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Tax Saving Options for Salaried Employees

Tax planning tends to be a significant aspect of financial management, mostly for salaried employees in the country. With fixed income and a limited avenue of deduction, having knowledge about tax saving options can significantly reduce your tax burden and also help to align your investments to fulfil long-term financial goals. In this guide, we will explore all the effective tax saving options for salaried individuals. The guide will also provide insights into key exemptions and deductions under the Income Tax Act 1961.

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Tax Planning for Salaried Employees: Key Pointers to Consider

Tax Saving Options for Salaried Employees
December 12, 2024

Table of Content

 

To manage your personal finances as a salaried employee, tax planning is a crucial aspect to consider. With proper options for tax planning for salaried employees, you can maximise your savings, support long-term monetary goals and also ensure compliance. Here are some key pointers to consider in this case:

1. Understand Tax Regimes and Slabs

Make sure to familiarise yourself with the tax rates applicable under both old and new tax regimes. While the old tax regime allows several exemptions and deductions, the new tax regime offers low tax rates without any exemptions. You need to analyse your financial situation to choose the regime that is feasible and maximises your savings.

2. Maximise Benefits from Health Insurance

Under Section 80D of the Income Tax Act 1961, you can claim deductions on the premiums paid towards health insurance, including maternity health insurance, are eligible for tax deductions.  The deduction under this section is applicable for insurance premiums paid on the health of self, spouse, and children. The maximum deduction available for the family shall be ₹25,000. In case the insurance premium paid on the health of a senior citizen in the family then an additional deduction of ₹25,000 shall be available.

In addition to above, amounts paid on account of preventive health check-up for the family, deduction for a maximum ₹5000 can be claimed in a year. This helps you to get dual benefits of health protection as well as tax savings.

3. Implement Deductions Under Section 80C

Another option for tax saving for salaried individuals is claiming deductions under Section 80C of Income Tax Act,  1961. You can get deductions of up to Rs. 1.5 lakh annually on different types of investments such as NSC (National Savings Certificate), PPF (Public Provident Fund), ELSS (Equity Linked Savings Schemes) and EPF (Employee Provident Fund) invested in 5-year or more fixed deposit in a schedule bank or post office or National Savings Term Deposit etc. Investment in these options also helps you build a diversified portfolio.

4. Opt for Housing Loan and higher education loan

  • Effective tax saving options for salaried employees measures Deduction in respect of interest on housing loan can be Claimed up to Rs. 2 lakh under Section 24 for self-occupied property interest and an additional interest on education loan is available under 80EE and Section 80EEA subject to conditions as may be prescribed.
  • Deduction in respect of interest on loan for higher education in India or abroad is available under Sections 80EThere is no upper limit, ensuring financial relief during repayment for up to 8 years.

5. Use LTA and HRA Exemptions

For salaried workers, the House Rent Allowance (HRA) and Leave Travel Allowance (LTA) exclusions drastically lower taxable income. To be eligible for these benefits, make sure that the rent and travel expenses are properly documented.

Sr No.

Tax Saving and Tax Planning Tips

Comments

Tip 6

Education Loan

Interest paid on education loans for higher education in India or abroad qualifies for tax deduction under section 80E. There is no upper limit, ensuring financial relief during repayment for up to 8 years.

Tip 7

Home Loan Interest Repayment 

Claim up to Rs. 2 lakh under Section 24 for self-occupied property interest and an additional Rs. 1.5 lakh under Section 80EEA for first-time homebuyers

Tip 8

Opt for a correct tax regime 

Choose between the old tax regime with deductions and exemptions or the new regime with lower rates but no deductions.

Tip 9

Gratuity

Gratuity is a tax-free benefit given to employees with at least 5 years of continuous service. Non-government employees can claim tax exemption up to Rs. 20 lakh under Section 10(10)subject  to condition.

Tip10

Tax-Saving Fixed Deposit

Investments up to Rs. 1.5 lakh qualify for deductions under Section 80C. However, interest earned is taxable and has a 5-year lock-in period.

Tip11

Equity Linked Savings Scheme (ELSS) 

Investments up to Rs. 1.5 lakh qualify for Section 80C deductions. It has a 3-year lock-in and potential for high equity-based returns.

 

Gratuity

A gratuity is a one-time payment made by an employer to a worker as a token of appreciation for their years of service and contributions to the company. Usually, it is paid when a worker retires, resigns, or passes away while still employed. This monetary benefit is provided to staff members as an appreciation for their steadfast devotion and years of service. 

Gratuity taxation depends on the employee type.

  • For government employees, it’s fully tax-exempt. 

  • For non-government employees under the Payment of Gratuity Act, the least of actual gratuity or ₹20 lakhs or 15 days’ salary for each completed year of service (calculated as the last drawn salary divided by 26, multiplied by 15, and then multiplied by the number of completed years of service) is exempt; excess is taxable.

  • For non-government employees not under the Act, least of actual gratuity or ₹20 lakhs or half month’s salary for each completed year of service (calculated as the average salary of the last 10 months). is exempt; the remainder is taxed.

Tax Saving Fixed Deposit

Under Section 80C of the Income Tax Act, risk-averse investors who want tax benefits frequently choose tax-saving fixed deposits (FDs). These FDs, which offer assured returns with no risk, have a 5-year obligatory lock-in term. Deduction are available under Section 80C on amount invested in 5-year or more fixed deposit in a schedule bank or post office or National Savings Term Deposit. It enables you to deduct up to Rs. 1, 50,000 from your taxable income 

It is to be kept in mind that people who put money into a post office fixed deposit will have to pay taxes on the interest. People younger than 60 who owe taxes must pay taxes on the interest. On the other hand, for people over the age of 60 interests income is exempt from taxation maximum upto Rs 50,000 under Section 80TTB of income Tax Act.

Depending on the bank and the state of the market, tax-saving FD interest rates normally fall between 5% and 7%. Tax-saving FDs offer a simple and safe alternative for novice investors to reduce taxes while maintaining money. This product is particularly well-suited for people seeking a simple, dependable way to add to their larger investing portfolio.

Equity Linked Savings Scheme (ELSS)

An Equity Linked Savings Scheme (ELSS) is a type of mutual fund in India that offers tax benefits under Section 80C of the Income Tax Act. For salaried employees, who want to optimise returns while reducing taxes, ELSS are a great tax-saving strategy. It provides both liquidity and growth potential, with the shortest lock-in period of any Section 80C option at just 3 years. 

Although they include market-linked risks, these mutual funds, which primarily invest in equity markets, offer larger returns than conventional fixed-income vehicles. With tax benefits available under Section 80C for investments up to Rs. 1.5 lakh, ELSS offers two advantages. Over the long term, ELSS funds have consistently outperformed other tax-saving instruments, making them ideal for wealth creation.

Conclusion

Overall, tax planning is not just about saving money, it is about creating a solid financial foundation. It is important for tax saving options for salaried to understand the nuances of tax-saving options is essential for optimising their financial health. By leveraging the right tools, such as education loans, home loans, ELSS, and gratuity, you can reduce your tax liability while achieving your long-term financial goals. Always stay updated with the latest tax policies and consult a financial advisor for tailored advice. Smart tax planning today will ensure a secure and prosperous future.

Related Articles

References:

https://groww.in/mutual-funds/equity-funds/elss-funds

https://clc.gov.in/clc/sites/default/files/PaymentofGratuityAct.pdf

https://tax2win.in/guide/tax-planning-for-salaried-employees

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Note: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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