Know all about how salaried individuals can save tax maximally

The tax filing season in every assessment year acts as a harbinger of worries and frenzy for salaried individuals. Since they need to shell out money for taxes for the said financial year, they look for tax saving options.

Being an Indian taxpayer, you need to know about various tax saving options for salaried individuals and your tax slab. It will help you figure out how salaried person can save tax and avoid complications that may arise during tax planning. Income tax planning for salaried individuals can become complicated if not done well in advance. Let’s take a deep look into the tax saving options for salaried people.

TOP 10 TAX SAVING OPTIONS FOR SALARIED IN 2020 

With various tax saving options for salaried individuals, you can plan to save tax under the provisions of the Income Tax Act, 1961. These tax planning options for salaried employees provide a platform for the Indian taxpayers to save tax.

Here are the top 10 tax savings options for salaried that are worth knowing:

Let’s discuss about some of the top tax saving options stated above in detail.

1. EMPLOYEES’ PROVIDENT FUND (EPF) 

Employees’ Provident Fund, also known as EPF, is one of the most popular tax saving options for salaried people. It was introduced under the Employees’ Provident Fund and Miscellaneous Act of 1952 and is managed by the Central Board of Trustees. 

Under this scheme, both the employee and employers contribute 12% of the employee’s salary to the Employee Provident Fund. On their contributions, the employees receive interest at a specific rate.

Tax savings for salaried employees under EPF comes in the form of tax exemption. The accumulated fund in an employee’s PF account along with interest earned is tax-free.

2. PUBLIC PROVIDENT FUND (PPF) 

Public Provident Fund, popularly known as PPF, is a tax saving option for salaried individuals that provides a return on the investments, which are free from tax. Being one of the best investment-cum-tax saving options for salaried people, PPF enables them to plan for creating a corpus for retirement and earn guaranteed returns.

PPF investments fall under the EEE or Exempt-Exempt-Exempt category. It means that the amount one invests in a PPF account is tax-deductible under Section 80C and thus, helps in income tax planning for salaried employees. Alongside, the accumulated amount, along with the returns, is exempt from tax when withdrawn from the account. This is one way how salaried person can save tax.

3. EQUITY LINKED SAVINGS SCHEME (ELSS) 

Equity Linked Savings Scheme or ELSS is considered one of the best tax saving options for salaried individuals. Investment in ELSS schemes is eligible for deduction from an employee’s taxable income u/s 80C. You should also know that its qualification for tax deduction makes it different from all other mutual fund schemes.

ELSS stands out from other tax saving options for salaried individuals because of its dual benefit – comparatively higher returns, which are partially taxable. After Mar 31, 2018, ELSS returns are taxable at 10% for gains above Rs, 1,00,000. 

4. NATIONAL PENSION SCHEME (NPS)

NATIONAL PENSION SCHEME (NPS) IS ONE OF THE LONG-TERM TAX SAVING OPTIONS FOR SALARIED PEOPLE IN INDIA. IT IS AN INVESTMENT PLAN THAT FALLS UNDER THE PURVIEW OF PFRDA AND THE CENTRAL GOVERNMENT. PEOPLE WHO WANT TO PLAN FOR EARLY RETIREMENT AND HAVE LOW-RISK APPETITE INVEST IN NPS.

Compared to PPF and Fixed Deposit (FD), NPS investments can provide higher returns but is not equally tax-efficient. Salaried individuals can claim tax benefits under Section 80 CCD (1) within the Rs. 1.5 Lakh ceiling u/s 80CCE. In other words, it helps in income tax planning for salaried employees.

5. TAX SAVING FD 

A tax saving Fixed Deposit or FD is quite popular as one of the tax saving options for salaried individuals. It is a type of FD with which you can avail tax deductions on your investments of a maximum of Rs. 1,50,000. The related tax benefits are covered under Section 80C.  

Along with FDs, there are many other tax saving options for salaried people to create wealth. However, tax-saving FD, which has a lock-in period of 5 years, is deemed as the safest option for tax savings for salaried employees.

The returns from FDs are safe but are taxable. It is added under the head ‘Income from Other Sources’ in the ITR and gets taxed at applicable rates. 

6. NATIONAL PENSION SCHEME (NPS)

The uncertainties in life call for planning for the financial security of your loved ones under life insurance. While the primary benefit of buying a life insurance plan is to secure the financial needs of your family, you can also avail of tax benefits on such investments.

