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CA Suresh Surana highlights elements of law relevant to individuals, focusing on optimising tax outgo through deduction, exemption
The IT Act provides taxpayers a choice between two distinct regimes: the old tax regime and the new tax regime.
India’s rapidly expanding economy and evolving tax landscape have significantly influenced individual and corporate financial planning. With an estimated GDP surpassing $3.93 trillion in nominal terms, the government has implemented numerous reforms to streamline tax laws, enhance compliance, and simplify tax filing processes. CA (Dr.) Suresh Surana underlined that the introduction of dual tax regimes—offering taxpayers a choice between the traditional, deduction-based old tax regime and the simplified, concessional-rate new tax regime under the Income-Tax Act has provided flexibility in managing tax liabilities based on personal financial scenarios.
Additionally, stringent measures such as The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 aim to curb tax evasion and enhance transparency in reporting foreign assets. As India’s salaried workforce grows, particularly in sectors like technology and digital services, understanding the intricacies of tax computation, available allowances, and compliance requirements has become essential.
In this article, CA (Dr.) Suresh Surana summarised the key elements of Indian tax laws relevant to individuals, focusing on optimising tax outgo through various deductions, exemptions, and strategic financial planning.
Including:
- Introduction to Indian Tax Law
- Tax Rates and Computation
- Key Allowances and Reliefs
- Perquisites
- Deductions and Exemptions
- Expatriate Taxation – Working in India
- Employer Responsibilities, Penalties, and Prosecution
- The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
Residential Status and Scope of Taxation under Income-Tax Act – Brief Overview
The determination of an individual’s tax liability in India is fundamentally based on their residential status, classified as Resident, Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR).
Residents are subject to tax on their global income, whereas RNORs and NRs are taxed only on income that accrues or arises in India. The determination of residential status is pivotal in defining the scope of taxability, influenced by the individual’s duration of physical presence in India during the financial year.
Tax Rates and Computation
The IT Act provides taxpayers a choice between two distinct regimes: the old tax regime and the new tax regime. The old regime follows a progressive tax slab structure, allowing for numerous deductions and exemptions, making it suitable for taxpayers with significant eligible deductions. Conversely, the new regime introduces simplified tax slabs with reduced rates but limits the availability of deductions, appealing to individuals seeking a straightforward tax filing process.
The tax rates for the old as well as new tax regimes are as follows:
Under the new regime, the basic exemption limit is Rs. 3,00,000 (applicable to all individuals including senior citizens and super senior citizens), with the highest surcharge capped at 25% for income exceeding Rs. 5 crores, whereas under the old tax regime the highest surcharge is 37%.
Further, under the old tax regime, the threshold limit of Rs 5,00,000 for tax rebate u/s 87A of the IT Act is still available. Correspondingly, under the new regime, the threshold limit of Rs. 7,00,000 for full tax rebate u/s 87A of the IT Act continues to be provided for. Accordingly, there would be no effective tax for total income up to Rs. 7,00,000 in case the taxpayer opts for new tax regime u/s 115BAC of the IT Act.
It may be pointed out that as compared to the old tax regime, the new tax regime has more liberal tax slabs but is subjected to restrictions on availing certain specified tax deductions and exemptions.
Further, the new tax regime continues to be the default tax regime for FY 2024-25 as well, however, individuals may still have the option to opt for the old tax regime.
The taxpayers can switch between the old and the new tax regime on a year-on-year basis. However, any taxpayer deriving income from a business or profession who has exercised the option of shifting out of the new tax regime shall be able to exercise the option of opting back to the new tax regime only once.
Key Allowances and Reliefs
Income-tax Act 1961 under the old tax regime provides various allowances and reliefs aimed at reducing taxable income, thereby alleviating the tax burden on salaried employees. Some of these include House Rent Allowance (HRA), which offers tax exemption based on the rent paid, salary, and the city of residence, subject to specific conditions. Similarly, Leave Travel Allowance (LTA) allows employees to claim exemptions on expenses incurred for travel within India, facilitating a reduction in taxable income.
Additionally, relief under Section 89 is designed to mitigate the tax impact of salary arrears or advances by adjusting the tax liability to the year in which the income was earned. Other critical deductions include investments under Section 80C, such as contributions to the Provident Fund, life insurance premiums paid, registration and stamp duty fees, principal repayment on housing loans, specified savings schemes, etc enhancing tax-saving opportunities for individuals. Most of the deductions are not available in the new default tax regime.
Perquisites
Perquisites, commonly referred to as fringe benefits, are non-cash benefits provided by employers that are generally part of an employee’s compensation package and are taxable in the hands of the employee as per the prescribed rules. These may include accommodation, the use of company cars, other payments by employers on behalf of employees, participation in Employee Stock Option Plans (ESOPs), etc.
The taxability of perquisites is assessed based on specific valuation rules prescribed by tax authorities. However, certain perquisites like medical reimbursements up to Rs 15,000 annually and meal vouchers provided within a specified limit are exempt from tax, offering employees additional avenues for tax optimization. Employers often structure compensation packages with a blend of cash and non-cash benefits to maximise tax efficiency for employees.
Deductions and Exemptions
The Income-Tax Act offers a broad range of deductions and exemptions to reduce the taxable income of individuals, thereby minimising their tax liabilities. Section 80C remains the most utilised provision, allowing deductions up to Rs 1,50,000 for eligible investments such as Public Provident Fund (PPF), National Savings Certificates (NSC), and equity-linked savings schemes (ELSS). The standard deduction for salaried individuals has been increased to Rs 75,000 under the new tax regime, providing immediate relief to all salary earners. Whereas the standard deduction under the old tax regime continues to be Rs 50,000.
