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The tax filing season in every assessment year acts as a harbinger of worries and frenzy for salaried individuals. Since you need to shell out money for taxes for the said financial year, you look for tax saving options.
Being an Indian taxpayer, you need to know about your tax slab and the various income tax deductions for salaried employees. It will help you figure out how tax saving for salaried class works and avoid complications that may arise during tax planning. If you find the appropriate financial instruments, you can reduce the payable income tax for salaried employees.
However, understanding the income tax deductions for salaried employees can become complicated if not done well. There are several tools that allow tax benefits for salaried employees and can make a significant impact on your financial planning. So, let’s take a deep look into the tax saving options for salaried people.
Top 10 Tax Saving Options for Salaried in 2020
With various tax saving options for salaried individuals, you can plan to save tax under the provisions of the Income Tax Act, 1961. These tax benefits for salaried employees provide a platform for the Indian taxpayers to save their hard-earned money.
Here are the top 10 tax savings options for salaried that are worth knowing:
- Employees’ Provident Fund (EPF)
- Public Provident Fund (PPF)
- ELSS
- NPS
- Tax Saving FD
- Life Insurance Premium
- HRA
- LTC
- Retirement Benefits (Gratuity)
- Health Insurance Premium
Let’s discuss how tax saving for salaried individuals can work with each of these options:
1. Employees’ Provident Fund (EPF)
Employees’ Provident Fund, also known as EPF, is one of the most popular tax saving options for salaried people. It was introduced under the Employees’ Provident Fund and Miscellaneous Act of 1952 and is managed by the Central Board of Trustees.
Under this scheme, both the employee and employers contribute 12% of the employee’s salary to the Employee Provident Fund. On their contributions, the employees receive interest at a specific rate.
Tax saving for salaried employees under EPF comes in the form of tax exemption. The accumulated fund in an employee’s PF account along with interest earned is tax-free.
1. Employees’ Provident Fund (EPF)
Employees’ Provident Fund, also known as EPF, is one of the most popular tax saving options for salaried people. It was introduced under the Employees’ Provident Fund and Miscellaneous Act of 1952 and is managed by the Central Board of Trustees.
Under this scheme, both the employee and employers contribute 12% of the employee’s salary to the Employee Provident Fund. On their contributions, the employees receive interest at a specific rate.
Tax saving for salaried employees under EPF comes in the form of tax exemption. The accumulated fund in an employee’s PF account along with interest earned is tax-free.
2. Public Provident Fund (PPF)
Public Provident Fund, popularly known as PPF, is a tax saving option for salaried individuals that provides a return on the investments, which are free from tax. Being one of the best investment-cum-tax saving options for salaried people, PPF enables them to plan for creating a corpus for retirement and earn guaranteed returns.
PPF investments fall under the EEE or Exempt-Exempt-Exempt category. It means that the amount one invests in a PPF account is tax-deductible under Section 80C and thus, helps in income tax planning for salaried employees. Alongside, the accumulated amount, along with the returns, is exempt from tax when withdrawn from the account. This is one way how the tax benefits for salaried employees can be optimized.
3. Equity Linked Savings Scheme (ELSS)
If you are looking for financial tools that enable income tax deductions for salaried employees, consider ELSS. Equity Linked Savings Scheme or ELSS is considered one of the best tax saving options for salaried individuals. Investment in ELSS schemes is eligible for deduction from an employee’s taxable income u/s 80C. You should also know that its qualification for tax deduction makes it different from all other mutual fund schemes.
ELSS stands out from other tax saving options for salaried individuals because of its dual benefit – comparatively higher returns, which are partially taxable. After Mar 31, 2018, ELSS returns are taxable at 10% for gains above Rs, 1,00,000.
4. National Pension Scheme (NPS)
National Pension Scheme (NPS) is one of the long-term tax saving options for salaried people in India. It is an investment plan that falls under the purview of PFRDA and the Central Government. People who want to plan for early retirement and have low-risk appetite invest in NPS. Besides, it also serves as a means for income tax deductions for salaried employees.
Compared to PPF and Fixed Deposit (FD), NPS investments can provide higher returns but is not equally tax-efficient. Tax benefits for salaried employees can be claimed under Section 80 CCD (1) within the Rs. 1.5 Lakh ceiling u/s 80CCE. In other words, it helps in income tax planning for salaried employees.
4. National Pension Scheme (NPS)
National Pension Scheme (NPS) is one of the long-term tax saving options for salaried people in India. It is an investment plan that falls under the purview of PFRDA and the Central Government. People who want to plan for early retirement and have low-risk appetite invest in NPS. Besides, it also serves as a means for income tax deductions for salaried employees.
Compared to PPF and Fixed Deposit (FD), NPS investments can provide higher returns but is not equally tax-efficient. Tax benefits for salaried employees can be claimed under Section 80 CCD (1) within the Rs. 1.5 Lakh ceiling u/s 80CCE. In other words, it helps in income tax planning for salaried employees.
