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What Are the Tax-Saving Options for Salaried Employees

04 Dec 2023

One of the perks of being a salaried employee is that you have a stable source of income. Over the years, as you progress along your career, you will also earn salary hikes and promotions. The flip side to this is that with increasing income, your tax liability also increases. Once your income crosses the basic exemption limit, you will have to start paying taxes at the applicable rates, with the highest tax rate being 30%. 

However, there is also some good news. The Income Tax Act, 1961 recognizes many tax-saving options for salaried employees. By investing in the right tax-saving options, you can reduce your tax liability and also create wealth over the long term. Let’s take a closer look at some of the most popular tax-saving options for salaried employees in India. 

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1. Employees’ Provident Fund (EPF)

The Employees’ Provident Fund is an excellent tax-saving option for salaried individuals. It is essentially a retirement fund that salaried employees as well as their employers contribute to. Typically, you will have to contribute 12% of your salary each month, and your employer will also match this contribution. 

Your contribution to your EPF account is tax-deductible to the extent of Rs. 1.5 lakhs u/s 80C of the Income Tax Act, 1961.

2. Public Provident Fund (PPF)

The PPF is also a retirement-oriented investment scheme like the EPF. However, it is open to salaried, self-employed, unemployed and also retired people. You can open a Public Provident Fund account and invest in the scheme over a period of 15 years, after which you can either extend the investment by a block of 5 years or withdraw your corpus. 

The amount invested in the PPF scheme each year is deductible from your total income to the tune of Rs. 1.5 lakhs u/s 80C. Furthermore, the amount withdrawn as well as the interest earned on the investment are both tax-free. You can use a PPF calculator to see how much your tax savings will be each year, given your investment amount. This can help you determine how much you can afford to invest in PPF to maximize your tax benefits.

3. Tax-Saving Fixed Deposit (FD)

Another safe tax-saving option for salaried individuals is a tax-saving fixed deposit. This works like a regular fixed deposit, where you invest a lump sum amount and earn interest on your investment. However, these tax-saving FDs come with a lock-in period of 5 years. The interest earned on the deposit is taxable as income from other sources. 

However, the principal amount invested is tax-deductible up to Rs. 1.5 lakhs in the financial year in which you invest. As a salaried employee, this is another tax-saving option to consider if you have a lump sum amount ready to invest. 

4. Equity Linked Savings Scheme (ELSS) 

The Equity Linked Savings Scheme is a kind of mutual fund scheme that invests predominantly in the equity market. ELSS comes with a lock-in period of three years and gives you dual benefits under a single scheme — namely market-linked returns as well as tax benefits. 

The amount invested in an Equity Linked Savings Scheme is eligible for deduction from your total income to the extent of Rs. 1.5 lakhs as per section 80C. So, as a salaried employee, you can get the advantage of tax benefits as well as long-term wealth creation with ELSS.

5. Life Insurance Premium

As a salaried individual, you may also want to protect your family in case something unexpected happens to you. A life insurance policy can help you with this. The sum assured under the policy can protect your loved ones financially even in your absence. In order to avail of this benefit, you need to pay a premium to your life insurance service provider. This sum can be paid as a lump sum amount upfront at the time of purchase, or in regular installments over a specified number of years. 

The life insurance premium paid during a financial year is eligible for deduction from your total income u/s 80C of the Income Tax Act. The maximum amount of deduction is Rs. 1.5 lakhs, along with other deductions you may have under this section.

6. Health Insurance Premium

Health insurance is also a necessary financial product that can protect you from the financial repercussions of rising healthcare costs. Here, the insurance service provider covers specified medical costs and healthcare expenses that you may incur when the policy is active, so you do not need to pay for them out of pocket. Similar to life insurance, you also need to pay premiums for your health insurance policy.

As per section 80D of the Income Tax Act, the health insurance premiums paid for a policy taken for yourself, your spouse or children are deductible from your total income. The maximum amount of deduction allowed is Rs. 25,000 per financial year (or Rs. 50,000 if the policyholder is a senior citizen). An additional deduction of up to Rs. 25,000 is allowed for premiums paid for health insurance taken for your dependent parents. If your parents are senior citizens, the deduction limit is Rs. 50,000. 

7. Home Loan Repayments

As a salaried individual, you may have obtained a housing loan to fulfil your dream of becoming a homeowner. The good news is that home loans can also be rewarding tax-saving options for salaried individuals. The principal component in home loan EMIs is eligible for tax deductions up to Rs. 1.5 lakhs u/s 80C. 

In addition to this, the interest component of home loan EMIs is also eligible for deduction u/s 24(b) to the extent of Rs. 2 lakhs (in the case of self-occupied house properties). In the case of let-out properties, the entire interest repaid during a financial year is eligible for tax deductions. 

Conclusion

Each of these tax-saving investment options carries its own risks and rewards. To decide which of these investments is best for your financial portfolio, you can compare your options in terms of risks, rewards, tax benefits, investment horizon and other relevant factors. This way, you can make an informed decision about which tax-saving investments to choose. 

If you decide to invest in market-linked tax-saving options like the Equity Linked Savings Scheme, you can do so without a demat account too. However, having this account makes it easy for you to invest in stocks, bonds and other securities, and allows you to track your investments from one common platform. So, if you don’t have one yet, you can open a demat account with Motilal Oswal via a simple paperless process in no time. 

 

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