In fact, buying life insurance is considered one of the most sought-after tax saving options for salaried people. You can use online insurance premium calculator to check how much tax you can plan to save in a financial year. The premiums you pay toward life insurance is tax-deductible u/s 80C, up to the limit of Rs. 1,50,000. Furthermore, the death benefits or survival benefits under these plans are tax exempted u/s 10(10D). As a result, investments in life insurance plans lead to tax savings for salaried employees.

7. HOUSE RENT ALLOWANCE (HRA) 

Individuals living in rented accommodation can avail tax benefits as per the related rules. HRA or House Rent Allowance (HRA), a part of an employee’s salary structure, is not fully taxable.

What makes HRA one of the tax saving options for salaried individuals is that a part of it is exempted u/s 10(13A) of the Income Tax Act, 1961, subject to certain clauses. The taxable income is calculated after deducting HRA from the total income.

You should also know that HRA received from the employers is fully taxable if you live in your own house and do not pay any rent. This is a crucial aspect you must consider to understand how salaried person can save tax.

8. LEAVE TRAVEL CONCESSION (LTC) 

Leave Travel Concession or LTC, as the name suggests, is an exemption that salaried employees receive from their employer to travel on leave. Although the tax savings for salaried employees looks simplified under LTC, there are various rules related to claiming LTC exemption. Some of them are:

You should also know that LTC cannot be treated as a tax-free income every year u/s 10(5) of the Income Tax Act.

9. RETIREMENT BENEFITS (GRATUITY) 

Gratuity is yet another option for tax saving for salaried employees. It is given either on superannuation, resignation, retirement, or death or disablement of an employee. Another prerequisite is that the employee must complete a minimum of five years of service with an employer.

The gratuity amount received on any of these eventualities is tax-exempt u/s 10(10), up to the limit of Rs. 20,00,000. Previously, this limit was Rs. 10,00,000 but has been recently increased as per CBDT Notification no. S.O. 1213(E).

10. HEALTH INSURANCE PREMIUM

Health insurance Plan provides financial security to you and your loved ones in medical emergencies or planned hospitalisation. Besides safeguarding your financial interests, health insurance is one of the most used tax saving options for salaried people.

In general, the premiums paid towards health insurance are eligible for tax deductions, subject to the term of Section 80D. As a part of income tax planning for salaried employees, you can benefit more from this provision by paying for health insurance of your spouse, dependent children, and parents.

The maximum deduction you can avail u/s 80D is Rs. 1,00,000

FILE ITR FOR TAX PLANNING FOR SALARIED EMPLOYEES 

For salaried individuals, the monthly salary they receive is often the primary source of their income. However, the returns or interests received from various tax saving options for salaried people lower their tax liability, which is to be considered while filing the income tax return.

For a salaried individual, the process to file ITR starts with filling a certain type of ITR form. Alongside, he/she also has to report gross salary, different allowances, investments, and income from other sources separately while filling the form online.

Here’s a list of documents required by salaried employees while filing returns:

CONCLUSION 

As a salaried individual in India, you must do the tax planning in advance rather than waiting for the last few months to get things done. As detailed above, you can choose to invest in various tax saving options for salaried individuals. Make sure your decisions help simplify various aspects of financial planning for you.

FREQUENTLY ASKED QUESTIONS (FAQS) 

Q. IN WHICH TAX SAVING OPTIONS SHOULD SALARIED INDIVIDUALS INVEST? 

A. There are many tax planning options for salaried employees, like EPF, PPF, ELSS, as detailed above. As a salaried individual, you can invest in them based on your risk appetite, budget, and needs.

Q. DO SALARIED INDIVIDUALS NEED TO PAY TAXES ON THEIR INVESTMENTS? 

A. The taxes are levied on various tax saving options for salaried people, based on the rules related to capital gains, dividends, and taxes on interest. You are advised to know about these things in detail before making investments.

Q. IN HOW MANY OPTIONS FOR TAX SAVINGS CAN I INVEST? 

A. There is no specific limit to the tax planning options for salaried employees that can be chosen. However, limits do exist on the maximum deductions one can avail under a specific option.

