How to Maximize Your Business Tax Deductions

Income tax in India is a fundamental component of the country's fiscal system, designed to levy taxes on the income earned by individuals, businesses, and other entities within its jurisdiction. Governed primarily by the Income Tax Act, 1961, this tax regime plays a pivotal role in financing governmental activities, infrastructure development, and public welfare initiatives. It encompasses a wide range of aspects, including the determination of taxable income, applicable rates, deductions, exemptions, filing procedures, and enforcement mechanisms.

The imposition of income tax in India is rooted in the constitutional mandate under Article 265, which empowers the government to levy taxes on income "other than agricultural income." The Income Tax Act, 1961, along with its subsequent amendments and allied rules, forms the legal framework for administering and regulating the income tax system in the country. It classifies income under distinct heads such as salary, house property, business or profession, capital gains, and other sources, each subject to specific provisions regarding computation, exemptions, and deductions.

Residential status, another crucial determinant under the Act, categorizes taxpayers into resident, non-resident, and not ordinarily resident, influencing the extent of their tax liability in India. Tax rates applicable to different categories of taxpayers are prescribed annually through the Finance Act, reflecting the government's fiscal policies and economic priorities.

Moreover, the Income Tax Act provides for various incentives and concessions aimed at promoting savings, investments, and socio-economic objectives. These include deductions for contributions to provident funds, life insurance premiums, donations to charitable institutions, and expenditures on healthcare, education, and housing.

The administration of income tax involves filing annual returns, assessment by tax authorities, and potential scrutiny to ensure compliance with statutory provisions. Non-compliance may result in penalties, interest on unpaid taxes, and in severe cases, prosecution under provisions of the Act.

In summary, income tax in India serves as a critical tool for revenue generation and economic management, impacting individuals, businesses, and the broader economy. Understanding its intricacies is essential for taxpayers and professionals alike, enabling effective tax planning, compliance, and contributing to the nation's development agenda.

What are Income Tax Slabs?

Income Tax in India operates on a system of tax slabs. Here, taxpayers' income is divided into ranges or slabs, with specific tax rates assigned to each slab. This progressive taxation system ensures that individuals earning higher incomes are taxed at higher rates proportionate to their earnings.

The introduction of income tax slabs by the Government of India aims to establish a fair taxation structure for all citizens. To achieve this goal, the government periodically revises these slabs and announces amendments to the Union Budget accordingly.

Now that you understand how income tax slabs work, let's explore the different slabs under both the old and new tax regimes for a clearer perspective.

For many years, individuals have often purchased life insurance primarily as a tax-saving strategy. However, it's important to recognize that life insurance plays a vital role in any comprehensive financial plan. Before outlining financial plans for the upcoming fiscal year, it's crucial to gain a thorough understanding of the new rules and regulations. In February 2023, the finance minister presented the budget for the upcoming year, which included adjustments to the new tax regime. Among these changes, the finance minister reduced the number of tax slabs and expanded the standard deduction to encompass the salaried class and pensioners as well.

New Regime of Income Tax:

The Union Budget 2023 revamped the tax regime, introducing uniform tax rates applicable to every individual and HUF taxpayer, unlike the previous regime that differentiated taxpayers based on their age. Below are the tax rates for the new regime applicable for FY 2023-24.

 

Income Tax Slabs for FY 2023-24

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Income Slab (Rs.)	Tax Rate (%)	Tax Rebate (Rs.)
Up to 3,00,000	Nil	Nil
3,00,001 - 6,00,000	5	Up to 12,500
6,00,001 - 9,00,000	10	Up to 25,000
9,00,001 - 12,00,000	15	Nil
12,00,001 - 15,00,000	20	Nil
Above 15,00,000	30	Nil

 

Old Tax Regime for Individuals and HUFs (Age Less than 60 years)

