Taxes in 2025: It is January 2025 and taxpayers have nearly three months to review their tax payments and obligations. It is crucial for taxpayers to assess their financial situation and proactively reduce their tax liabilities. With India's fiscal year ending on March 31, 2025, this three-month period presents a valuable opportunity for individuals to educate themselves on the various tax benefits outlined in the Income Tax Act, 1961 (IT Act).
While your gross salary may appear to be a sizable sum, it is crucial to take into account your net salary or take-home pay. This is the amount you receive after deductions such as taxes. Failing to plan for taxes may result in a lower net salary than expected. It is essential to be mindful of this when evaluating your overall financial picture.
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Let's discuss steps to analyse your tax liability and how to reduce it
1. Understanding Your Tax Bracket
Understanding your tax bracket is key to developing a successful tax planning strategy. For the 2025-26 Assessment Year, individuals have the choice between the old and new tax regimes. The new regime may provide lower tax rates for different income levels, but it does come with the loss of certain deductions available in the old regime.
2. Old Tax Regime vs New Tax Regime
Under the Old Tax Regime, taxpayers have the ability to leverage a variety of deductions and exemptions across different sections. Approximately 70 deductions and exemptions are offered under this system, aiding in the reduction of taxable income. Additionally, individuals can claim a deduction of up to Rs 1.5 lakh under Section 80C.
In the Union Budget 2020, the New Tax Regime was introduced offering concessional tax rates. Taxpayers who opt for this new regime are not eligible to claim major deductions such as HRA, LTA, Section 80C, and others.
In Budget 2023, the Union government established the New Tax Regime as the default choice. If a taxpayer does not explicitly select between the old and new tax regimes, their taxes will be automatically calculated under the new regime.
Salaried individuals and business professionals have the flexibility to switch between the old and new tax regimes annually. However, individuals outside of these categories can only transition between the old and new regimes once in their lifetime.
Tax slabs under the Old Tax Regime
Tax Slabs Tax Rate
Up to Rs.2.5 lakh Exempt Over Rs.2.5 lakh to Rs.3 lakh 5% Over Rs.3 lakh to Rs. 5 lakh 5% Over Rs.5 lakh to Rs.6 lakh 20% Over Rs.6 lakh to Rs. 9 lakh 20% Over Rs.9 lakh to Rs.10 lakh 20% Over Rs.10 lakh to Rs.12 lakh 30% Over Rs.12 lakh to Rs.15 lakh 30% Above Rs.15 lakh 30%
New Tax Regime slabs applicable in FY25
Tax Slabs Rates
Up to Rs. 3,00,000 NIL
Rs. 300,001 to Rs. 6,00,000 5% (Tax Rebate u/s 87A)
Rs. 6,00,001 to Rs. 900,000 10% (Tax Rebate u/s 87A up to Rs 7 lakh)
Rs. 9,00,001 to Rs. 12,00,000 15%
Rs. 12,00,001 to Rs. 1500,000 20%
Above Rs. 15,00,000 30%
3. Investment under the Old Tax Regime
Taxpayers have the option to invest in various instruments like National Savings Certificate (NSC), ULIP (Unit-linked Insurance Premium), and PPF (Public Provident Fund) to avail of income tax exemption under Section 80C. The highest limit for tax exemption is Rs 1.5 lakh.
4. Tax Savings through Different Sections
Section 80CCC: This section permits individuals to claim annual deductions of up to Rs 1.5 lakh for contributions made to designated pension plans provided by life insurance companies.
Section 80CCD (1): Taxpayers can avail tax deductions on the amount deposited in their NPS account under this section. The maximum deduction allowed is Rs 1.5 lakh for a financial year.
Section 80D: Taxpayers can claim deductions on premiums paid towards medical insurance for self, spouse, parents, and dependent children under section 80D of the Income Tax Act, 1962. The maximum limit is Rs 25,000 for regular citizens and Rs 50,000 for senior citizens annually.
Section 80CCD (1B): This section allows for an additional deduction of up to Rs 50,000 for contributions made to NPS.
5. Investment under the New Tax Regime
Under the New Tax Regime, the government brought introduced some tweaks in recent years that will be applicable in tax filing for FY25.
New Tax Rebate Limit: The full tax rebate now applies to incomes up to Rs 7 lakhs, contrasting with the previous threshold of Rs 5 lakhs. This adjustment ensures that individuals earning up to Rs 7 lakhs will not be liable to pay any taxes under the new tax regime.
Salary Income: The standard deduction of Rs 50,000, previously exclusive to the old regime, is now available in the new tax regime as well. Effective from FY 2024-25, this deduction has been raised to Rs 75,000 for the new regime only.
Family Pension: Individuals receiving a family pension are eligible to claim a deduction of Rs 15,000 or 1/3rd of the pension amount, whichever is lower. This deduction has been increased to Rs 25,000 for the new regime starting from FY 2024-25.
Surcharge rate: The surcharge rate on income exceeding Rs 5 crores for high net worth individuals has been lowered from 37% to 25%, resulting in a decrease in their effective tax rate from 42.74% to 39%.
Leave encashment: The exemption limit for higher leave encashment for non-government employees has been raised from Rs 3 lakhs to Rs 25 lakhs, marking an 8-fold increase in the limit.