Introduction: Why Tax Planning Matters
Are you paying more tax than you should? Most salaried employees in India end up paying excess tax simply because they don't plan ahead. With proper tax planning, you can legally save ₹50,000 to ₹2,00,000 or more annually. This guide will show you exactly how.
Old vs New Tax Regime: Which to Choose?
From FY 2023-24, you can choose between two tax regimes annually. Let's understand both:
Old Tax Regime
Tax Slabs:
- Up to ₹2.5 lakh: Nil
- ₹2.5 - 5 lakh: 5%
- ₹5 - 10 lakh: 20%
- Above ₹10 lakh: 30%
Advantages:
- Allows all deductions (80C, 80D, HRA, etc.)
- Best if you have housing loan, children's education, insurance
- Maximum tax savings possible
New Tax Regime
Tax Slabs (FY 2023-24):
- Up to ₹3 lakh: Nil
- ₹3 - 6 lakh: 5%
- ₹6 - 9 lakh: 10%
- ₹9 - 12 lakh: 15%
- ₹12 - 15 lakh: 20%
- Above ₹15 lakh: 30%
Advantages:
- Lower tax rates
- No need for tax-saving investments
- Simpler calculation
- Best for those with income below ₹8-9 lakh with no deductions
Quick Decision Guide:
Choose Old Regime if:
- You have home loan (interest deduction)
- You pay HRA or have rent
- You invest ₹1.5 lakh+ in 80C
- You have multiple deductions (health insurance, education loan, etc.)
Choose New Regime if:
- Your income is below ₹8 lakh
- You don't have many deductions
- You prefer simplicity over tax-saving investments
Section 80C: Your Primary Tax-Saving Tool
Save up to ₹46,800 tax annually with ₹1.5 lakh investment under Section 80C:
Best 80C Options:
- ELSS (Equity Linked Savings Scheme)
- Only 3-year lock-in (shortest in 80C)
- Potential returns: 12-15% historically
- Best for wealth creation + tax saving
- Invest via SIP for rupee cost averaging
- PPF (Public Provident Fund)
- Guaranteed returns (currently 7.1%)
- 15-year lock-in
- Completely tax-free (EEE status)
- Best for conservative investors
- EPF (Employee Provident Fund)
- Automatic from salary (12% contribution)
- Employer also contributes 12%
- Current interest: 8.15%
- Tax-free withdrawal after 5 years
- Life Insurance Premium
- Term insurance premiums qualify
- Traditional plans also covered
- Maximum 10% of sum assured
- Home Loan Principal Repayment
- Principal portion of EMI qualifies
- Interest covered separately under 24(b)
- NSC (National Savings Certificate)
- 5-year tenure
- Fixed returns (currently 7.7%)
- Available at post offices
- Sukanya Samriddhi Yojana
- For girl child below 10 years
- Highest interest rate (8.0%)
- Maximum ₹1.5 lakh per year
- Completely tax-free maturity
- Children's Tuition Fees
- For up to 2 children
- Only tuition fees, not development charges
Section 80D: Health Insurance Tax Benefits
Often overlooked, but can save significant tax:
- Self, spouse, children: ₹25,000 deduction (₹50,000 if senior citizen)
- Parents: Additional ₹25,000 (₹50,000 if senior citizens)
- Preventive health checkup: ₹5,000 within above limits
- Maximum total: ₹1 lakh (if self and parents both senior citizens)
- Tax savings: Up to ₹31,200 at 30% tax bracket
Pro Tip: Even if you have employer health insurance, buy personal policy for parents to claim 80D benefits.
