Tax planning is a crucial aspect of financial management, especially for salaried employees who have limited avenues for tax exemptions and deductions. While paying income tax is a responsibility, optimizing tax savings legally can help increase disposable income.
The Indian government currently provides several tax saving options under various sections of the Income Tax Act, 1961. However, with the introduction of the new tax regime in FY 2020-21, taxpayers now have to choose between the old and new tax regimes, each offering distinct benefits. Therefore, in this guide, we will explore the best tax saving options for salaried employees and, consequently, help you make informed decisions.
Tax Regime Comparison – Old vs New
One of the key decisions for salaried employees is, on the one hand, choosing between the old and new tax regimes. On the other hand, they must consider the long-term financial implications of their choice. On the other hand, they must consider the long-term financial implications of their choice. Moreover, this choice significantly impacts their tax liability and financial planning.
| Criteria | Old Tax Regime | New Tax Regime |
| Tax Slabs | Higher tax rates | Lower tax rates |
| Exemptions & Deductions | Multiple deductions available | Most exemptions removed |
| Best Suited For | Employees with high deductions | Employees with minimal deductions |
| Flexibility | Allows claim under sections like 80C, 80D, HRA | Fixed slab rates, no deductions |
While the new tax regime offers lower tax rates, it eliminates many deductions that salaried individuals use to reduce their taxable income. The old tax regime remains beneficial for those who can claim deductions under various sections.
Top Tax Saving Options for Salaried Employees
Here are the top tax saving options available for salaried employees:
1. Section 80C – Maximum Tax Savings up to ₹1.5 Lakh
Section 80C specifically allows a deduction of up to ₹1.5 lakh from taxable income by leveraging various instruments.
- Employee Provident Fund (EPF): Mandatory savings for salaried employees; tax free returns.
- Public Provident Fund (PPF): Long-term investment with tax free interest.
- Equity-Linked Savings Scheme (ELSS): Market-linked mutual funds with tax benefits.
- National Savings Certificate (NSC): Government-backed savings scheme in NSC.
- Life Insurance Premium: Premium paid for self, spouse, or children is deductible.
- 5-Year Fixed Deposit (FD) with Banks/Post Office: Tax saving FDs offer deductions under 80C.
- Sukanya Samriddhi Yojana (SSY): Savings for girl child education/marriage.
Tip: If you are already contributing to EPF, then consider complementing it with ELSS or PPF for better returns and, moreover, additional tax savings.
2. House Rent Allowance (HRA)
For salaried employees living in rented accommodation, HRA provides significant tax benefits. The deduction is calculated as the minimum of the following:
- Actual HRA received
- 50% of basic salary (for metro cities) / 40% (for non-metro cities)
- Rent paid minus 10% of basic salary
Note: Employees living in their own house or not paying rent cannot claim HRA.
3. Section 80D – Health Insurance Premium
Tax deductions on medical insurance premiums:
- Up to ₹25,000 for self, spouse, and children.
- Additional ₹50,000 for parents (if senior citizens).
- Preventive health checkups allow a deduction of ₹5,000 within the limit.
Pro Tip: Investing in health insurance not only provides tax benefits but also ensures financial security.
4. Home Loan Tax Benefits
Owning a home offers multiple tax benefits:
- Section 80C – Principal repayment up to ₹1.5 lakh.
- Section 24(b) – Interest repayment up to ₹2 lakh on a self-occupied house.
- Additional ₹50,000 deduction under Section 80EE for first-time home buyers.
Smart Move: If you are planning to buy a home, consider using a home loan to maximize tax benefits.
5. National Pension System (NPS) – Additional ₹50,000 Deduction
Under Section 80CCD(1B), investing in NPS allows an extra ₹50,000 deduction over and above 80C.
- Provides retirement benefits.
- Lock-in till 60 years but allows partial withdrawal.
- Offers market-linked returns.
Ideal For: Those looking for long-term retirement planning with tax benefits.
6. Leave Travel Allowance (LTA)
LTA typically covers the cost of domestic travel for salaried employees by and large twice in a block of four years.
- Covers travel expenses for self, spouse, children, and parents.
- Does not include expenses like food or sightseeing.
Tip: Plan vacations strategically to utilize LTA benefits.
Additional Tax Saving Tips
Besides the major tax saving sections, consider these additional ways to reduce your tax burden:
- Standard Deduction of ₹50,000: All salaried employees get a flat ₹50,000 deduction from taxable income, reducing tax liability instantly.
- Interest on Savings Account (Section 80TTA): Interest up to ₹10,000 from a savings account is tax free for individuals below 60 years.
- Education Loan (Section 80E): Interest on education loans is deductible for up to 8 years from the date of repayment.
- Voluntary Provident Fund (VPF): An extension of EPF, where employees can voluntarily contribute beyond 12% for higher savings in VPF.
- Invest in Tax Free Bonds: Government bonds offer tax free interest, making them a great long-term investment.
Conclusion
Salaried employees have multiple options to legally reduce their tax liability. While tax saving investment options help in financial planning, it is essential to align them with your financial goals rather than just focusing on tax benefits.
Before making decisions, calculate the tax implications under both tax regimes and choose wisely. If needed, consult a tax advisor to maximize benefits. Remember, effective tax planning leads to better wealth creation in the long run!
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Frequently Asked Questions
Q. What are the best tax saving options for salaried employees?
A. Top tax saving options Section 80C investments, health insurance (80D), home loan benefits, HRA, LTA, NPS (80CCD(1B)), and tax free allowances like food coupons.
Q. How can I maximize tax savings under Section 80C?
A. To maximize savings under Section 80C (₹1.5 lakh limit), invest in EPF, PPF, ELSS mutual funds, NSC, life insurance premiums, home loan principal repayment, or a tax saving FD.
Q. How to pay zero tax up to ₹20 lakhs?
A. To avoid taxes below ₹20 lakh, utilize deductions like standard, 80C, 80D, NPS, & others to notably reduce taxable income.
Q. How much HRA can be claimed in income tax?
A. HRA exemption is based on the lower of actual HRA received, a percentage of salary (50% for metro cities, 40% for non-metro cities), and rent paid minus 10% of basic salary.
Q. What deductions are available under the new tax regime?
A. The new tax regime does not allow 80C, 80D, HRA, LTA, and other deductions. However, it allows a standard deduction of ₹50,000 and the employer’s NPS contribution.
Q. How does the NPS help in tax savings?
A. Under Section 80CCD(1B), an additional ₹50,000 deduction is available beyond 80C. Employers’ contribution to NPS (up to 10% of salary) is also tax exempt.
Q. Can I save tax through EPF and PPF investments?
A. Yes. EPF contributions (mandatory for salaried employees) qualify under Section 80C, and PPF offers tax free interest with a 15-year lock-in.
Q. What tax benefits are available on education loans?
A. Under Section 80E, interest paid on education loans is fully deductible for up to 8 years with no upper limit.
