It was a hectic Monday evening at Brew Baithak. Dubey urgently called Gupta and Kandola for a meeting. His HR had shared a form asking him to choose between the old and new tax regimes for the financial year, and as it was their first year in corporate, they had no clue about it.
Understanding Tax Deductions
As they settled into their seats with steaming cups of coffee, Kandola started, “Alright, Dubey, let’s talk about why taxes are deducted from your salary. Ready?”
Dubey sighed, “Do I have a choice? Anyway, why do they take a chunk of our hard-earned money?”
Kandola chuckled, “It’s called Tax Deducted at Source (TDS). The government requires employers to deduct tax from your salary and pay it directly to the government. This ensures that everyone pays their taxes on time.”
Dubey’s Dilemma
Kandola asked, “So, what’s your salary, Dubey? We need to know to figure this out.”
Dubey squirmed, “Uh, do we really need to discuss that? Let’s just use a dummy salary.”
Kandola smirked, “Alright, Mr. Secretive. Let’s say your annual salary is ₹10,00,000. Happy?”
Dubey nodded, “Fine. Go on.”
The Old Tax Regime
Dubey looked puzzled. Kandola continued, “There are two tax regimes: the old and the new. The old tax regime has higher tax rates but allows various deductions and exemptions. In the old tax regime, you can claim deductions under Section 80C for investments like PPF, ELSS, etc., up to ₹1,50,000. There’s also Section 80D for health insurance and Section 80CCD(1B) for NPS up to ₹50,000.”
Tax Calculation in the Old Regime
Kandola continued, “Let’s say you have deductions like ₹1,50,000 in PPF and ₹50,000 in NPS, your total deductions would be ₹2,00,000. So, your taxable income would be ₹10,00,000 - ₹2,00,000 = ₹8,00,000.”
Dubey looked more interested, “Okay, got it. What next?”
Kandola explained, “Now, let's calculate the tax:
Up to ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
₹5,00,001 to ₹8,00,000: 20% of ₹3,00,000 = ₹60,000
Total Tax: ₹12,500 + ₹60,000 = ₹72,500
Cess (4%): ₹72,500 × 0.04 = ₹2,900
Total Tax Payable: ₹72,500 + ₹2,900 = ₹75,400”
Dubey's Misunderstanding
Dubey looked puzzled again, “Wait, I always thought if my salary is ₹10,00,000, they’d just deduct 20% directly from the whole amount. Isn’t that how it works?”
Clarifying Progressive Taxation
Kandola chuckled, “No, Dubey, that’s a common misconception. Our tax system is progressive. This means your income is divided into different slabs, and each slab is taxed at a different rate.”
Tax Slabs for FY 2024-25 (Old Regime)
Kandola pulled out a notepad, “Here are the tax slabs for the old regime for FY 2024-25:
Up to ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5%
₹5,00,001 to ₹10,00,000: 20%
Above ₹10,00,000: 30%”
The New Tax Regime
Dubey listened intently. Kandola continued, “Now, under the new regime, there are no deductions, so your taxable income remains ₹10,00,000.”
Kandola took over the tax calculation, “Here’s the tax calculation:
Up to ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
₹5,00,001 to ₹7,50,000: 10% of ₹2,50,000 = ₹25,000
₹7,50,001 to ₹10,00,000: 15% of ₹2,50,000 = ₹37,500
Total Tax: ₹12,500 + ₹25,000 + ₹37,500 = ₹75,000
Cess (4%): ₹75,000 × 0.04 = ₹3,000
Total Tax Payable: ₹75,000 + ₹3,000 = ₹78,000”
Dubey Needs More Clarification
Dubey, still curious, said, “So, if my salary after all deductions becomes ₹8,34,000, how does the progressive tax work?”
Further Clarification on Progressive Taxation
Kandola smiled, “Good question, Dubey. Here’s how the tax calculation works for a taxable income of ₹8,34,000 in the old regime:
Up to ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
₹5,00,001 to ₹8,34,000: 20% of ₹3,34,000 = ₹66,800
Total Tax: ₹12,500 + ₹66,800 = ₹79,300
Cess (4%): ₹79,300 × 0.04 = ₹3,172
Total Tax Payable: ₹79,300 + ₹3,172 = ₹82,472”
Explaining Future Deductions
Kandola added, “By the way, Dubey, we’ll go over all the possible deductions like Section 80C, 80D, and others some other day. There’s a lot to cover!”
Dubey looked relieved, “Thanks, Kandola! This clears up a lot. I’ll go through my deductions and decide which regime to choose.”
Kandola raised his cup, “To making informed financial decisions!”
They all clinked their cups, toasting to financial wisdom and a prosperous future. Dubey felt more confident about his choices and was ready to tackle the form from HR with clarity.
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