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7 Tax Saving Options for Salaried Employees

Salaried employees can significantly enhance tax efficiency by strategically leveraging effective tax-saving options.

  • 5,125 Views | Updated on: Apr 08, 2024

As the financial year comes to a close, salaried employees seek ways to optimize their tax liabilities and maximize savings. Understanding the array of tax-saving options available is crucial for effective financial planning.

To facilitate the planning process, various sections under the Income Tax Act 1961 provide tax-saving opportunities for the salaried.

Tax Saving Options for Salaried Employees in India

While income tax is an inevitable part of earning, there are several legitimate avenues for tax savings that can significantly lighten the burden on your wallet. Some of these tax-saving options include:

National Pension System (NPS)

The National Pension System is a voluntary, long-term retirement savings scheme designed to enable systematic savings. It is a retirement scheme where one can invest a minimum of ₹6000 annually. Apart from section 80C, you can also claim a deduction of up to 10% of the salary under section 80CCD. Additionally, the income tax limit for a salaried person is 20% of the salary if the person is self-employed.

An exclusive deduction of up to ₹50,000 is available under Section 80CCD(1B). NPS also provides a mix of equity, fixed deposits, corporate bonds, liquid funds, and government funds, making it a versatile choice for long-term retirement planning.

Equity-Linked Savings Scheme (ELSS)

An equity-linked saving scheme or ELSS is a scheme that invests in equity or the stock market and provides tax savings for salaried employees under section 80C. ELSS not only helps tax-saving but also offers the potential for higher returns than traditional tax-saving instruments. With a lock-in period of just three years, ELSS provides a good balance between tax benefits and liquidity.

Life and Term Insurance

Investing in life and term insurance provides your loved ones’ financial security and tax benefits. Life and term insurance are among the best financial plans for salaried persons to invest, and one can claim tax deductions on their premiums under section 80C. Additionally, the death benefit received by the nominee is tax-free under Section 10(10D). Considering the dual benefits of financial protection and tax savings, life and term insurance is a crucial component of a comprehensive financial plan.

Employee Provident Fund (EPF)

EPF is a mandatory employer and employee contribution towards a provident fund account. Employee contributions to EPF are eligible for deduction under Section 80C. The interest earned and the maturity amount are tax-free, making EPF a tax-efficient long-term savings option. EPF not only helps in building a retirement corpus but also serves as a safety net during unforeseen financial emergencies. The employee and the employer can pay for the Employee Provident Fund using 12% of the base salary.

Public Provident Fund (PPF)

PPF is a popular long-term savings instrument that combines safety with attractive interest rates. Contributions to PPF are eligible for a deduction under Section 80C, and the interest earned is tax-free. The lock-in period for PPF is 15 years, providing a disciplined approach to long-term savings. PPF is an excellent choice for risk-averse investors looking for tax benefits and stable returns.

National Savings Certificate (NSC)

NSC is a fixed-income investment with a lock-in period of 5 years. The interest accrued on NSC is compounded annually and is eligible for deduction under Section 80C. While the interest is taxable, it can be reinvested for availing tax benefits under Section 80C in subsequent years. NSC is a low-risk option suitable for conservative investors seeking assured returns.

Sukanya Samriddhi Yojana (SSY)

SSY is a government-backed savings scheme specifically designed for the girl child. Contributions towards SSY are eligible for deduction under Section 80C, and the interest earned is tax-free. The maturity amount is also tax-exempt, making SSY an ideal choice for parents looking to secure their daughter’s financial future.

Key Considerations

As the fiscal year draws close, understanding and implementing key tax-saving options can make a substantial difference in take-home pay.

Utilize Section 80CCD(1B)

Consider leveraging the additional deduction of up to ₹50,000 available under Section 80CCD(1B) by contributing to the NPS.

Optimize Section 80D Limits

Review your health insurance coverage to maximize the deductions under Section 80D. Separate limits are available for individual and senior citizen premiums.

Diversify Investments

Spread your investments across different instruments to balance risk and returns. Diversification ensures a well-rounded portfolio that aligns with your financial goals.

Regularly Review Investments

Periodically reassess your financial portfolio and tax-saving instruments to ensure they align with your changing financial goals and circumstances.

Public Provident Fund (PPF)

Final Thoughts

Salaried employees have a plethora of tax-saving options at their disposal, each catering to different financial goals and risk appetites. By strategically leveraging these seven options, individuals can maximize their tax efficiency, optimize savings, and work towards achieving long-term financial well-being. It is crucial to align these choices with individual financial goals and seek professional advice if needed, ensuring a holistic and effective approach to tax planning.

Key takeaways

  • Employee contributions to the EPF are eligible for deductions under Section 80C of the Income Tax Act, offering a dual advantage of savings and reduced tax liability.
  • Salaried employees can consider allocating a portion of their savings to PPF for a disciplined and tax-efficient investment.
  • The National Pension System (NPS) is a government-backed retirement savings scheme that allows salaried individuals to build a corpus for their post-retirement years.
  • SSY is a government-backed savings scheme designed for female children.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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