5. Tax Saving FD
A tax saving Fixed Deposit or FD is quite popular as one of the tax saving options for salaried individuals. It is a type of FD with which help in availing of income tax deductions for salaried employees on your investments of a maximum of Rs. 1,50,000. The related tax benefits for salaried employees are covered under Section 80C.
Along with FDs, there are many other tax saving options for salaried people to create wealth. However, tax-saving FD, which has a lock-in period of 5 years, is deemed as the safest option for tax savings for salaried employees.
The returns from FDs are safe but are taxable. It is added under the head ‘Income from Other Sources’ in the ITR and gets taxed at applicable rates.
6. National Pension Scheme (NPS)
The uncertainties in life call for planning for the financial security of your loved ones under life insurance. While the primary benefit of buying a life insurance plan is to secure the financial needs of your family, you can also avail of tax benefits on such investments.
In fact, buying life insurance is considered one of the most sought-after tax saving options for salaried people. You can use online insurance premium calculator to check how much tax you can plan to save in a financial year. The premiums you pay toward life insurance is tax-deductible u/s 80C, up to the limit of Rs. 1,50,000. Furthermore, the death benefits or survival benefits under these plans are tax exempted u/s 10(10D). As a result, investments in life insurance plans lead to tax savings for salaried employees.
6. National Pension Scheme (NPS)
The uncertainties in life call for planning for the financial security of your loved ones under life insurance. While the primary benefit of buying a life insurance plan is to secure the financial needs of your family, you can also avail of tax benefits on such investments.
In fact, buying life insurance is considered one of the most sought-after tax saving options for salaried people. You can use online insurance premium calculator to check how much tax you can plan to save in a financial year. The premiums you pay toward life insurance is tax-deductible u/s 80C, up to the limit of Rs. 1,50,000. Furthermore, the death benefits or survival benefits under these plans are tax exempted u/s 10(10D). As a result, investments in life insurance plans lead to tax savings for salaried employees.
7. House Rent Allowance (HRA)
Individuals living in rented accommodation can avail tax benefits for salaried employees as per the related rules. HRA or House Rent Allowance (HRA), a part of an employee’s salary structure, is not fully taxable, leading to income tax deductions for salaried employees.
What makes HRA one of the tax saving options for salaried individuals is that a part of it is exempted u/s 10(13A) of the Income Tax Act, 1961, subject to certain clauses. The taxable income is calculated after deducting HRA from the total income.
You should also know that HRA received from the employers is fully taxable if you live in your own house and do not pay any rent. This is a crucial aspect you must consider to understand how salaried person can save tax.
8. Leave Travel Concession (LTC)
Leave Travel Concession or LTC, as the name suggests, is an exemption that salaried employees receive from their employer to travel on leave. Although the tax savings for salaried employees looks simplified under LTC, there are various rules related to claiming LTC exemption. Some of them are:
- The employees must go on an actual journey to get tax exemption.
- Only domestic travel expenses are considered under LTC exemption.
- The tax savings for salaried individuals apply on actual travel costs like bus or rail fare, but not on miscellaneous expenses such as local sightseeing.
You should also know that LTC cannot be treated as a tax-free income every year u/s 10(5) of the Income Tax Act.
9. Retirement Benefits (Gratuity)
Gratuity is yet another option for tax saving for salaried employees. It is given either on superannuation, resignation, retirement, or death or disablement of an employee. Another prerequisite is that the employee must complete a minimum of five years of service with an employer.
The gratuity amount received on any of these eventualities is tax-exempt u/s 10(10), up to the limit of Rs. 20,00,000. Previously, this limit was Rs. 10,00,000 but has been recently increased as per CBDT Notification no. S.O. 1213(E).
10. Health Insurance Premium
Health insurance plan provides financial security to you and your loved ones in medical emergencies or planned hospitalisation. Besides safeguarding your financial interests, health insurance is one of the most used tax saving options for salaried people.
In general, the premiums paid towards health insurance are eligible for income tax deductions for salaried employees, subject to the term of Section 80D. As a part of planning income tax for salaried employees, you can benefit more from this provision by paying for health insurance of your spouse, dependent children, and parents.
The maximum deduction you can avail u/s 80D is Rs. 1,00,000
10. Health Insurance Premium
Health insurance plan provides financial security to you and your loved ones in medical emergencies or planned hospitalisation. Besides safeguarding your financial interests, health insurance is one of the most used tax saving options for salaried people.
In general, the premiums paid towards health insurance are eligible for income tax deductions for salaried employees, subject to the term of Section 80D. As a part of planning income tax for salaried employees, you can benefit more from this provision by paying for health insurance of your spouse, dependent children, and parents.
The maximum deduction you can avail u/s 80D is Rs. 1,00,000
File ITR for Tax Planning for Salaried Employees
For salaried individuals, the monthly salary they receive is often the primary source of their income. However, the returns or interests received from various tax saving options for salaried people lower their tax liability, which is to be considered while filing the income tax return.
