According to ClearTax, choosing the right tax regime and maximising available deductions and exemptions remains key to effective tax planning.

Tax Saving Strategies

Choosing between old and new tax regimes

ClearTax highlights that the most critical decision for those in the Rs 20 lakh+ salary bracket is selecting the more beneficial tax regime. The new tax regime provides lower slab rates but limited deductions, while the old regime rewards higher deductions and exemptions.

Key detail- For a Rs 20 lakh salary, the old regime becomes advantageous only when total deductions exceed approximately Rs 7.08 lakh. If sufficient deductions are not possible, the new regime is generally the better option.

Deductions and exemptions available in the new tax regime

Even under the new regime, several relief measures are accessible:

• Standard deduction: Rs 75,000
• Employer's Contribution to NPS (Section 80CCD(2)): Up to 14 per cent of basic salary
• Full interest deduction on home loans for let-out properties (Section 24)
• Exemptions on gratuity, leave encashment, and voluntary retirement benefits

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Richer deduction options in the old tax regime

The old regime offers significantly more avenues for tax savings through exemptions and deductions:

Exempt allowances include:

• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA) - for two trips in four years
• Children's education and hostel allowances (up to Rs 4,800 per child for max 2 children)
• Mobile/internet reimbursements (with proof)
• Food expenses (up to Rs 26,400 annually)

Major Deductions:

• Standard deduction: Rs 50,000
• Section 80C: Up to Rs 1.5 lakh (EPF, PPF, ELSS, NSC, 5-year FD, home loan principal, etc.)
• Section 80D: Health insurance premiums (up to Rs 25,000/ Rs 50,000 for seniors)
• Section 80CCD(1B): Additional Rs 50,000 for NPS
• Home loan interest: Up to Rs 2 lakh (Section 24b)
• Deductions for disabled dependents (Section 80DD), education loan interest (Section 80E), and charitable donations (Section 80G)

Tax calculation example - Rs 20 lakh salary

ClearTax provides a practical illustration for X with a Rs 20 lakh salary and moderate claims (HRA, LTA, children's allowance, 80C, 80D, and NPS).

Under the new regime, his tax liability (including cess) comes to around Rs 1.92 lakh.

Under the old regime with the listed deductions, it rises to about Rs 3.02 lakh.

Thus, in this scenario, the new regime saves over Rs 1.09 lakh in taxes. However, higher deductions would tilt the balance toward the old regime.

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Expert recommendations

Optimise your CTC structure to include maximum exempt allowances and employer NPS contributions. For the new regime, focus on employer NPS (up to 14 per cent) and available exemptions. Review your situation annually, as non-business taxpayers can switch regimes each year. Use reliable calculators to compare outcomes based on personal deductions.

(Source: ClearTax)

(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money-related decisions.)

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