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Tax Saving Options and Planning Tips For Salaried Professionals

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Taxpayers are constantly on the lookout for opportunities to minimise their tax burden and reduce their overall tax liability. If you’re wondering how to save tax on salary, this article will help you explore the best tax-saving options for salaried employees and help you make informed decisions about your financial future. Let’s look at different schemes that help with overall tax planning for salaried employees in India.

Top 10 Tax Saving Options for Salaried Employees in 2024

Here are the top 10 tax-saving investment options for salaried persons;

1. Employee Provident Fund (EPF)

Employee Provident Fund is one of the most efficient and commonly used options for tax saving for salaried employees. Every month, both the employee and the employer contribute up to 12% of the employee’s salary to the provident fund and the employee receives interest set by the government, which is about 8.6%. When it matures, the returns are tax-free. Also, under section 80C of the Income Tax Act contributions to EPF are eligible for tax deductions.

2. Public Provident Fund (PPF)

Any tax planning for salaried employees is lacking without a Public Provident Fund investment. PPF is a government-backed savings scheme that also provides a return on investments, which are tax-free. The appeal of PPF is in its tax advantages. It follows the Exempt-Exempt-Exempt (EEE) status, meaning the money you put into the fund, the interest it earns, and the final maturity amount are all tax-free. This makes it an excellent choice for both tax savings and long-term investments.

3. Equity Linked Savings Scheme (ELSS)

Equity Linked Savings Scheme or ELSS is hailed as one of the top tax-saving choices for salaried individuals. They are mutual funds that invest primarily in equities. ELSS has a shorter lock-in period of three years, making it a more flexible option for those seeking both tax savings and potential capital appreciation.

Investing in ELSS schemes allows you to claim deductions from your taxable income under Section 80C. It is also the only mutual fund scheme that is eligible for tax deductions, which sets it apart from the rest.

4. ULIPs

ULIPs, or Unit Linked Insurance Plans, are also a great option for tax savings for salaried employees. ULIPs are unique as they offer a blend of insurance and investment. When you pay premiums, you not only secure financial protection for your family but also have the opportunity to invest in a range of securities for potential returns through strategic planning.

ULIPs are categorised as EEE, indicating that they offer tax advantages, and under Section 80C, the premiums paid for ULIPs are eligible for tax deductions.

Also Read: Tax Planning for Beginners: Top Key Principles Explained

5. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a retirement-focused savings option that provides a long-term retirement corpus and is regulated by the government. It not only offers a secure investment avenue but is one of the best tax-saving options for salaried employees. Under Section 80C of the Income Tax Act, you can avail tax benefits on your contributions. Additionally, you have the opportunity to claim extra deductions of up to Rs. 50,000 under Section 80CCD(1b).

6. Tax Saving FD

A Tax Saving Fixed Deposit, or a  tax-saving FD, is one of the most favoured savings options as it is often considered the safest choice for salaried employees. Not only do they offer a smart way to grow your money, they simultaneously reduce your tax burden. Tax Saving Fixed Deposits are offered by banks and have a lock-in period of five years. They are eligible for income tax exemptions for salaried employees under Section 80C. While these FDs offer the security of a fixed return, the interest earned is taxable, and the returns may be lower compared to other investment options.

7. House Rent Allowance (HRA)

Salaried professionals who live in rented houses can claim House Rent Allowance (HRA) exemptions as per Section 10(13A) of the Income Tax Act. In general, your salary package often comprises HRA, which isn’t entirely subject to taxation. Taxable income is determined based on your income tax slab rate, following the subtraction of HRA from the total income.

Note that you will have to pay taxes on the HRA you receive from your employers in case you live in your own house and don’t pay any rent. 

8. Retirement Benefits (Gratuity)

Retirement planning often involves taking into account benefits such as Gratuity, which also offers tax advantages. If you have completed a minimum of five years with an employer, you are eligible for gratuity. It is provided upon superannuation, resignation, retirement, or in the unfortunate events of an employee’s death or disability. The gratuity amount received under any of these circumstances is eligible for tax exemption as per section 10(10), up to a maximum limit of Rs. 20 lakh.

9. Life Insurance

Life insurance stands as one of the finest tax-saving investment options, serving as a means to both grow your wealth and ensure financial security during unforeseen circumstances. Salaried professionals can opt for term insurance plans, endowment plans etc. to meet their insurance needs while also reducing their tax liability.

The premiums you pay for life insurance are eligible for tax deductions under Section 80C of the Income Tax Act. The sum assured received in case of death and the survival benefit also comes with applicable tax benefits under Section 10(10D).

Read More: How to Save Taxes with Existing Investments?

10. Health Insurance

Health insurance not only offers financial security during medical crises but also serves as a popular tax-saving choice for salaried individuals. Typically, the premiums you pay for yourself, your family, or your parent’s health insurance can be deducted from your taxable income under Section 80D, with a maximum of Rs. 1 lakh. This encourages people to secure their health and the health of their loved ones while enjoying tax benefits.

Tax Planning and Saving Tips for Salaried Employees

Tax planning is a crucial aspect of financial management, especially for salaried employees. By leveraging various tax-saving options, you can significantly reduce your tax liability and increase your disposable income. Here are some effective tax planning and saving tips tailored specifically for salaried employees.

1. Understand Your Salary Structure

  • Basic Salary: This is fully taxable.
  • House Rent Allowance (HRA): Use HRA exemption if you live in a rented house.
  • Leave Travel Allowance (LTA): Claim LTA for travel expenses within India.
  • Special Allowances: These may have exemptions or specific tax treatments.