Q. WHICH INVESTMENT OPTIONS COME UNDER SECTION 80C? 

A. The following tax saving options for salaried employees fall under the purview of Section 80C:

Q. HOW CAN I MAXIMISE TAX SAVINGS LEGALLY? 

A. The best way to reduce tax liability is by investing in various tax saving options for salaried individuals. 

Know all about how salaried individuals can save tax maximally

The tax filing season in every assessment year acts as a harbinger of worries and frenzy for salaried individuals. Since they need to shell out money for taxes for the said financial year, they look for tax saving options.

Being an Indian taxpayer, you need to know about various tax saving options for salaried individuals and your tax slab. It will help you figure out how salaried person can save tax and avoid complications that may arise during tax planning. Income tax planning for salaried individuals can become complicated if not done well in advance. Let’s take a deep look into the tax saving options for salaried people.

Top 10 Tax Saving Options for Salaried in 2020 

With various tax saving options for salaried individuals, you can plan to save tax under the provisions of the Income Tax Act, 1961. These tax planning options for salaried employees provide a platform for the Indian taxpayers to save tax.

Here are the top 10 tax savings options for salaried that are worth knowing:

Let’s discuss about some of the top tax saving options stated above in detail.

1. Employees’ Provident Fund (EPF) 

Employees’ Provident Fund, also known as EPF, is one of the most popular tax saving options for salaried people. It was introduced under the Employees’ Provident Fund and Miscellaneous Act of 1952 and is managed by the Central Board of Trustees. 

Under this scheme, both the employee and employers contribute 12% of the employee’s salary to the Employee Provident Fund. On their contributions, the employees receive interest at a specific rate.

Tax savings for salaried employees under EPF comes in the form of tax exemption. The accumulated fund in an employee’s PF account along with interest earned is tax-free.

2. Public Provident Fund (PPF) 

Public Provident Fund, popularly known as PPF, is a tax saving option for salaried individuals that provides a return on the investments, which are free from tax. Being one of the best investment-cum-tax saving options for salaried people, PPF enables them to plan for creating a corpus for retirement and earn guaranteed returns.

PPF investments fall under the EEE or Exempt-Exempt-Exempt category. It means that the amount one invests in a PPF account is tax-deductible under Section 80C and thus, helps in income tax planning for salaried employees. Alongside, the accumulated amount, along with the returns, is exempt from tax when withdrawn from the account. This is one way how salaried person can save tax.

3. Equity Linked Savings Scheme (ELSS) 

Equity Linked Savings Scheme or ELSS is considered one of the best tax saving options for salaried individuals. Investment in ELSS schemes is eligible for deduction from an employee’s taxable income u/s 80C. You should also know that its qualification for tax deduction makes it different from all other mutual fund schemes.

ELSS stands out from other tax saving options for salaried individuals because of its dual benefit – comparatively higher returns, which are partially taxable. After Mar 31, 2018, ELSS returns are taxable at 10% for gains above Rs, 1,00,000. 

4. National Pension Scheme (NPS)

National Pension Scheme (NPS) is one of the long-term tax saving options for salaried people in India. It is an investment plan that falls under the purview of PFRDA and the Central Government. People who want to plan for early retirement and have low-risk appetite invest in NPS.

Compared to PPF and Fixed Deposit (FD), NPS investments can provide higher returns but is not equally tax-efficient. Salaried individuals can claim tax benefits under Section 80 CCD (1) within the Rs. 1.5 Lakh ceiling u/s 80CCE. In other words, it helps in income tax planning for salaried employees.

5. Tax Saving FD 

A tax saving Fixed Deposit or FD is quite popular as one of the tax saving options for salaried individuals. It is a type of FD with which you can avail tax deductions on your investments of a maximum of Rs. 1,50,000. The related tax benefits are covered under Section 80C.  

Along with FDs, there are many other tax saving options for salaried people to create wealth. However, tax-saving FD, which has a lock-in period of 5 years, is deemed as the safest option for tax savings for salaried employees.

The returns from FDs are safe but are taxable. It is added under the head ‘Income from Other Sources’ in the ITR and gets taxed at applicable rates. 

6. National Pension Scheme (NPS)

The uncertainties in life call for planning for the financial security of your loved ones under life insurance. While the primary benefit of buying a life insurance plan is to secure the financial needs of your family, you can also avail of tax benefits on such investments.

In fact, buying life insurance is considered one of the most sought-after tax saving options for salaried people. You can use online insurance premium calculator to check how much tax you can plan to save in a financial year. The premiums you pay toward life insurance is tax-deductible u/s 80C, up to the limit of Rs. 1,50,000. Furthermore, the death benefits or survival benefits under these plans are tax exempted u/s 10(10D). As a result, investments in life insurance plans lead to tax savings for salaried employees.

