10 Tax Saving Options For Salaried Employees
Introduction
Every individual or salaried employee views income tax as a burden. Not only do taxes burn a hole in a pocket, but they also squeeze out a portion of one’s hard-earned money. As the financial year's end is approaching, now is the time to plan and revise the investments (or the salary structure) in relation to the tax-saving options.
Here are the 10 best ways for salaried employees to save their taxes in India-
The 80C section of the Income Tax Act of India refers to the various investments and expenditures exempted from Income Tax1. The maximum limit for benefits under Section 80C is INR 1.5 lakhs, which means that the individuals can claim either one option or a combination of options in 80C, the maximum limit of which would be INR 1.5 lakhs.
1. Employee Provident Fund
One of the saving options in 80C is EPF or the Employee Provident Fund. The employer and the employee contribute monetary contributions to the fund every month at 12% of the employee's basic wage (Basic + Dearness allowance). The employee enjoys the lump sum amount on the retirement together with interest. The monthly payment is tax deductible, and the claim is tax-free.
2. Public Provident Fund
The account's term and lock-in period is 15 years. One can deposit to a PPF account as small as INR 500 and a maximum of INR 1.5 lakhs. The deposits must be made annually during the account term. Also, PPF deposits are tax deductible. In addition, the interest and the accumulated amount are also tax-exempt at the time of withdrawal.
3. Equity-Linked Saving Schemes (ELSS)
ELSS or Equity-Linked Saving Scheme refers to the mutual funds that primarily invest in the stocks of the listed companies and come with a lock-in of 3 years. Investments up to INR 1.5 lakhs in ELSS funds are tax deductible under Section 80C.
4. Tax Saver FD
A tax-saving fixed deposit is distinct from regular fixed deposits. It has a fixed term of 60 months or 5 years. Individuals can invest in multiples of INR 100. This minimum deposit amount is different from bank to bank. They can claim a tax deduction of up to INR 1.5 lakhs on the principal amount under Section 80C. However, the interest accrued on the FD amount is taxable.
5. Life Insurance
Life insurance is another effective and flexible tax management method. The premium paid towards the life insurance policy is exempt under Section 80C. This is in addition to the exemption of the proceeds received under the policy at the end of the tenure, which must comply with the conditions prescribed under Section 10 (10D) of the Income Tax Act2.
6. Home Loan Principal And Interest
While taking a home loan could seem risky, it can also lead to yearly tax benefits. While the principal amount of a home loan is exempt under section 80C up to a limit of Rs 1.5 lakhs, the interest payable amount is exempt under Section 24 of the Income Tax Act. The condition attached is that the house property cannot be transferred for 5 years from the possession date.
Note: Tax planning options are not limited to section 80C. Some of the other tax saving options, as mentioned in different rules of the Income Tax Act; are as follows. It should be noted, however, that the maximum tax exemption is INR 1.5 lakh + 50k.
7. National Pension Scheme (NPS)
National Pension System (NPS) falls under Section 80CCD(1B). This option is in addition to the tax saving options under Section 80C and can be availed up to the limit of INR 50000. Thus, an individual can enhance the maximum deduction limit to Rs 2 lakhs by investing in sections 80CCD(1) and Section 80CCD(1B), apart from 80C.
8. Health Insurance
Health or medical insurance covers unanticipated hospital bills and medical expenditures and offers tax-saving opportunities under Section 80D of the Income Tax Act. Individuals can claim deductions towards the insurance premium paid for themselves, their spouse, dependent children, and parents, whether or not senior citizens. The allowable deduction in a financial year is INR 25000. However, this limit is extended to INR 50000 for senior citizens.
9. Flexible Benefits
Some employers offer salary restructuring opportunities to employees, allowing them to choose tax-saving options that match their preferences regarding financial goals and taxes. Some allowances that can be used for tax benefits are explained here.
Housing Rent Allowance | The exemption is partial if the employee resides in a rented house. This allowance is subject to receipt of HRA as part of one’s CTC and submission of valid proofs of rent payments. |
Child Education Allowance | The allowance is granted to employees for expenditure incurred on school fees, limited to INR 100 per month per child for a maximum of 2 children. |
Hostel Expenditure Allowance | This allowance is granted to employees for expenditures related to the payment of hostel fees. It is limited to INR 300 per month per child, up to a maximum of 2 children. |
10. Salary Splitting
It is another interesting way to lower taxes. If an employee's family member falls in the lower tax bracket, they can split their income by investing in the name of such a family member. This method is subject to legal limits, employer rules, and justifiable financial arrangements.
Conclusion
A salaried employee can avail of a range of options to manage taxes. However, these options are subject to change as per the changes in the tax laws and exemption limits. Therefore, being up to date with the latest regulations is important. Additionally, the employees should consult with the HR department to assess the possibilities of salary structure and benefits optimisation to align them with their individual financial goals and tax preferences.
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Frequently Asked Questions On Tax Saving For Salaried Employees
1. Can I claim both 80D and 80C?
One can claim both Section 80D and Section 80C simultaneously. Section 80C has a deduction limit of INR 1.5 lakhs. On the other hand, Section 80D provides an additional deduction on insurance policies subject to a certain limit.
2. Which is better, PPF or NPS?
Both PPF and NPS are government-backed tax-saving options. While NPS generates an income of about 12- 14% and PPF generates an income of around 7-8%, the former is market-associated and, therefore, risky. However, NPS has a longer lock-in period till retirement, while it is 15 years for PPF.
3. How can I save tax on my salary without investing?
Some options for tax saving without investments are deductions and allowances from salary in the form of tuition fees, house rent allowance, and home loan interest.
References:
- Income Tax Department <https://tinyurl.com/ybffed2v>
- Central Board of Direct Taxes <https://tinyurl.com/7tybke8v>
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