Q1 FY25 Tax Planning: Strategies to Optimise Your Tax Liabilities in the New Financial Year

According to the Income Tax Act, of 1961, the income earned by Indian assessees during each financial year (FY) is taxed in the relevant assessment year (AY). The financial year in India extends from April 1 to the following March 31. The assessment year follows the financial year.

So, as we move into the new financial year from April 1, 2024, to March 31, 2025, the time is right to revisit your tax planning strategies and take the necessary measures to minimise your tax liabilities as much as possible. 

In this article, we'll take a look at some new year tax planning strategies that you can implement to ensure that the burden of tax is reduced as much as possible. 

New Year Tax Planning: How to Optimise your Tax Liabilities in FY25

The income you earn in FY25 (from April 1, 2024 to March 31, 2025) will be taxed in AY26 (from April 1, 2025 to March 31, 2026). So, with the new financial year having just begun, you can get a headstart in your tax planning exercise and take timely measures to minimise your tax liabilities in FY25. Here are some effective new year tax planning strategies to consider and implement in the coming months. 

• Estimate Your Income for FY25

The first thing you need to do as a part of your new year tax planning efforts is to estimate your potential taxable income in FY25. If you are a salaried employee, this may be easier because you can simply multiply your gross monthly salary by 12. Of course, this does not account for any potential salary hikes, but it gives you a reliable starting point.

Alternatively, if you are self-employed or own a business, you can project the revenue for the next 12 months based on your business’s historical records. In addition to this, you also need to factor in income from other sources and rental income, if any.

• Choose the Right Tax Regime

The Income Tax Act currently specifies two tax regimes. The old tax regime comes with higher tax rates but offers a wider range of deductions for specific investments and expenses. The new tax regime, on the other hand, offers fewer deductions but has lower tax rates. You can tentatively assess your tax liabilities under both regimes and choose the option that results in lower tax payable. 

The new tax regime has now been made the default option. So, if you want to choose the old tax regime, you can do so when you file your Income Tax Return (ITR) for FY25. Your choice of the tax regime is an important part of your new year tax planning measures. 

• Create a Suitable Tax-Saving Investment Strategy 

Based on the income tax regime you choose, you can begin to create a suitable investment strategy to save tax this year. This is particularly true if you choose the old tax regime, which offers the whole range of deductions mentioned in Chapter VI A of the Income Tax Act. You can claim up to Rs. 1.5 lakhs as deductions for eligible investments under section 80C. 

The new tax regime also offers a few limited deductions. So, if you choose this option, you can try to include the eligible investments under the new tax regime to reduce your tax liabilities further. Whichever regime you choose, ensure that you select the right investments as a part of your new year tax planning strategy. 

• Plan Your Expenses Smartly

In addition to certain eligible investments, some expenses can also be claimed as deductions from your total income to reduce your taxable income. You can also identify such expenses and plan these outlays strategically to minimise your tax burden in FY25. For instance, if you are planning to avail of a home loan, the principal and the interest repaid can both be claimed as deductions. 

Similarly, other expenses like the premiums paid for life insurance and health insurance plans and the EMIs paid on education loans can also help lower your tax burden. However, keep in mind that the new tax regime offers limited deductions when compared with the old tax regime. 

Portfolio Rebalancing in the New Financial Year

If you already have a well-populated investment portfolio, it may be necessary to revisit this basket of assets and check if your investments minimise your tax liability as much as possible. Portfolio rebalancing — or the practice of redeeming certain investments and including some new ones — can help you with this. Here is a quick guide to portfolio rebalancing to help you with tax planning in the new year.

• Identify the Amount of Tax-Saving Investments You Need

Start by assessing the amount of tax-saving investments you need. This depends on factors like your total taxable income and the tax regime you choose. It's important to do this because it offers some much-needed perspective for your tax planning. For instance, if your total tax liability may only amount to Rs. 1 lakh this year, you can ensure that you limit your tax-saving investments to this level instead of aiming for the entire Rs. 1.5 lakh limit u/s 80C. 

• Compare it With the Tax-Saving Investments You Have 

Once you know how much you need to invest to reduce your tax liabilities optimally in FY25, you can compare it with the current tax-saving investment options in your portfolio. This will give you a better idea of how much more you need to invest to bring your tax liabilities down as much as possible. For instance, if you have Rs. 40,000 in tax-saving investments so far but need to claim at least Rs. 1 lakh as deductions to bring your tax dues to zero, you need Rs. 60,000 more in tax-saving investments. 

• Select Suitable Tax-Saving Investment

The next step in rebalancing your portfolio is to select the right investments to save tax. While tax-saving is a valid goal in itself, it also helps if the new investments you choose align with your long-term financial goals and milestones in life. So, when you select new investments as a part of your portfolio rebalancing efforts, ensure they also align with your long-term life goals. 

• Decide Which Investments to Redeem

Lastly, to complete the process of portfolio rebalancing, you need to decide which investments to redeem to make room for the new tax-saving assets in your portfolio. Ideally, you should redeem underperforming assets and redirect the capital towards new tax-saving investments. This way, you can optimise your tax liabilities and simultaneously ensure that your is still aligned with your overall financial goals.

Conclusion

These new year tax planning strategies can help you reduce your total taxable income and consequently, your income tax liabilities too. You can also use the techniques outlined in this article to carry out portfolio rebalancing effectively and ensure that the tax benefits from your investments are maximised. If you need additional help with rebalancing your portfolio or with your new year tax planning exercise, you can always seek professional assistance from a tax advisor or financial expert