7. House Rent Allowance (HRA) 

Individuals living in rented accommodation can avail tax benefits as per the related rules. HRA or House Rent Allowance (HRA), a part of an employee’s salary structure, is not fully taxable.

What makes HRA one of the tax saving options for salaried individuals is that a part of it is exempted u/s 10(13A) of the Income Tax Act, 1961, subject to certain clauses. The taxable income is calculated after deducting HRA from the total income.

You should also know that HRA received from the employers is fully taxable if you live in your own house and do not pay any rent. This is a crucial aspect you must consider to understand how salaried person can save tax.

8. Leave Travel Concession (LTC) 

Leave Travel Concession or LTC, as the name suggests, is an exemption that salaried employees receive from their employer to travel on leave. Although the tax savings for salaried employees looks simplified under LTC, there are various rules related to claiming LTC exemption. Some of them are:

You should also know that LTC cannot be treated as a tax-free income every year u/s 10(5) of the Income Tax Act.

9. Retirement Benefits (Gratuity) 

Gratuity is yet another option for tax saving for salaried employees. It is given either on superannuation, resignation, retirement, or death or disablement of an employee. Another prerequisite is that the employee must complete a minimum of five years of service with an employer.

The gratuity amount received on any of these eventualities is tax-exempt u/s 10(10), up to the limit of Rs. 20,00,000. Previously, this limit was Rs. 10,00,000 but has been recently increased as per CBDT Notification no. S.O. 1213(E).

10. Health Insurance Premium

Health insurance Plan provides financial security to you and your loved ones in medical emergencies or planned hospitalisation. Besides safeguarding your financial interests, health insurance is one of the most used tax saving options for salaried people.

In general, the premiums paid towards health insurance are eligible for tax deductions, subject to the term of Section 80D. As a part of income tax planning for salaried employees, you can benefit more from this provision by paying for health insurance of your spouse, dependent children, and parents.

The maximum deduction you can avail u/s 80D is Rs. 1,00,000

File ITR for Tax Planning for Salaried Employees 

For salaried individuals, the monthly salary they receive is often the primary source of their income. However, the returns or interests received from various tax saving options for salaried people lower their tax liability, which is to be considered while filing the income tax return.

For a salaried individual, the process to file ITR starts with filling a certain type of ITR form. Alongside, he/she also has to report gross salary, different allowances, investments, and income from other sources separately while filling the form online.

Here’s a list of documents required by salaried employees while filing returns:

Conclusion 

As a salaried individual in India, you must do the tax planning in advance rather than waiting for the last few months to get things done. As detailed above, you can choose to invest in various tax saving options for salaried individuals. Make sure your decisions help simplify various aspects of financial planning for you.

Frequently Asked Questions (FAQs) 

Q. In which tax saving options should salaried individuals invest? 

A. There are many tax planning options for salaried employees, like EPF, PPF, ELSS, as detailed above. As a salaried individual, you can invest in them based on your risk appetite, budget, and needs.

Q. Do salaried individuals need to pay taxes on their investments? 

A. The taxes are levied on various tax saving options for salaried people, based on the rules related to capital gains, dividends, and taxes on interest. You are advised to know about these things in detail before making investments.

Q. In how many options for tax savings can I invest? 

A. There is no specific limit to the tax planning options for salaried employees that can be chosen. However, limits do exist on the maximum deductions one can avail under a specific option.

Q. Which investment options come under Section 80C? 

A. The following tax saving options for salaried employees fall under the purview of Section 80C:

Q. How can I maximise tax savings legally? 

A. The best way to reduce tax liability is by investing in various tax saving options for salaried individuals. 

Your search for Tax Saving Investment Options ends here

Tax planning is a key component of a financial plan. Whenever we make investments, one of the thoughts in our mind is “Will it be eligible for tax benefits? This article is an attempt to make the readers identify some popular tax friendly investments.

There are various investment options under section 80C, 80CCC and 80CCD of Income Tax Act that allow deductions from our total income (up to Rs. 150,000). When you utilize these provisions, the net taxable income reduces resulting in lowering tax liabilities. A gist of the various forms of investments is given below:

(A) Investments under Section 80C

1. Public Provident Fund (PPF)

It is one the most conservative and risk-free avenue of investment where an interest is accumulated annually, and the maturity period is 15 years. Minimum amount of contribution is Rs. 500. Its principal, interest earned and the maturity value would remain tax free.

