Understanding income tax slabs is critical for efficient tax planning and achieving financial goals. The government offers two primary taxation systems: the new tax regime slabs and the old tax regime. Each has distinct advantages, tax rates, and allowances. Choosing the right one can significantly impact your tax liability. Alongside these tax regimes, investment tools like ELSS funds (Equity-Linked Savings Schemes) can help taxpayers save money while building wealth.
Gold Rate
Saturday18 Jan. 2025
This article will outline six essential rules related to income tax slabs under the new tax regime and explore how ELSS funds can play a vital role in reducing tax liabilities.
1. What are income tax slabs?
Income tax slab refer to a progressive tax structure, where the tax rate increases with an individual’s income. This approach ensures that those with higher incomes pay a greater percentage in taxes compared to lower-income earners. The government revises these slabs periodically to reflect economic changes and provide relief to taxpayers.
Under the new tax regime slabs, taxpayers are offered reduced rates across various income brackets, but most exemptions and deductions are eliminated. On the other hand, the old tax regime provides higher tax rates but allows deductions under numerous sections, including Section 80C, which covers investments like ELSS funds.
2. Key features of the new tax regime slabs
The new tax regime slabs, introduced in FY 2020-21, aim to simplify the taxation process by offering reduced tax rates. However, these benefits come at the cost of relinquishing deductions and exemptions.
| New Tax Regime u/s 115BAC | ||
| Income Tax Slab | Income Tax Rate | *Surcharge |
| Up to Rs. 3,00,000 | Nil | Nil |
| Rs. 3,00,001 – Rs. 7,00,000** | 5% above Rs. 3,00,000 | Nil |
| Rs. 7,00,001 – Rs. 10,00,000 | Rs. 20,000 + 10% above Rs. 7,00,000 | Nil |
| Rs. 10,00,001 – Rs. 12,00,000 | Rs. 50,000 + 15% above Rs. 10,00,000 | Nil |
| Rs. 12,00,001 – Rs. 15,00,000 | Rs. 80,000 + 20% above Rs. 12,00,000 | Nil |
| Above Rs. 15,00,000 | Rs. 1,40,000 + 30% above Rs. 15,00,000 | Nil |
| Rs. 15,00,001- Rs. 50,00,000 | Rs. 1,40,000 + 30% above Rs. 15,00,000 | Nil |
| Rs. 50,00,001- Rs. 100,00,000 | Rs. 1,40,000 + 30% above Rs. 15,00,000 | 10% |
| Rs. 100,00,001- Rs. 200,00,000 | Rs. 1,40,000 + 30% above Rs. 15,00,000 | 15% |
| Above Rs. 200,00,001 | Rs. 1,40,000 + 30% above Rs. 15,00,000 | 25% |
Benefits of the new tax regime
The new regime simplifies tax calculations by reducing rates and eliminating the need for extensive documentation. Taxpayers with minimal investments and expenses benefit the most under this regime.
Drawbacks of the new tax regime
The new tax regime does not allow deductions for investments in tax-saving instruments like ELSS funds, home loan interest, or insurance premiums. This makes it less appealing for taxpayers who utilise these benefits.
3. Old tax regime: Benefits and allowances
The old tax regime allows taxpayers to claim deductions and exemptions, reducing their taxable income significantly. Some of the most popular deductions include:
- Section 80C: Covers investments like ELSS funds, Public Provident Fund (PPF), Employee Provident Fund (EPF), and life insurance premiums, with a limit of Rs. 1.5 lakh annually.
- Section 80D: Allows deductions on health insurance premiums for self, spouse, children, and parents.
- HRA and LTA: House Rent Allowance and Leave Travel Allowance provide additional relief to salaried individuals.
These deductions make the old regime more attractive for individuals with significant investments or expenses.
4. Choosing between the new and old regimes
Selecting the right tax regime depends on various factors, including your income, expenses, and investment preferences.
- New tax regime: Best for individuals with straightforward finances, limited expenses, or no significant tax-saving investments.
- Old tax regime: Ideal for taxpayers who actively invest in options like ELSS funds or have eligible deductions like home loans and health insurance.
A comparison of tax liabilities under both regimes can help determine the most beneficial option.
5. Role of ELSS funds in tax saving
ELSS funds are equity-oriented mutual funds that qualify for tax deductions under Section 80C of the Income Tax Act. These funds come with a lock-in period of three years, the shortest among all tax-saving options. They invest primarily in equities, offering the potential for higher returns compared to traditional tax-saving instruments.
Benefits of ELSS funds
- Tax savings: Investments up to Rs. 1.5 lakh annually qualify for deductions under Section 80C, reducing taxable income.
- Wealth creation: ELSS funds provide an opportunity for long-term capital appreciation through equity investments.
- Short lock-in period: The three-year lock-in is shorter compared to PPF (15 years) or National Savings Certificate (5 years).
- Systematic investment: Investors can opt for SIPs (Systematic Investment Plans) to invest small amounts regularly, promoting disciplined saving.
6. Tax planning strategies with income tax slabs
Effective tax planning involves leveraging the benefits of the income tax slabs and investing in tax-saving instruments. Here are some strategies:
Evaluate your income and expenses
Calculate your annual income and identify eligible expenses or investments to determine whether the old or new tax regime suits you better.
Maximise Section 80C deductions
Under the old tax regime, use Section 80C to claim deductions for investments in ELSS funds, PPF, or insurance policies. ELSS funds are particularly attractive due to their growth potential and shorter lock-in period.
Plan your health and insurance expenses
Use Section 80D to claim deductions for health insurance premiums. This not only reduces taxable income but also ensures financial security.
Opt for SIPs in ELSS funds
A SIP allows you to invest in ELSS funds systematically, spreading your investments over time and minimising market risks. This is particularly useful for salaried individuals seeking consistent tax-saving opportunities.
Regularly review your investments
Monitor your investments to ensure they align with your financial goals and tax planning needs. Reassess your strategy annually based on changes in income or expenses.
Income tax slab considerations for financial growth
Tax slabs and exemptions significantly influence your financial planning. The new tax regime slabs are designed for simplicity, offering reduced rates without exemptions, making them ideal for those with fewer investments or expenses. Conversely, the old regime allows individuals to claim deductions through investments in options like ELSS funds, providing a dual benefit of tax saving and wealth creation.
Conclusion
Understanding income tax slab rules and choosing the right tax regime is essential for effective tax planning. The new tax regime slabs simplify taxation but remove deductions, while the old regime offers substantial savings through investments like ELSS funds. By evaluating your financial situation and aligning it with the right regime, you can optimise your tax liability and maximise your savings. Investments like ELSS funds not only help save taxes but also build wealth over time, making them a valuable component of a comprehensive financial strategy.