Income Slab (Rs.)	Tax Rate (%)	Tax Rebate (Rs.)
Up to 2,50,000	Nil	Nil
2,50,001 - 3,00,000	5	Up to 2,500
3,00,001 - 5,00,000	5	Up to 12,500
5,00,001 - 10,00,000	20	Nil
Above 10,00,000	30	Nil

Old Tax Regime for Individuals and HUFs (Age 60 to 80 years)

Income Slab (Rs.)	Tax Rate (%)
Up to 3,00,000	Nil
3,00,001 - 5,00,000	Nil
5,00,001 - 10,00,000	20
Above 10,00,000	30

 

Old Tax Regime for Individuals and HUFs (Age More than 80 years)

Income Slab (Rs.)	Tax Rate (%)
Up to 5,00,000	Nil
5,00,001 - 10,00,000	20
Above 10,00,000	30

These points outline the applicable tax rates based on income brackets and age categories as per the tax regime before the financial year 2023-24.

Here's the surcharge rate information for the financial year 2023-24 (FY 23-24) categorized by income ranges, based on both the old and new tax regimes:

 

Surcharge Rate for FY 23-24

Income Slab (Rs.)	New Regime	Old Regime
Up to 50,00,000	Nil	Nil

 

Tax Rate for Income Between Rs. 50 Lakh and Rs. 1 Crore

Income Slab (Rs.)	New Regime Tax Rate (%)	Old Regime Tax Rate (%)
50,00,001 - 1,00,00,000	10	10

 

Tax Rates for Income Between Rs. 1 Crore and Rs. 2 Crore

Income Slab (Rs.)	New Regime Tax Rate (%)	Old Regime Tax Rate (%)
1,00,00,001 - 2,00,00,000	15	15

 

Income Tax Slab for Income Between Rs. 2 Crore and Rs. 5 Crore

Income Slab (Rs.)	New Regime Tax Rate (%)	Old Regime Tax Rate (%)
2,00,00,001 - 5,00,00,000	25	Not Specified

 

Tax Rates for Income Above Rs. 5 Crore

Tax Regime	Tax Rate (%)
New	37
Old	Not Specified

 

These points outline the applicable surcharge rates based on income ranges for the financial year 2023-24 under both the old and new tax regimes.

Exceptions to the surcharge rates:

Exceptions to the surcharge rates apply to certain types of income under specific tax sections. Income taxable under

• Sections 111A (Short Term Capital Gains on Shares),
•  112A (Long Term Capital Gains on Shares), and
• 115AD (tax on income of FIIs) will not be subject to the higher surcharge rates of 25% and 37%.
• For these taxpayers, the maximum surcharge applicable will be 15%.

Additionally, when the surcharge on income tax payable exceeds the actual increase in income over the specified limit, marginal relief comes into play. The maximum surcharge rate on tax payable for income from dividends or capital gains is capped at 15%. Similarly, the surcharge for Associations of Persons (AOPs), including companies, will also be limited to 15%. These adjusted surcharge rates will be effective for Assessment Year 2024-25.

Taxpayers choosing the new tax regime should consider the following key points:

• The new tax regime does not allow individuals to avail 70 tax deductions and exemptions available under the old regime, including popular ones like Section 80C, Section 80D, and HRA exemption.
• The income tax slabs and rates are uniform across all categories of taxpayers, including individuals, senior citizens, and super senior citizens under the new regime.
• Taxpayers with a net taxable income of up to Rs. 7 lakh are eligible for a rebate under Section 87A.

Difference between Old tax regime and New Tax regime:

Let's delve into the tax implications for Mr. Sinha under both the old and new tax regimes, considering his total taxable income of Rs. 40 lakh. Before diving into the specific tax amounts, it's essential to understand key differences between these regimes:

- The new tax regime is more favorable for individuals with fewer investments in tax-saving schemes.

- The old income tax slab provides greater tax benefits to individuals who have eligible investments and expenses.

- It's advisable to evaluate both tax slabs thoroughly before making a decision, as the advantages of each regime can vary depending on individual circumstances.