Furthermore, under old tax regimes, exemptions like HRA and LTA enable employees to reduce their taxable income significantly, provided they meet specific conditions. These tax incentives are designed to encourage savings, investments, and responsible financial planning among taxpayers. Employees should evaluate both regimes before selecting the appropriate tax regime.
An Individual opting for the new default tax regime would be required to forego the following exemptions/deductions:
a) Section 10(13A) – House Rent Allowance
b) Section 10(5) – Leave travel Concession
c) Section 10(14) – Covers special allowance detailed in Rule 2BB (such as children’s education allowance, hostel allowance, transport allowance for other than specially abled, per diem allowance, uniform allowance, etc.)
d) Section 10(17) – Income by way of Daily allowance / any other allowance received by MP, member of state legislature, etc.
e) Section 10(32) – Clubbing benefit of Rs. 1,500 per minor child
f) Section 10AA – Exemption to SEZ unit
g) Section 16 –Entertainment Allow., PT
h) Section 24(b) – Interest on borrowed loan for a Self-Occupied property (rented property not covered)
I) Section 32(1)(iia) –Additional depreciation
j) Section 32AD – Investment Allowance for investment in Andhra Pradesh/ Telangana / Bihar / West Bengal
k) Section 33AB – Tea / Coffee / Rubber Development
l) Section 33ABA – Site Restoration Fund
m) Section 35(2AA) – deduction for Payment to National Laboratory or University or IIT
n) Section 35AD – Deduction in respect of specified business
o) Section 35CCC – Expenditure on agricultural extension project
p) Section 57(iia)- Family pension
q) Any provision of chapter VI – A – section 80C, 80CCD(1B), 80D etc other than section 80CCD(2) and section 80CCH
However, the taxpayers would be able to claim the following deductions under the new tax regime:
- Standard deduction to salaried taxpayer of Rs. 75,000;
- Deduction from income like family pension [1/3rd or Rs. 25,000 (earlier Rs. 15,000), whichever is less];
- Amount paid or deposited in Agniveer Corpus Fund under section 80CCH of the IT Act;
- Deduction for employer contribution to NPS to the extent of 14% of the salary.
Expatriate Taxation – Working in India
The taxation framework for expatriates in India depends primarily on their residential status, which is determined by their duration of stay within the country during a financial year. Expatriates classified as residents are subject to tax on their worldwide income, while non-residents are taxed only on income sourced in India.
Double Taxation Avoidance Agreements (DTAAs) play a crucial role in preventing the double taxation of income earned by expatriates, offering credits or exemptions for taxes paid in their home countries. Additionally, expatriates are required to adhere to local compliance obligations, including obtaining a Permanent Account Number (PAN), filing income tax returns, and complying with tax withholding norms, to ensure adherence to Indian tax regulations.
In case of dual residency, the employee can go for the tie-breaker test, subject to review and in consultation with the local tax consultants and in accordance with the provisions of the IT Act and the respective DTAA.
Employer Responsibilities, Penalties, and Prosecution
Employers in India have a statutory duty to deduct Tax Deducted at Source (TDS) from employee salaries by the prevailing tax laws. The deducted tax must be remitted to the government within stipulated deadlines to avoid penalties. Non-compliance, such as delays in TDS payments or failure to file TDS returns on time, attracts penalties and interest, as well as potential prosecution in severe cases. The penalties for non-compliance include fines and interest charges, which escalate with the extent and duration of the default. Employers are also required to issue Form 16 to employees, detailing the tax deducted, to facilitate accurate tax filing by the employee.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
This legislation addresses the challenge of undisclosed foreign income and assets held by Indian residents, imposing stringent measures to tackle tax evasion. Under this Act, undisclosed foreign income and assets are taxed at a flat rate of 30%, with additional penalties, alongside potential imprisonment for severe non-compliance. The Act mandates comprehensive disclosure of foreign assets in the annual tax return and enforces penalties for failure to declare such income, aiming to curb the practice of hoarding wealth abroad and to integrate undisclosed foreign income into the Indian tax system.
This Act will apply to all persons who are Resident and Ordinarily Resident in India as per section 6 of the IT Act and covers undisclosed foreign income and assets (including financial interest in any entity). as per the amendment brought in July 2019, it is now also made applicable to a person being Not ordinarily resident or Non-resident (applicable w.e.f. 01 July 2015) but who was an ordinary resident of India in the previous year to which the foreign income relates or in the previous year in which foreign asset was acquired.
However, w.e.f. 01-04-2024, if a person, who is a Resident and Ordinarily Resident (ROR), who is required to file an income tax return for any previous year as per the provision of the Income Tax Act and who at any time during such previous year:
- held any asset (including financial interest in any entity) located outside India as a beneficial owner or otherwise; or
- was a beneficiary of any asset (including financial interest in any entity) located outside India; or
- had any income from a source located outside India,
and fails to furnish such a return before the end of the relevant assessment year, then a penalty of Rs 1 Million can be imposed.
However, this penalty does not apply if the total value of their foreign assets (excluding immovable property) is Rs 20 lakh or less.
In a nutshell, navigating the complexities of the Income Tax law in India requires a comprehensive understanding of its provisions, particularly for salaried individuals who form a significant portion of the taxpayer base. With the introduction of flexible tax regimes, varied deductions, and exemptions, taxpayers now have multiple avenues to optimise their tax liabilities.
