Are you just starting your first job or are you planning to file your first income tax return but have no idea how to do it? You’re not alone! Every April marks the beginning of a new fiscal year, which brings with it the opportunity for better tax planning and financial decisions.
Every year, I see some of my friends looking for ways to save on tax, something that can easily be eliminated.
What Has Changed Between the New Tax Regime and the Old Tax Regime?
It is imperative to understand the difference between the two regimes before choosing which one to file your returns under in 2023.
It is not applicable to all of the usual income tax exemptions present in the old regime (oddly now referred to as the old regime), because there are more slabs and lower taxes. When you choose a regime, you are unable to change it for the current financial year. Therefore, it is always advisable to compare the two regimes using an online calculator before making a decision.
Considering All This, What’s the Best Course of Action?
Two years ago, when I made this decision, I calculated my net taxable income. The right choice depends entirely on your gross annual income and the tax-saving tools you use. My gross income was taken and the standard deduction of 50K, exemptions like HRAs, LTAs, and voluntary investments to qualify for Section 80C deductions (LIC, PF, ELSS, NPSs, etc.) and Section 80D deductions (Medical Insurance, Critical Health Insurance, etc.) were subtracted.
After this, I did another round of calculations using the new tax regime slabs with no deductions allowed. You can reach your decision with a host of free online calculators if manual calculations are not your cup of tea. In both scenarios, you should understand your tax liability clearly.
For me, I maximize my Sec 80C deductions (limit = 1.5 lakh). Furthermore, I claim deductions for my HRA in accordance with the permissible limits. If I switched to the new tax regime, I would lose out on these deductions, which would increase my taxable income and net tax. Thus, I have remained with the old system.
In addition to this, one can use a salary tax calculator to make one’s tax calculations simpler!
Why Are Some Paying Advance Taxes?
If you receive other income besides your regular salary, and your tax liability is greater than Rs.10,000, you will be required to pay advance tax. Rental income from a property, interest earned from a savings account or fixed deposit, capital gains from a mutual fund sale, etc.
Since no external factors are involved, the calculation is fairly straightforward,
- Make an estimate of your earnings from non-salary sources for the year.
- Once the combined income for the year is added to your gross salary, you will get your gross salary.
- Calculate the tax payable based on the income tax slabs for the old or new regime (whichever you chose).
- For salaried employees (in the old system), you should subtract the already deducted TDS and other income tax deductions.
- You are required to pay advance tax when your extra amount exceeds Rs.10K. The deadline for 100% payment of the advance tax is the 15th of March of each year. If the amount is not paid, you will be penalized by 1% per month.
- It is quite simple to pay an advance online on the Income Tax website. This saves you money and helps you avoid late fees and penalties.
Tax-Saving and Planning Tips
It makes more sense for me to stick to the old tax regime if I’m going to save on taxes. As a result, I can maximize the following deductions:
HRA – for the house rent I pay
Section 80C deductions – up to a limit of 1.5 L, including life insurance premiums, ULIPS, ELSS, PF, ELSS, etc.
A voluntary NPS contribution of up to $50K is deductible under Section 80CCD
In the case of seniors, an additional amount of Rs.50K may be deducted from the income based on Section 80D deductions.
It is not rocket science to plan your taxes. Take the time to carefully examine your income and research the various tax-saving tools available to you. Be sure to take into account your preferred investment horizon, as well as your risk tolerance. Don’t let tax-saving concerns drive you away, causing you to lock away a chunk of your money for long periods of time, leaving you unable to reach your short- or mid-term goals.