How do tax deductions help you save taxes? - An example - Part 2

In the last article, we saw how Rocket Singh claimed tax deductions under various components of his salary structure. If you have not checked that article yet, please read it before proceeding further - Click here.

Income tax deductions help individuals lower their taxable income and ultimately reduce their tax liability in a given financial year. Put simply, income tax deductions are investments made during a financial year that is offset against the gross annual income when filing income tax returns

Now that Rocket Singh has claimed all the deductions available for him under various allowances he is now eager to reduce it further:

Income Tax Calculation

Old Regime
Tax Deduction (INR
New Regime
Tax Deduction (INR)
a) Annual Income12,00,00012,00,000
b) Tax deduction from salary slip-3,76,0000Refer to part 1
c) Standard Deduction-50,000-50,000It is usually deducted from the gross salary and is claimed as an exemption without having to show any proof of expenses. Hence, this flat amount of INR 50,000 is deducted from the gross salary
d) Section 80C (EPF +ELSS Mutual fund)-1,50,0000It allows taxpayers to make certain investments and claim tax deductions of up to Rs 1.5 lakh in a financial year. Read here - to know more.
e) Section 80D (Health Insurance)-50,0000It provides income tax deductions related to the medical insurance premium paid for yourself, your spouse, your parents, and your dependent children.
f) Section 80CCD (NPS)-50,0000It relates to the deductions available against contributions made to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY).
g) Total (Deduction & Exemption)7,26,00050,000
Net Taxable Income (a-f)5,24,00011,50,000

As his taxable income is now INR 5,24,000, he falls under the slab of 5 lakhs - 7.5 lakhs of income tax. Thus he now has to pay a tax of INR 1500 only each month whereas he had to pay INR 15,000 in the beginning as his taxable income as per CTC was INR 12,00,000.

In contrast, if he opts for the New Regime, he would have to pay INR 7,150 in taxes each month. This example clearly shows that Rocket Singh would benefit more from the Old Regime as he can claim more deductions and allowances to reduce his taxable income.

Understanding your taxable income, how it is taxed, and planning carefully can help you save on taxes. It's crucial to declare all investments at the beginning of the assessment year to ensure accurate calculation of the taxes to be paid.

It is important to note, After Budget 2023, you can choose your Tax Regime option with the employer ONLY ONCE in any particular Financial Year. If you fail to mention your tax regime before due date, your employer will deduct taxes on salary income based on the New Tax Regime by default. However, if you are unsure about which  tax regime to choose, you have the flexibility to change your decision ONLY at the time of filing your ITR. 

Further to know more about rocket Singh’s journey and how he reduced his tax liability - check our course- Understanding CTC and Salary Structure.

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