The beginning of the financial year is the perfect time to get your tax investments and expenses started. There are many benefits for doing so. One, you can study and then choose the most appropriate instruments. Two, if the expense is big, for example, premium for a health insurance policy, you can plan for it in advance. Three, your investments will get more time to grow. And, four, you will not have to scramble at the last minute, which often leads to wrong decisions.
Step 1: See What Your Tax Outgo Is Likely To
Before getting on to that journey, you need to check what your tentative tax outgo is. Income taxes in India are based on age and then the income level. See the graphics to figure out the taxes that apply to you. For those who are 60 years old or younger, till Rs 2.5 lakh per annum, no taxes apply. From there till Rs 5 lakh per annum, it is 5 per cent. After that, it is 20 per cent and 30 per cent in the old tax regime. In the new tax regime, there are more gradations—10 per cent, 15 per cent, 20 per cent, 25 per cent and 30 per cent.
See the tax rates applicable for your age group followed by your income level.
Step 2: Choosing Between The Old And new Tax Regime
From the financial year 2020-21, the taxpayer can choose to pay income tax either under the new tax regime or can stick to the old tax regime. If you opt for the new tax regime, you will have to inform your employer and TDS will be deducted monthly. If you don’t choose the new tax regime, the old one applies automatically.
While the new tax regime has lower tax rates, tax deductions are not allowed. So, for example, if you bought life insurance, you will not be able to claim the premium paid for tax deduction. As each person’s financial expenses and needs are different, calculate based on your own details. Check if the exemptions and deductions reduce your tax outgo enough to cover the extra tax rate you would pay under the old tax regime. If you do not have too many such investments, the new tax regime may be the better choice.
As you will see, these decisions will have a big impact on your finances. Therefore, the beginning of the year is a good time to invest time and effort in understanding the details to get your taxes in order. If you are not able to choose, take an expert’s help.