For a salaried individual, the process to file ITR starts with filling a certain type of ITR form. Alongside, he/she also has to report gross salary, different allowances, investments, and income from other sources separately while filling the form online.
Here’s a list of documents required by salaried employees while filing returns:
- Form 16
- Form 26 AS
- Statement of all savings bank accounts
- Interest or TDS certificates
Understand Income Tax for Salaried Employees
As a salaried individual in India, you must do the tax planning in advance rather than waiting for the last few months to get things done. It is in your best interest to be aware of how income tax for salaried employees works to avoid any penalties. As detailed above, you can choose to invest in various tax saving options for salaried individuals. Make sure your decisions help simplify various aspects of financial planning for you. Max Life Insurance has policies designed to help you achieve your financial goals such as the Smart Wealth Plan which comes with comprehensive investment and insurance benefits.
Frequently Asked Questions (FAQs)
Q. In which tax saving options should salaried individuals invest?
A. There are many tax planning options for salaried employees, like EPF, PPF, ELSS, as detailed above. As a salaried individual, you can invest in them based on your risk appetite, budget, and needs.
Q. Do salaried individuals need to pay taxes on their investments?
A. The taxes are levied on various tax saving options for salaried people, based on the rules related to capital gains, dividends, and taxes on interest. You are advised to know about these things in detail before making investments.
Q. In how many options for tax savings can I invest?
A. There is no specific limit to the tax planning options for salaried employees that can be chosen. However, limits do exist on the maximum deductions one can avail under a specific option.
Q. Which investment options come under Section 80C?
A. The following tax saving options for salaried employees fall under the purview of Section 80C:
- PPF
- EPF
- Life insurance
- Tax-saving FDs, and many others
Q. How can I maximise tax savings legally?
A. The best way to reduce tax liability is by investing in various tax saving options for salaried individuals.
Q. What is the difference between form 16 and Form 16A?
A. Form 16 is for salary income exclusively, whereas Form 16A is for TDS on Income Other Than Salary. When a bank deducts TDS on your interest income from fixed deposits, for TDS deducted on insurance commission, or for TDS deducted on your rent receipts, for example, a Form 16A will be sent to you.
Q. What is the tax slab for salaried employees?
A. Here is the tax slab according to which income tax deductions for salaried employees apply:
Income Tax Slab |
New Regime Income Tax Slab Rates for FY 2020-21 (Applicable for All Individuals & HUF) |
Rs 0.0 – Rs 2.5 Lakhs |
NIL |
Rs. 3.00 lakhs – Rs 5.00 Lakhs |
5% (tax rebate u/s 87a is available) |
Rs. 3.00 lakhs – Rs 5.00 Lakhs |
|
Rs. 5.00 lakhs- Rs 7.5 Lakhs |
10% |
Rs 7.5 lakhs – Rs 10.00 Lakhs |
15% |
Rs 10.00 lakhs – Rs. 12.50 Lakhs |
20% |
Rs. 12.5 lakhs- Rs. 15.00 Lakhs |
25% |
> Rs. 15 Lakhs |
30% |
Q. What are the claim relief under section 89(1) for salaried employees?
A. The following situations qualify for salary arrears relief under section 89(1):
- Salary received in advance or in arrears
- Compensation if your job is terminated
- Pension Commutation
- Gratuity
Q. What is the difference between assessment year and financial year?
A. When planning income tax deductions for salaried employees, these are some of the terms you must understand. FY stands for fiscal year, and it is the year in which you earn money. AY is the year after the financial year in which you must review and pay taxes on the previous year's earnings.
For example, if your fiscal year runs from April 1, 2019 to March 31, 2020, it is referred to as FY 2019-20. The assessment year for money earned during this time would commence after the financial year ended, which would be from April 1, 2020, to March 31, 2021. As a result, the assessment year will be 2020-21.
Q. How can my family help me in tax saving?
A. You can increase the tax benefits for salaried employees by purchasing insurance for your family members, investing money in your parents’ name, etc. Certain investments made in the names of your children, such as PPFs, ULIPs, mutual funds, and insurance policies, will be eligible for income tax deductions for salaried employees.
Q. What are the tax benefits for Senior citizens?
A. The income tax benefits for senior citizens include higher exemption limits, medical insurance tax benefits, relief from TDS under Section 194A and more.
Q. How can I save income tax on house rent allowance?
A. If you pay rent for your residential accommodation, you can claim a tax exemption on HRA. By producing documentation of rent receipts to your employer, you can claim HRA exemption. You can also claim the HRA exemption on your own when filing your income tax return.
Q. How much income tax can I save?
A. Depending on your investment portfolio, you can optimize your income tax deductions for salaried employees if you are careful. There are income tax calculators available to help estimate the tax saving for salaried individuals.
ARN No: Oct22/Bg/12L
## save 46800 on taxes if insurance amount is Rs.15 lakh and you are a regular individual. Fall under 30% income tax slab having taxable income less than Rs.50 lakh and opt for old tax regime