Gross Salary Foundation
The journey to calculating your taxable income begins with understanding your gross salary, which is the sum of all monetary earnings listed in the 'earnings'
section of your pay slip. This foundational figure includes your basic pay, House Rent Allowance (HRA), special allowances, and any other taxable perks you receive. It serves as the starting point for all tax calculations, irrespective of whether you opt for the old or the new tax regime. Therefore, meticulously identifying and summing these components is the crucial first step before delving into regime-specific calculations. This comprehensive view ensures no income component is overlooked at the outset.
New Regime Simplicity
Under the current tax regime, the calculation of taxable salary is significantly streamlined due to the general unavailability of most exemptions and deductions. Nearly all components of your gross salary, including HRA and various allowances, are treated as fully taxable. The primary exception is the standard deduction, where applicable, which can be subtracted. Employee contributions towards the Employees' Provident Fund (EPF) are no longer deductible, and most deductions typically claimed under Chapter VI-A of the Income Tax Act are also disallowed. Consequently, your taxable income in this regime is simply your gross salary minus only the specifically permitted deductions, such as the standard deduction.
Old Regime Flexibility
The traditional tax regime offers more avenues for reducing your taxable income through a range of exemptions and deductions. When analysing your salary slip under this regime, it's essential to identify components that are exempt, such as HRA, provided you meet specific conditions and submit the required documentation. Additionally, you can claim eligible deductions, including your own EPF contributions under Section 80C, and other deductions available under Chapter VI-A. By subtracting these eligible exemptions and deductions from your gross salary, while adhering to statutory limits and conditions, you arrive at your taxable income for the old regime.
Comparing Tax Outcomes
The divergence in taxable income between the old and new tax regimes primarily stems from the extensive list of exemptions and deductions that are permissible under the former but largely absent in the latter. To ascertain which tax structure is more advantageous, it is imperative to meticulously calculate your taxable income under both systems, using the details from your salary slip. By comparing the final taxable income figures derived from each regime, you can then determine which option will result in a lower overall tax liability for the financial year. This comparative analysis empowers informed decision-making for tax efficiency.
