Tax saving guide: The optimal tax saving instruments under old tax regime

In the Union Budget 2023, Finance Minister Nirmala Sitharaman announced significant adjustments to the new income tax regime, including reduced tax rates and a tax rebate on annual income up to ₹7 lakh. The enhancement of the rebate for individuals subject to the new income tax regime from ₹5 lakh to ₹7 lakh was the most significant of the main announcements made by the finance minister. Additionally, FM announced a modification to the tax structure under the new tax regime by decreasing the number of tax slabs to five and raising the tax exemption threshold to ₹3 lakh. In contrast to the new income tax regime, the old tax structure's tax slabs were not altered by the budget 2023. “We are also making the new income tax regime as the default tax regime. However, citizens will continue to have the option to avail the benefit of the old tax regime,” said FM Nirmala Sitharaman during her budget speech.

In addition, the new income tax bracket has added a standard deduction of ₹50,000 and a family pension deduction of up to ₹15,000 annually. This indicates that under the new income tax regime, a salaried individual would also be eligible for a lump-sum deduction of ₹50,000 from his or her total taxable income, which was previously only possible under the old tax regime.

Let's find out how individual taxpayers can make the most from the old tax regime in terms of tax deductions for Assessment Year (AY) 2024-25 or for the income made in FY 2023-24., even as the government has made a number of changes under the new tax regime.

Tax saving investments for individuals under old tax regime

Based on an exclusive interview with Dr. Suresh Surana, Founder, RSM India, the spokesperson said in accordance with the provisions of the Income Tax Act, 1961 (‘IT Act’), individual taxpayers are offered several deductions under chapter VI-A on fulfilment of certain conditions. As per the prevailing laws, most of these benefits are restricted only to such individuals who continue with the Old Tax Regime. We have provided an overview of some of the most widely used and optimal tax saving instruments for individuals.

1. Section 80C – Deduction for certain specified Investments and Expenditures:

Section 80C of the IT Act is one of the most popular deductions amongst individuals as it offers investment-linked and expenditure-based deductions. Some of the investment-linked options under this section include Life Insurance Premium, Contribution to PPF, investment in Sukanya Samriddhi Yojana, Equity Linked Savings Scheme (‘ELSS’), investments in 5 years fixed deposits, etc. 

Further, the section allows a deduction for expenditure incurred for Tuition fees paid for children’s education in India, stamp duty / registration charges, principal repayment of housing loans, etc. The total quantum of deduction under this section is restricted to Rs. 1,50,000 per Financial Year (FY) under this section. Majority of the taxpayer aims to avail full benefit under this section which can ultimately reduce their basic tax liability upto Rs. 45,000 (i.e. Rs. 1,50,000x30% - assuming they fall in the 30% tax bracket)

2. Section 80CCD(1b) – Deduction for National Pension Scheme

Individuals, who contribute to a notified National Pension Scheme, are granted additional relief of upto Rs. 50,000 under this section. Thus, an individual can effectively save tax on taxable income upto Rs. 2,00,000 per Financial Year i.e. ₹1,50,000 u/s 80C and ₹50,000 under this section.

3. Section 80TTA/80TTB – Deduction for Interest on Bank Accounts:

Almost every individual holds a Savings Account in some or the other bank and earns interest on the same. Further, as India is moving towards a cashless economy, lower and weaker section of the society are also encouraged to open and maintain a bank account. 

As per section 80TTA, individuals who earn interest on savings account maintained either with a bank or a post office, can claim deduction upto Rs. 10,000 per FY. Further, Section 80TTB of the IT Act provides additional benefit to resident senior citizens, wherein it enhances the maximum limit of deduction to Rs. 50,000 per FY and also extends the benefit of interest received on time/fixed deposits.

Commenting on the view of overall Budget 2023 in terms of taxation, Dr. Suresh Surana said “The Union Budget 2023 is a dream budget with focus on investment and infrastructure, digital initiatives, fiscal consolidation, stability of corporate tax regime and major simplification of personal tax regime. There is a massive increase in investment outlay, thrust on agro based activities, tourism, fintech and education. The measures to improve ease of doing business, expeditious returns processing and appellate proceedings and increase in limits for presumptive tax for small businesses and professionals will improve the tax administration greatly. The personal tax regime has been revamped and new regime provides for higher basic exemption, reduction in number of tax slabs from 7 to 6 in a symmetrical manner, higher rebate and lowering of the highest tax rate from 42.74% to 39%. The widespread apprehension of enhancement of capital gains tax or new taxes to meet additional outlay has also been addressed with no changes in this respect. The corporate tax regime is already very attractive with effective tax rates of 25.17% and even a lower tax rate of 17.16% for new manufacturing companies. The possible areas for further improvement are the extension of period for commencement of manufacture for availing the lower tax rate and reduction of tax on dividends to a maximum of 20%.”