Optimum tax planning is important for maximising one’s savings and achieving long-term financial security. The selection of the right tax regime – old or new – plays a vital role in deciding the best tax-saving strategy. The new tax regime provides lower rates of taxation with little compliance, whereas the old tax regime enables one to make several deductions and exemptions.
An understanding of these options empowers taxpayers to make intelligent financial choices, legally lower their tax burden and maximise their total tax expenditure without stretching their budget.
Old vs. new tax regime: Which one to choose?
The tax system currently offers two tax regimes: the old one with multiple deductions and exemptions, and the new one with lower tax rates but fewer deductions. Choosing the right one depends on an individual’s financial profile.
New tax regime: Best for those without deductions
The government has introduced zero income tax for those with an income of up to ₹12.75 lakh for salaried taxpayers (including the basic standard deduction of ₹75,000). The new tax system has reduced rates and is most suitable for people who do not have deductions, such as the Equity Linked Savings Scheme (ELSS) or health insurance premiums. It offers a flat structure with limited compliance.
Old tax regime: Best for those looking to claim deductions
The old tax regime remains unchanged and allows taxpayers to use various deductions, and so it is the ideal choice for people having considerable tax-saving investments.
Old tax slabs (unchanged):
- 0% tax up to ₹2.5 lakh.
- 5% tax from ₹2.5 lakh to ₹5 lakh.
- 20% tax from ₹5 lakh to ₹10 lakh.
- 30% tax above ₹10 lakh.
Under the old regime, individuals could claim exemptions and deductions such as:
- Section 80C: Investments in Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Pension Scheme (NPS), life insurance, etc.
- Section 80D: Health insurance premium deductions.
- HRA (House Rent Allowance) and other applicable exemptions.
The best approach to selecting a tax regime is to compare the total tax liability under both systems. If deductions exceed the tax savings offered by the new regime’s lower rates, the old tax regime is the better option.
Top ways to save taxes without straining one’s budget
If opting for the old tax regime, the following are some of the methods in detail that can help save taxes while ensuring financial security and growth:
Invest in mutual funds (ELSS) for high returns and tax savings
Equity-linked savings schemes (ELSS) are one of the most popular tax-saving investments under Section 80C, offering:
- Tax deductions up to ₹1.5 lakh.
- The lock-in period among tax-saving options is the shortest (only three years).
- Market-linked returns are often higher than traditional tax-saving investments.
- One can invest in mutual funds through a Systematic Investment Plan (SIP) option, spreading investments to reduce risk.
ELSS combines tax benefits and wealth creation, making it an excellent choice for long-term investors.
Opt for the national pension scheme for retirement and extra deductions
The National Pension System (NPS) provides an additional tax-saving opportunity beyond Section 80C:
- ₹1.5 lakh deduction under Section 80C.
- Additional ₹50,000 deduction under Section 80CCD(1B) (beyond the ₹1.5 lakh limit).
- Market-linked investment with exposure to both equity and debt for balanced growth.
- Retirement security: Ensures a pension income post-retirement.
NPS is a smart choice for those looking for tax-free investments with long-term financial benefits.
Utilise health insurance benefits to save taxes and secure your family
Health insurance helps in tax savings and financial security against medical emergencies. Section 80D allows tax deductions on premiums paid:
- ₹25,000 deduction for self, spouse, and dependent children.
- ₹50,000 deduction if covering senior citizen parents.
- Up to ₹1 lakh deduction if taxpayers and parents are above 60.
- ₹5,000 additional deductions for preventive health check-ups.
A family floater health insurance policy ensures medical security while helping save taxes effectively.
Ending note
Tax-saving strategies should be tailored to an individual’s financial goals. If opting for the new tax regime, lower tax rates and simplified compliance make it ideal for those without deductions. However, the old tax regime remains the best choice for individuals seeking to maximise tax savings through deductions.
Investing in mutual funds (ELSS), NPS, and health insurance allows effective tax planning without financial stress. Choosing the right tax-saving investments ensures both tax efficiency and long-term wealth growth.
