Tax planning is a crucial component of personal finance, enabling taxpayers to minimize liabilities while complying with legal obligations. With significant changes introduced by the recent Finance (No. 2) Act 2024, understanding how to optimize tax planning for the Financial Year (FY) 2024-25 (Assessment Year 2025-26) is essential.
In this article, we will discuss effective tax planning strategies that taxpayers can undertake for the purpose tax optimisation.
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Tax Planning Strategies for 2025
1. Utilise Tax-Loss Harvesting
Tax-loss harvesting is a strategy where securities are sold at a loss to offset capital gains from other investments. This approach can lower overall tax liabilities while maintaining the integrity of the investment portfolio. Unused losses can be carried forward to offset future gains, offering continued tax benefits.
With the increase in the long-term capital gains (LTCG) exemption limit from Rs. 1 lakh to Rs. 1.25 lakh, investors should consider strategically selling investments to book profits within this limit annually. This approach helps in minimizing future tax liabilities while keeping investment portfolios balanced.
2. Maximise Deductions under Chapter VIA
To reduce taxable income, individuals should fully utilize deductions available under Section 80C, which allows deductions up to Rs. 1.5 lakh for investments in specified instruments like Public Provident Fund (PPF), Insurance premium, 5 years fixed deposits, Equity-Linked Savings Scheme (ELSS), and Unit Linked Insurance Plans (ULIPs) etc. Additionally, contributions to the National Pension System (NPS) can provide an extra deduction of Rs. 50,000 under Section 80CCD(1B) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the IT Act’).
3. Maximise Deductions under the Head Salary
With the recent changes made vide Finance (No. 2) Act 2024 in the new tax regime, particularly the increase in the standard deduction for salaried individuals from Rs. 50,000 to Rs. 75,000, taxpayers can significantly reduce their taxable income without needing to make specific investments. This standard deduction applies to all taxpayers opting for the new tax regime, providing a straightforward way to lower tax liabilities.
Additionally, u/s 80CCD(2) of the IT Act, the deduction for employer contributions to the National Pension System (NPS) has increased from 10% to 14% of the basic salary. This change incentivizes salaried individuals to ensure higher employer contributions to NPS, enabling both immediate tax savings and long-term retirement benefits.
Other deductions which salaried taxpayers can claim includes Leave Travel Concession, House Rent Allowance, etc. under the old tax regime.
By effectively utilizing these deductions, salaried individuals can optimize their tax position for the financial year 2024-25, thereby maximizing their take-home pay and ensuring better financial planning for the future. Further, the taxpayers may evaluate the new (default) tax regime to compare and plan for the tax regime, which is more suitable to them.
4. Timely payment of Advance Tax
One critical aspect of tax planning is the timely payment of advance tax. Taxpayers whose total tax liability exceeds Rs. 10,000 in a financial year must adhere to advance tax payment schedules to avoid interest penalties under Sections 234B and 234C. Quarterly installments ensure compliance, with due dates falling on 15th of June, September, December, and March.
Section 234B of the IT Act imposes interest on taxpayers who fail to pay advance tax or pay less than 90% of the assessed tax whereas Section 234C deals with interest for deferment of quarterly advance tax installments. It is essential to be diligent in making these payments to prevent unnecessary financial leakage.
While adopting the aforementioned tax planning strategies, it is crucial for the taxpayers to consider major life events such as marriage, childbirth, or retirement which can significantly impact their financial situations. Thus, Individuals should reassess their financial plans and make necessary adjustments to their tax strategies based on these changes.