2. Tax Saving Fixed Deposit

These are similar to other bank fixed deposits but have a lock-in period of 5 years or more.

3. Life Insurance Premiums

Any amount paid towards LIP for yourself, your spouse or your children can be included in Section 80C deduction. Premium paid for more than one insurance policy can also be claimed.

4. Equity Linked Savings Scheme (ELSS)

ELSS Funds is a category of equity mutual funds that offer tax savings. Investments in ELSS are locked for three years.

5. National Savings Certificate (NSC) (VIII Issue)

NSC is a tax saving instrument with a maturity period of Five years. Minimum investment amount is Rs. 100, there is no maximum amount (Interest income is chargeable to tax). Note: Ten Year NSC has been discontinued from April 2016.

6. New Pension Scheme

You can invest Rs. 500 per month or Rs. 6000 p.a. in NPS. The returns from NPS varies in the range of 4% to 10%. There is no minimum contribution requirement in NPS but it is recommended to invest Rs 1000 per annum to earn a reasonable pension after retirement.

  1. Sukanya Samriddhi Scheme

Protection and financial stability of a girl child is a matter of concern in our country hence, the Sukanya Samriddhi Account, a special deposit scheme was launched by PM Narendra Modi on 22nd January 2015 for girl child. Under this scheme:

  1. Minimum deposit amount is Rs. 1,000 and maximum is Rs. 1,50,000 per year Under Section 80C.
  2. Money to be deposited for 14 years.
  3. Interest rate 8.40%per annum [1]
  4. Per girl child only single account is allowed (maximum 2 girls). In case of twins will be extended to third child.

(B) Section 80CCC

Under this section, the amount paid towards premium for any annuity plan of an insurance company is allowed as a deduction.

(C) Section 80CCD(1) & 80CCD(1B)

Deduction in respect of contribution to pension scheme of Central Government is allowed from Gross Total Income.

Additional Deduction uptoRs 50,000 is allowed while making contribution to new pension scheme apart from 80C limit of uptoRs 1,50,000/-

Illustration: Mr. Malhotra’s Gross Total Income for FY 2020-21 is Rs. 12,50,000. He invests in following instruments: PPF Rs. 45,000, Paid LIP Rs. 15,000, ELSS Rs. 75,000, and Tax Saving FD Rs. 30,000.

Computation of Net Income:

Gross Total Income Rs.12,50,000
Less: Deductions us 80C PPF Rs. 45,000
LIP Rs. 15,000
ELSS Rs. 75,000
FD Rs. 30,000
Total Rs. 165,000
Maximum deduction allowed Rs. 1,50,000 Rs. 1,50,000
Total Income/ Net Income Rs. 11,00,000 Rs. 11,00,000

(D) EMI for Housing Loans

If an individual has availed a housing loan, the EMI payment will be eligible for availing tax benefits. Here are the components:

  1. Home Loan Principal Repayment: The EMI that you pay every month consists of two components – Principal and Interest.
  2. The principal component qualifies for deduction Under Section 80C uptoRs. 1,50,000.
  3. The interest component can save you tax, but under Section 24, under the head “Income from House & Property” uptoRs. 2,00,000.
  4. Stamp Duty and Registration Charges for a home can be claimed as deduction under section 80C in the year of purchase of the house.

We have tried to separate the chaff from the grain by giving most tax friendly investment options, to help you utilize your earnings better and better your financial health.

You may be entitled to certain applicable tax benefits on your premiums and policy benefits. Please note that all the tax benefits are subject to tax laws prevailing at the time of payment of premium or receipt of benefits by you. Tax benefits are subject to changes in tax laws.

Sources

Tax planning is a key component of a financial plan. Whenever we make investments, one of the thoughts in our mind is “Will it be eligible for tax benefits? This article is an attempt to make the readers identify some popular tax friendly investments.

There are various investment options under section 80C, 80CCC and 80CCD of Income Tax Act that allow deductions from our total income (up to Rs. 150,000). When you utilize these provisions, the net taxable income reduces resulting in lowering tax liabilities. A gist of the various forms of investments is given below:

Sources

[1] http://www.nsiindia.gov.in/InternalPage.aspx?Id_Pk=132