Tax Saving Investments for Salaried Employees

Last Updated: 16 Oct 2024

Tax contributions in India are fueled by salaried employees. From the data available, salaried employees, on average, pay three times more taxes than individual business taxpayers. Paying taxes on time is commendable, but so is looking for the right tax-saving schemes. While the tax burden can fall quite heavily on the shoulders of salaried employees, they can invest in several instruments to avail of deductions and exemptions that help lighten this burden. When choosing tax saving investment options, you should consider how the returns would be taxed.

Understanding your Payslip

Firstly, understanding the various components like house rent allowance, leave travel allowance, conveyance allowance, etc. of your payslip is very important. After analyzing this, you can create a structure that helps you avail of a maximum amount of exemptions.

The 1.5 Lakh limit under Section 80C

Under Section 80C of the Income Tax Act, you can avail a host of deductions to lower your income tax liability. These are:

• Tax Saver FDs: 5-year FDs offered by banks and post offices are tax-deductible. The interest earned on FDs is taxable.
• Public Provident Funds or PPF: This is a government-established scheme. The total tenure of this scheme is 15 years. The interest rates are subject to change every quarter.
• ELSS Funds: ELSS or Equity Linked Saving Schemes is a type of mutual fund that invests 80% of its funds in equity with a lock-in period of 3 years. ELSS gives one significantly high rate of returns.

With a demat account, you can invest seamlessly in ELSS. Deductions of up to Rs. 1.5 lakhs are available every financial year. To open an online demat account in a few easy steps, you must consider a reputable stockbroker:

• NSC or National Saving Certificate: NSC comes with a tenure of 5 years. The interest earned through this scheme is also tax-deductible.
• Life Insurance Premiums: Several types of insurance policies come under this scheme, to avail deductions under Section 80C, one must ensure that the premiums paid towards one’s insurance policy does not exceed 10% of the sum assured it offers.
• National Pension System (NPS): Both the employer’s and employee’s contributions to this scheme are eligible for tax deductions.
• Home Loan Repayment: Repayment of the principal part of your home loan is tax-deductible.
• Payment of Tuition Fees: You can claim tax benefits on your children’s fees for school, university or college.
• Employee Provident Fund or EPF: Employee’s contributions to this scheme are tax-deductible.
• Senior Citizens Saving Scheme: Senior citizens can avail of this benefit. It has a tenure of 5 years. Returns from this scheme are taxable.

Health Insurance Premiums

Under Section 80D, you are eligible for deductions up to Rs 25,000 on your health insurance premiums. This limit is Rs 50,000 for senior citizens.

Deduction on Home Loan Interest

As per Section 24 of the ITA, if you’ve taken a home loan, you can get a deduction on the interest component of your repayment amount. You can claim a deduction of up to Rs 2 lakh per year.

Savings Account

For all those who prefer conservative avenues of investment, tax savings under savings accounts are also available. Under Section 80TTA, interest earned on savings accounts is tax-deductible up to Rs 10,000. This limit shoots up to Rs 50,000 for senior citizens under Section 80 TTB.

No Delayed Tax Planning

This step is crucial. While it does not refer to actual financial investment, it points out that planning your finance and tax is of utmost importance. For salaried individuals, investments in tax-saving instruments are a key part of financial planning. Last-minute investment plans lack research, making tax planning a huge burden. On the other hand, careful planning of investments for tax exemptions provides high returns.