Best Ways to Reduce Tax On Salary
Updated On Dec 27, 2023
As a salaried employee, managing the demands of your daily life while attempting to save some hard-earned income can often feel like a daunting task. The struggle to manage expenses, coupled with the burden of income tax payments, can leave your pockets feeling a bit too light and this makes tax planning for salaried employees important.
So, if you've found yourself struggling with how to save tax then you are not alone! Many of us have faced the challenge of wanting to save more but unsure of where to start.
To help you, we have listed below the 7 best tax-saving options for salaried employees that will definitely prove to be a helping hand in your tax-saving journey.
Table of Contents
7 Best Options for Salaried Employees to Save Tax
Following are the 7 best tax-saving Schemes for salaried employees:
1. Employees’ Provident Fund (EPF)
The Employees’ Provident Fund, often shortened as EPF, is a highly-favored way for salaried employees to reduce tax on salary. Incorporated in 1952 and managed by the Central Board of Trustees, employees and employers contribute 12% of the salary to the EPF.
The best part about this plan is that the money in your EPF account and the interest you earn on this are completely tax-free. In short, it's an easy and popular way to help you save taxes under Section 80C of the Income Tax Act, of 1961.
2. Public Provident Fund (PPF)
As a salaried employee, another best way for you to save taxes is through the Public Provident Fund. Also known as PPF, the Public Provident Fund is a government-backed savings scheme that you can start with just Rs. 500. And, a maximum of Rs. 1.5 lakhs can be invested in it.
The thing that makes PPF a popular choice is its tax benefits under the Exempt-Exempt-Exempt (EEE) status. This means that the money you invest, the interest you earn, and the total amount at maturity in your PPF account are all tax-free. This makes PPF a fantastic choice for tax savings and investment, allowing you to claim a deduction under Section 80C of the Income Tax Act.
3. National Pension Scheme (NPS)
Another best way to save tax for salaried employees is the National Pension Scheme i.e. NPS. One must consider the National Pension Scheme for low-risk retirement planning. This tax saving scheme offers safety and allows deductions up to Rs. 1.5 lakhs under Section 80C.
Not only this but an additional Rs. 50,000 can also be deducted under Section 80CCD(1B). In comparison to the traditional options, NPS potentially provides higher returns, making it an effective choice for income tax planning for salaried individuals.
4. Retirement Benefits (Gratuity)
For salaried employees looking for tax-saving options, Gratuity is another viable choice. This retirement benefit is provided to employees upon superannuation, resignation, retirement, or in the unfortunate events of death or disablement. But, it requires a minimum of five years of service with an organization.
The important thing to note is that the gratuity amount received is tax-exempt under Section 10(10) of the Income Tax Act, of 1961. The tax exemption applies to the least of the following:
(a) Rs. 20 lakhs (increased from Rs. 10 lakhs as per the amendment),
(b) the actual gratuity amount received, or
(c) the total salary amount, calculated as 15 days of services for every completed year or part thereof exceeding six months.
5. Health Insurance Premium
You might think of a health insurance plan as a way to provide financial security during medical emergencies but it can help you in more than that way. Yes, a health insurance plan serves as a crucial tax-saving option for salaried individuals.
The premium that you pay towards your health insurance policy is eligible for income tax deductions under Section 80D of the IT Act. The health insurance tax benefit not only benefits you but also your spouse, dependent children, and parents.
Under Section 80D of the Income Tax Act, you can claim a maximum deduction of Rs. 75,000 annually. For detailed insights relating to health insurance tax benefits, refer to the table below:
|
Individuals Covered |
Total Deduction Under Section 80D |
|
Self/Spouse/Any Dependant |
Rs. 25,000 |
|
Self + Family |
Rs. 25,000+Rs. 25,000 = Rs. 50,000 |
|
Self+ Senior Citizen |
Rs. 25,000 + Rs. 50,000 = Rs. 75,000 |
6. Rental Accommodation
If you're living in a rented place, then you can fortunately save on taxes. Let us explain to you how!
When you get your salary, a part of it might be House Rent Allowance (HRA), and the best thing is that HRA is not entirely taxed. Section 10(13A) of the Income Tax Act relates to HRA tax exemption, helping a salaried person like you, to get some tax deductions. But make sure you check the specific terms and conditions that apply.
For HRA exemption, the least of the following can be claimed:
(a) Actual HRA received,
(b) 50% of [basic salary + DA] for metro city residents (Delhi, Kolkata, Mumbai, or Chennai),
(c) 40% of [basic salary + DA] for non-metro residents, or
(d) Actual rent paid minus 10% of basic salary + DA.
NOTE: If you live in your own house and don't pay any rent, the HRA you receive from your employers becomes fully taxable.
7. Tax Saving Fixed Deposit
A tax-saving Fixed Deposit (FD) is a popular choice among salaried individuals who are searching for tax-saving options. This type of fixed deposit allows for income tax deductions on investments up to a maximum of Rs. 1,50,000 and falls under Section 80C of the Income Tax Act, 1961.
While there are various options for tax-saving investments, the tax-saving FD stands out as a secure choice. However, please note that it comes with a mandatory lock-in period of 5 years.
Conclusion
Saving on taxes doesn't have to be complicated! If you are a salaried employee, you can explore a variety of options, from traditional choices like EPF and PPF to more specific tax-saving strategies like Rental Accommodation benefits and more. So, understand each of these tax-saving options for salaried employees and make an informed decision to optimize your tax-saving plan.
And, if you are planning to go for the health insurance tax benefit option then we at InsuranceDekho can help. Get in touch with us now for more details!
Frequently Asked Questions (FAQs)
Q 1: How does the Employees’ Provident Fund (EPF) help save taxes?
Ans: Both you and your employer contribute to the EPF, and the money and interest earned on it are tax-free. This popular choice falls under Section 80C for tax benefits.
Q 2: What makes a Public Provident Fund (PPF) a good tax-saving option?
Ans: PPF offers tax benefits under the Exempt-Exempt-Exempt (EEE) status. Your investment, earned interest, and maturity amount are all tax-free, making it an excellent choice for Section 80C deductions.
Q 3: Why consider the National Pension Scheme (NPS) for tax savings?
Ans: NPS allows deductions up to Rs. 1.5 lakhs under Section 80C, with an additional Rs. 50,000 under Section 80CCD(1B). It's a low-risk retirement planning option potentially offering higher returns.
Q 4: Can health insurance premiums help save taxes for salaried employees?
Ans: Yes, under Section 80D of the IT Act, premiums paid toward health insurance are eligible for deductions. You can claim up to Rs. 75,000 annually as a deduction under Section 80D.