Now, let's review Mr. Sinha's tax liability under both regimes:

Categories:

Annual Income

Tax Regime	Annual Income (Rs.)
Old	40,00,000
New	40,00,000

 

Section 80CCD Deduction Limit

Tax Regime	Maximum Deduction (Rs.)
Old Tax Regime	30,000
New Tax Regime	Not applicable

 

Section 80C Deduction Limit

Tax Regime	Deduction Limit (Rs.)
Old Tax Regime	1,50,000
New Tax Regime	Not Applicable

 

 

Health Insurance Tax Deduction

Tax Regime	Maximum Deduction (Rs.)
Old Tax Regime	75,000
New Tax Regime	Not Applicable

Standard Deduction

Tax Regime	Amount (Rs.)
Old	50,000
New	50,000

House Rent Allowance (HRA)

Tax Regime	Maximum HRA Exemption (Rs.)
Old	50,000
New	Not Applicable

 

Allowances

Allowance	Old Tax Regime	New Tax Regime
House Rent Allowance	Not Specified	Not Specified
Leave Travel Allowance	Rs. 25,000	Not Applicable

 

Net Taxable Income

Tax Regime	Net Taxable Income (Rs.)
Old	36,20,000
New	39,50,000

Total Tax Payable

Tax Regime	Total Tax Payable (Rs.)
Old	9,34,440
New	9,20,400

These points summarize the key details of Mr. Sinha's tax scenario under both the old and new tax regimes, including income figures, deductions, and total tax payable amounts.

In summary, Mr. Sinha's taxable income and corresponding tax liability differ under each regime, highlighting the importance of assessing both options carefully to determine the most beneficial tax structure based on individual financial circumstances.

Exemptions and Deductions under New Tax Regime:

The new income tax slab regime has fewer deductions compared to the old tax regime. However, it does allow deductions for specific items, including:

1. Transport allowances for differently-abled individual
2. Traveling allowance related to transfer or employment
3. Contributions to the National Pension Scheme under Section 80 CCD (1) and (2)
4. Deductions for new employees as per Section 80 JJAA
5. Other deductions under Section 32 of the Income Tax Act
6. Gratuity Amount under Section 10(10)
7. Gifts up to Rs. 5000
8. Employer’s contribution to employee’s EPS account
9. Conveyance allowance
10. Additional employee costs under Section 80 JJA
11. Voluntary retirement exemption under Section 10(10C)

These deductions highlight specific allowances and contributions that taxpayers can claim under the new tax regime, focusing on diverse aspects of income and employment-related benefits.

Exemptions under Old Tax regime:

1. Section 80C:

• Deduction limit: Combined limit of ₹1,50,000
• Includes payments made towards:
  • Life Insurance Premium
  • Provident Fund (PF)
  • Subscription to certain equity shares or mutual funds
  • Tuition Fees for children's education
  • National Savings Certificate (NSC)
  • Principal repayment of Housing Loan
  • Other various items like 5-year Fixed Deposit with banks, Senior Citizen Savings Scheme, etc.

2. Section 80CCC:

• Deduction for contributions to:
• Annuity plan of LIC (Life Insurance Corporation of India) or other Insurer towards Pension Scheme
• Included within the overall limit of ₹1,50,000 under section 80C.

3. Section 80 CD (1):

• Deduction for contributions towards:
  • Pension scheme of the Central Government
• This is separate from the ₹1,50,000 limit under section 80C.

Additional Notes:

• These deductions are available to individuals and Hindu Undivided Families (HUFs) for investments made during the financial year.
• Taxpayers need to ensure compliance with specific rules and guidelines under each section to claim deductions.

4. Section 80CCD(1B):

• Deduction limit: ₹50,000
• Applicable towards payments made to:
  • Pension scheme of the Central Government or any other scheme as notified by the Central Government.
• This deduction is in addition to the deduction available under section 80 CCD (1).
• Individuals can claim this deduction over and above the ₹1,50,000 limit available under section 80C.
• It allows taxpayers to further save on taxes by contributing towards their pension funds, thereby promoting retirement savings.