2. Utilize Section 80C Deductions

  • Investments: Maximize investments in PPF, EPF, ELSS, and NSC.
  • Insurance Premiums: Premiums paid for life insurance policies qualify.
  • Home Loan Principal Repayment: Repayment of the principal amount is eligible.
  • Tuition Fees: Fees paid for children’s education up to a certain limit.

3. Take Advantage of Section 80D

  • Health Insurance Premiums: Deduct premiums paid for self, spouse, children, and parents.
  • Preventive Health Check-up: Up to Rs. 5,000 within the overall limit.

4. Claim House Rent Allowance (HRA)

  • Calculate Exemption: Use the least of the actual HRA received, 50% of salary (metro cities), or rent paid minus 10% of salary.
  • Provide Rent Receipts: Ensure you have rent receipts to claim the exemption.

5. Home Loan Benefits

  • Section 24: Deduct interest paid on home loan up to Rs. 2 lakh per year.
  • Section 80EE/80EEA: Additional deductions for first-time homebuyers.

6. Standard Deduction

  • Flat Deduction: Utilize the standard deduction of Rs. 50,000 (as of current laws) from your salary income.

7. Claim Deductions under Section 80E

  • Education Loan Interest: Deduction for interest paid on loans taken for higher education.

8. Use Section 80G for Donations

  • Eligible Donations: Deduct donations to specified funds, charitable institutions, and relief funds.
  • Proof Required: Ensure you have valid receipts for all donations.

9. Professional Tax

  • Deduction: Professional tax paid is allowable as a deduction from salary income.

10. NPS Contributions

  • Section 80CCD(1B): Additional deduction of Rs. 50,000 for contributions to the National Pension System (NPS) over and above Section 80C.

11. Claim Leave Encashment

  • Exemption: Encashment of earned leave is exempt up to a certain limit on retirement or resignation.

12. Transport Allowance for Disabled

  • Additional Benefit: Higher exemption limits for salaried employees with disabilities.

File ITR for Tax Planning for Salaried Employees

Filing Income Tax Returns (ITR) is a pivotal step in effective tax planning for salaried employees. Beyond mere compliance, it offers numerous advantages in maximizing tax savings and financial well-being. By diligently filing ITRs, salaried individuals can claim deductions under various sections of the Income Tax Act, such as Section 80C (for investments like PPF, ELSS, etc.), Section 80D (health insurance premiums), and Section 24 (home loan interest). These deductions reduce taxable income, thereby lowering the overall tax liability.

Moreover, timely filing of ITRs ensures individuals stay compliant with tax laws, avoiding penalties and legal repercussions. It also facilitates easier loan approvals, visa processing, and serves as a crucial document for financial planning and investment purposes. Engaging with a financial advisor can further optimize tax filing strategies, ensuring maximum benefit from available exemptions and deductions tailored to individual financial goals.

Understand Income Tax for Salaried Employees

Understanding income tax is essential for every salaried employee to manage their finances effectively. Income tax is levied by the government on the earnings of individuals and varies based on income slabs. For salaried employees, income tax is deducted at source (TDS) by their employers based on the salary structure and applicable tax rates.

Key components of income tax include taxable income, which encompasses salary, allowances, bonuses, and perquisites. Deductions under various sections of the Income Tax Act, such as Section 80C, 80D, and 80E, reduce taxable income and thereby lower the tax liability. It’s crucial for employees to maintain records of income, investments, and expenses to accurately compute taxes.

Understanding these basics helps salaried individuals optimize their tax planning strategies, ensuring compliance with tax laws while maximizing savings through legitimate exemptions and deductions.

Conclusion

When it comes to financial planning for salaried employees in India, there’s a plethora of tax-saving options, each carrying its unique advantages and factors to consider. Diversifying your investments across these options can not only reduce your tax burden but can also strengthen your financial portfolio.

FAQs on Tax Savings Options

How can a salaried person reduce income tax?

Salaried individuals can lower their tax liability by investing in Section 80C tax-saving instruments (e.g., PPF, ELSS, EPF), claiming Section 80D deductions (for health insurance premiums), using HRA exemptions, and optimising other Income Tax Act exemptions and deductions.

How can I save 30% tax on my salary?

You can invest in deductions under Sections 80C, 80D, and other relevant sections. Use exemptions like HRA, standard deduction, and home loan interest deductions (under Section 24) if applicable.

How to save tax on 10 lakh salary?

To save tax on a 10 lakh salary, invest in Section 80C instruments like ELSS, PPF, NPS, and EPF. Claim deductions for health insurance premiums (Section 80D),, and HRA exemptions if renting. Effective tax planning and exemptions are crucial for lowering tax liability.

How to save tax for salary above 15 lakhs

To save tax on a salary above 15 lakh, invest in NPS, tax-saving fixed deposits, and senior citizen savings schemes. Explore deductions like home loan principal repayment (Section 80C) and maximise Section 80D deductions for health insurance premiums if you have dependents.

How to save tax for salary above 20 lakhs

To save tax on a salary above 20 lakh, optimise Section 80C deductions by investing in ELSS, PPF, EPF, NPS, and senior citizen savings schemes. Explore deductions under Section 80G for charitable contributions and Section 80E for education loan interest. Maximise exemptions such as HRA and standard deduction.