HRA (House Rent Allowance) Exemption
If you live in rented accommodation, HRA exemption can save lakhs:
HRA Exemption Calculation (Lowest of three):
- Actual HRA received
- 50% of salary (metro) or 40% (non-metro)
- Rent paid minus 10% of salary
Documents Required:
- Rent receipts
- Landlord's PAN (if rent > ₹1 lakh/year)
- Rental agreement
Can't claim HRA? You can still claim deduction under Section 80GG:
- Available if you don't receive HRA
- Maximum ₹5,000 per month or 25% of income (whichever lower)
- Can't own house in city where you work
Home Loan Tax Benefits
Home loan offers dual tax benefits:
1. Section 24(b) - Interest Deduction:
- Self-occupied property: Up to ₹2 lakh interest deduction
- Let-out property: Entire interest deductible (no limit)
- Tax saving: Up to ₹62,400 (at 30% bracket)
2. Section 80C - Principal Repayment:
- Up to ₹1.5 lakh within overall 80C limit
3. Section 80EEA - Additional Interest (First-time buyers):
- Additional ₹1.5 lakh interest deduction
- Loan sanctioned between 01-Apr-2019 to 31-Mar-2022
- Property value up to ₹45 lakh
- Total interest deduction: ₹3.5 lakh (₹2L + ₹1.5L)
Other Important Deductions
Section 80E - Education Loan Interest
- Full interest paid on education loan is deductible
- No upper limit
- Available for 8 years from start of repayment
- For self, spouse, or children's higher education
Section 80CCD(1B) - NPS
- Additional ₹50,000 deduction over and above 80C
- Invest in National Pension System
- Dual benefit: Tax saving + retirement corpus
- Tax savings: ₹15,600 at 30% bracket
Section 80G - Donations
- 50-100% deduction on donations to eligible institutions
- Check 80G registration of recipient
- Keep donation receipts
Section 80TTA/TTB - Interest Income
- 80TTA (Below 60 years): ₹10,000 deduction on savings account interest
- 80TTB (Senior citizens): ₹50,000 on interest from savings/FD
Salary Structure Optimization
Work with your employer to restructure salary for maximum tax efficiency:
Tax-Free Allowances to Negotiate:
- LTA (Leave Travel Allowance): Tax-free for 2 trips in 4 years (within India)
- Food Coupons/Meal Vouchers: Up to ₹50 per meal (₹26,400/year tax-free)
- Mobile/Internet Reimbursement: If for official use
- Driver/Helper Salary: Tax-free allowance
- Books & Periodicals: Tax-free reimbursement
- Uniform Allowance: Tax-free
- Children Education Allowance: ₹100/month/child (up to 2 children)
- Children Hostel Allowance: ₹300/month/child
Strategic Salary Components:
- Higher Basic: Increases EPF contribution (but reduces take-home)
- Higher HRA: More tax-free income if you pay rent
- Special Allowances: Ensure 50% of CTC isn't taxable
Tax Planning Calendar
Don't wait till March! Plan throughout the year:
April - June (Q1):
- Choose between old vs new tax regime
- Submit investment declaration to employer
- Start SIPs in ELSS
- Buy health insurance policies
July - September (Q2):
- Review investments made so far
- Plan remaining 80C investments
- Keep rent receipts organized
October - December (Q3):
- Pay pending insurance premiums
- Invest in NPS for 80CCD(1B)
- Make charitable donations if planned
January - March (Q4):
- Submit investment proofs to employer
- Complete pending 80C investments
- Pay children's tuition fees
- Review Form 16
Common Tax Planning Mistakes
- Last-minute investments: Rush decisions in March lead to poor choices
- Ignoring documentation: No proof means no deduction
- Over-investment in tax-saving: Don't compromise financial goals for tax saving
- Not updating employer: Results in excess TDS and refund hassles
- Fake rent receipts: Tax evasion is illegal and punishable
- Ignoring new regime: Sometimes it's actually better
- Not filing ITR: Even if no tax due, file for refunds and records
Sample Tax Saving Calculation
Scenario: Salaried employee, ₹12 lakh annual income, metro city, paying ₹15,000/month rent
Without Tax Planning:
- Taxable income: ₹12,00,000
- Tax (old regime): ₹1,57,500
With Tax Planning:
- Standard Deduction: -₹50,000
- 80C (ELSS + EPF + Insurance): -₹1,50,000
- 80D (Health insurance): -₹25,000
- 80CCD(1B) (NPS): -₹50,000
- HRA Exemption: -₹1,00,000
- Home loan interest (24b): -₹2,00,000
- Taxable income: ₹6,25,000
- Tax: ₹43,750
- Tax Saved: ₹1,13,750
Conclusion
Smart tax planning isn't about tax evasion—it's about using legal provisions to minimize your liability. Start early, invest systematically, and maintain proper documentation. Remember:
- Tax planning is year-round activity, not March madness
- Choose investments based on goals first, tax saving second
- Keep all investment proofs and receipts organized
- Review and adjust strategy annually
- When in doubt, consult a tax professional
Need personalized tax planning advice? Contact Inbest's tax consultants who can help you create a customized tax-saving strategy aligned with your financial goals.