5. Section 80 CCD(2):

• Applicable for contributions made by an employer to the Pension Scheme of the Central Government.
• Deduction calculation based on the type of employer:

1. Employer is a PSU, State Government, or any other employer:
   • Deduction limit: 10% of salary.
   • Salary here refers to the basic salary plus dearness allowance (if any) as per the terms of employment.
2. Employer is the Central Government:
   • Deduction limit: 14% of salary.
   • Salary refers to the total salary as per the terms of employment.

Key Points:

• This deduction is available in addition to the deductions under sections 80C, 80CCC, and 80CCD(1).
• The contribution is made by the employer towards the employee's pension fund, encouraging retirement savings.
• The deduction is limited to the actual amount contributed by the employer to the pension scheme.

1. Section 80D:

 1. Deduction towards Health Insurance Premium and Preventive Health Check-up:

• For self/spouse/dependent children:
  • Deduction limit: ₹25,000
  • Increased deduction limit if any insured person is a senior citizen: ₹50,000
  • Additional deduction for preventive health check-up: Up to ₹5,000 (included in the above limit)
• For parents (whether dependent or not):
  • Deduction limit: ₹25,000
  • Increased deduction limit if any insured parent is a senior citizen: ₹50,000
  • Additional deduction for preventive health check-up: Up to ₹5,000 (included in the above limit)

2. Deduction towards Medical Expenditure on Senior Citizens (if no health insurance premium is paid):

• For self/spouse/dependent children:
  • Deduction limit: ₹50,000
• For parents (whether dependent or not):
  • Deduction limit: ₹50,000

Key Points:

• Deductions under section 80D are available to individuals and Hindu Undivided Families (HUFs) for premiums paid for health insurance policies and medical expenditures.
• The total deduction for health insurance premiums and preventive health check-ups is capped at ₹25,000 (or ₹50,000 if any insured person is a senior citizen) for self, spouse, and dependent children, and similarly for parents.
• The additional deduction for preventive health check-ups is within the overall limit mentioned above.
• If no health insurance premium is paid for a senior citizen, medical expenditure up to ₹50,000 can be claimed as a deduction.

2. Section 80G:

1. Deduction towards Donations Made:

• 100% Deduction (Subject to qualifying limit):
  • Donations to certain specified funds and charitable institutions are eligible for 100% deduction without any limit.
  • These donations typically include contributions to the Prime Minister's National Relief Fund, National Defence Fund, etc.
• 50% Deduction (Subject to qualifying limit):
  • Donations to other specified funds and charitable institutions are eligible for 50% deduction subject to a qualifying limit.
  • These donations may include contributions to certain educational institutions, organizations involved in promoting social welfare, etc.

2. Conditions and Limits:

• No deduction shall be allowed under this section for donations made in cash exceeding ₹2,000. Donations above this amount must be made via cheque, draft, electronic transfer, or other non-cash modes to be eligible for deduction.

Purpose:

• Section 80G encourages individuals and entities to contribute towards charitable causes and specified funds by providing tax incentives.
• The deductions aim to support social welfare activities and community development initiatives while promoting a culture of philanthropy.

Key Points:

• Taxpayers should ensure that the organization or fund they are donating to is registered and eligible under section 80G for claiming deductions.
• The amount of deduction depends on whether the donation qualifies for 100% or 50% deduction and is subject to certain limits and conditions as specified by the Income Tax Act.

3. Section 80GGC:

• Deduction towards Donations Made:
  • Deduction is available for donations made to a political party or an electoral trust.
  • The deduction is allowed for the total amount paid through any mode other than cash.

Key Points:

• Donations made to political parties or electoral trusts are eligible for deduction under this section.
• To claim the deduction, the donation must be made through a mode other than cash (such as cheque, draft, electronic transfer, etc.).
• There is no specified percentage limit mentioned for deduction under this section; however, the entire amount donated through non-cash modes is eligible for deduction.