Calculating income tax and undertaking the task of income tax return filing at the end of the financial year can be taxing. However, it is crucial to understand the tax slabs in the upcoming fiscal year to be able to make an optimal investment plan to save maximum tax and invest in reliable financial instruments.

With the introduction of budget 2020, the process of income tax filing online has been simplified with the introduction of new tax slabs. At the same time, as a taxpayer, you are allowed to choose between new and old tax regime as per your income and investments.

According to the new tax regime, you would have to do away with all the deductions and tax-saving benefits of your investment plan if you want to be charged a lower tax. However, experts believe that you will end up paying a higher tax under the new tax regime.

The new budget is intended to increase your disposable income by reducing the incentive to save. But the exemption is given on income up to Rs. 5 Lakhs remain the same. If you are a salaried taxpayer and want to choose the more “simplified” new tax regime, you will have to forgo the standard deduction and deductions under chapter VI-A. Under this, standard exclusions include House Rent Allowance and investments under section 80C of the Income Tax Act that is tax-free in the old regime.

At the time of the income tax return filing, the following information will help you choose the appropriate tax regime.

1. New Tax Slab is Optional for FY 2019-20

Budget 2020 introduced a novel concept of a new tax regime by inserting a new section 115BAC. From FY 2020-21 onwards, you or Hindu Undivided Family (HUF) will have the option to choose between new and old tax regime. Both the options have several tax slabs that will be applicable at the time of income tax filing online.

Both regimes have their own rules about deductions and exemptions. The option can be exercised for every previous year, which will be applicable for that year and can only be changed again in the next assessment year.

If you have a business income, then the option of choosing the tax regime can be exercised on or before the due date of income under section 139(1) of the Income Tax Act. The option of choosing the tax regime can only be exercised once for income tax filing online. In case you cease to have a business income, then the tax regime you chose at the beginning of the year shall, by default, be valid for that financial year and all the subsequent years as well.

2. Saving Under Section 87

The income tax rebate provided under section 87A applies to people who have taxable salaries below Rs. 5 Lakh. So if you have an investment plan that gives you tax benefits under section 80C of the income tax act, then you can claim this benefit and make your income tax free.

Eligibility to claim this rebate is as follows:

• You must be a resident individual
• Your total income after deductions under section 80 should not exceed 5 Lakhs
• The maximum rebate applicable is Rs. 12,5000, which means that if the total tax payable is lower than 12,500, then that amount will be eligible for rebate under Section 87A. The rebate is applied before adding the Education Cess (4%).

3. Tax Saving Investment Safe FromTax Deductions Under New Regime

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If you are opting for the new tax regime, then you should first estimate your taxable income first and then choose your investment plan for the year. If you are better off in the new tax regime, then you must invest in instruments that do not require yearly contributions. Here are some options you can consider:

Equity-linked savings scheme (ELSS): Investment in these funds offers a tax deduction of up to Rs. 1.5 Lakh under section 80C with a lock-in period of three years. You are not required to invest any amount every year. The returns are market-linked, and gains are considered as long term capital gains, therefore taxed at 10%. However, do note that LTCG from equity investments is exempt from up to Rs 1Lakh in a financial year.

Public Provident Fund (PPF): Even though this is one of the most popular tax saving instrument, it comes with a lock-in period of 15 years. You can invest a maximum of 1.5Lakhs in PPF and invest just Rs. 500 to keep the account active through the years. The maturity proceeds in PPF is tax-free.

Sukanya Samriddhi Yojana (SSY): This social welfare scheme is meant for the maximum of two girl children and provides an interest rate of 8.4% compounded annually. You need a minimum of Rs. 250 to open an SSY account. The amount matures after 21 years with a partial withdrawal permissible when the girl turns 18. Both the interest earned and maturity amounts are tax-free.

The new structure is most suitable for those who do not wish to claim many deductions and want to avoid the hassle of paperwork at the time of income tax filing online. If you are a non-salaried taxpayer who is not eligible for tax exemptions and deductions under Chapter VI-A, they can also benefit from the new tax regime.

Additionally, senior citizens who do not draw their pension from their employers and are not eligible for a standard deduction of Rs. 50,000 can also benefit from the new tax regime. A newly introduced section, 80TTB of the Income Tax Act, will enable you to enjoy the exemption of Rs. 50,000 for interest income.

If you are someone who does not have a robust investment plan, then a new tax structure may benefit in some ways. However, if you are already drawing tax benefits under section 80C of the Income Tax Act, the old regime makes more practical sense.

Even though the new tax regime may seem less tax-saving friendly, you must understand that an investment plan is to provide you and your loved ones with financial security from life’s unpredictable events. Many term insurance plans are designed specifically to help you achieve your long term goals along with tax-saving benefits. Online term insurance plans from reputable insurers such as Max Life Insurance help you make the right choice when designing a tax saving portfolio.

If you want to get taxed in the old regime, avoid making the wrong investment decisions by rushing into buying tax saving instruments. Review and compare your insurance options and make an informed decision.