Quick Overview
Tax planning is essential for salaried individuals in India, especially those earning higher salaries. Here we explores how Kunal, a private-sector employee earning ₹12 lakh annually, legally reduced his tax liability to zero by utilizing various deductions and exemptions available under the Old Tax Regime.
Key Points
- Tax Regime Options: Kunal had the choice between the New Tax Regime and the Old Tax Regime, with significant differences in deductions.
- Effective Deductions: By strategically using deductions available under the Old Tax Regime, Kunal lowered his taxable income from ₹12 lakh to ₹5 lakh.
- Step-by-Step Approach: Kunal systematically claimed deductions, including standard deductions, investments in tax-saving instruments, and housing allowances.
- HRA Exemption: Utilizing the House Rent Allowance (HRA) exemption played a crucial role in bringing his taxable income down significantly.
- Consideration of Tax Regimes: The choice between tax regimes can greatly affect tax liabilities; taxpayers should evaluate which option provides the best benefits based on their financial situation.
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Detailed Breakdown
Tax Regime Options
Kunal faced a choice between two tax systems: the New Tax Regime, which offers lower tax rates but limits deductions, and the Old Tax Regime, which allows for multiple deductions. Kunal’s analysis showed that under the New Regime, he would incur a tax liability of ₹71,500, even after a ₹75,000 standard deduction. In contrast, the Old Regime enabled him to claim various deductions, ultimately qualifying him for a tax rebate.
Step-by-Step Approach
- Standard Deduction and Section 80C: Kunal started by claiming a standard deduction of ₹50,000, reducing his taxable income to ₹11.5 lakh. He then made investments in EPF, PPF, ELSS, and paid tuition fees for his children, claiming an additional ₹1.5 lakh under Section 80C, reducing his taxable income to ₹10 lakh.
- NPS and Home Loan Interest: By investing ₹50,000 in the National Pension System (NPS) under Section 80CCD(1B), Rakesh lowered his taxable income to ₹9.5 lakh. He also claimed ₹2 lakh in home loan interest under Section 24B, further reducing it to ₹7.5 lakh.
- Health Insurance Benefits: Kunal purchased a health insurance policy for his family, allowing him to claim ₹50,000 under Section 80D, which brought his taxable income down to ₹7 lakh.
- HRA Exemption: Living in a rented house, Kunal utilized the HRA exemption, claiming an additional ₹2 lakh deduction. This final step reduced his taxable income to ₹5 lakh, making him eligible for the Section 87A rebate, eliminating his tax liability.
Why Choose the Old Tax Regime?
While the New Tax Regime may seem appealing due to lower rates, it lacks the flexibility of deductions that the Old Tax Regime offers. For individuals like Kunal, who can leverage tax-saving investments and exemptions, the Old Tax Regime provides a viable path to achieving zero tax liability.
Important Details & Evidence
Kunal’s example illustrates the potential for significant tax savings through strategic planning. By understanding and utilizing available deductions, he transformed a seemingly burdensome tax situation into a zero-tax scenario. This case emphasizes the importance of tax literacy and proactive financial management.
Final Takeaways
- Tax planning is crucial for maximizing take-home salary.
- The Old Tax Regime can be more beneficial for individuals who can utilize deductions effectively.
- A thorough comparison of tax regimes is essential before filing taxes to minimize liabilities.
- Kunal’s case serves as a practical guide for others looking to optimize their tax situation legally and efficiently.
By following similar strategies, salaried professionals can navigate the complexities of the tax system and potentially reduce their tax outgo to zero.
