salary, which serves as an exemption," said Bajaj.
Following are the component which shall be considered while structuring salary in order to minimize tax liability, as per Jai:
What are the key factors to consider to ensure hygiene in my tax life? Clear's Gupta has the following advice: