Tax Saving Options for Salaried Employees

Tax Saving Investments & Planning

Death and taxes are not the only inevitable things in life.

As 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, availing the income tax deductions for salaried employees can be complicated if not done correctly. There are several tools that allow offer tax benefits to salaried employees and can make a significant impact on your financial planning. So, let’s take a closer look into the various tax saving options available to salaried people.

The Best Tax Saving Options in India

Benjamin Franklin said once, ‘there are just two things certain in life: Death and Taxes.’ There is not much we can plan for the former. But as for the later, you can certainly plan and find an effective way to know how much you pay every year.

Every individual, whether they are just starting with their career or are progressively climbing up the ladder, will be faced with two pertinent questions that are: 

·         How can I reduce my taxable income?

·         What is the maximum tax I can save? 

The amount of tax that an individual can save would depend upon two factors- the tax regime chosen and the expenses or the investments made by the individual for claiming the said deductions. It is important to note that no change has been made in the income tax slabs for FY 2024-25 (April 1, 2024-March 31, 2025) in the interim budget 2024.

A salaried individual has to opt specifically for the old tax regime. If an individual opts for the old/existing tax regime, then the individual will be eligible to claim the tax-exemptions such as house rent allowance (HRA), leave travel concession (LTC) and deductions under sections such as 80C (maximum up to Rs 1.5 lakhs in financial year), 80D (deduction on the medical policy premium paid), 80E (Interest paid on education loan) etc. Do keep in mind that there are only two deductions available.

Deductions and exemptions for eligible investments or expenses

Section 80C: A maximum deduction of Rs 1.5 lakh per financial year can be claimed by individuals under section 80C. The 80C tax benefit can only be claimed by those taxpayers who opt for the old tax regime.
The eligible investments under section 80C are vast and includes investment in Public Provident Fund, Employees' Provident Fund (EPF), equity-linked savings scheme (ELSS), and tax-saving fixed deposits (FD), National Savings Certificate (NSC) etc. Even certain expenses can also be claimed under section 80C provided the expenses are actually incurred. Some of these include life insurance premium, children's school fees, repayment of home loan principal, etc.

Tax-saving investment options under Section 80C

There are several options you can choose to save tax under Section 80C of the Income Tax Act. These include:

1. Equity Linked Saving Scheme (ELSS)

2. National Pension Scheme (NPS)

3. Unit Linked Insurance Plan (ULIP)

4. Public Provident Fund (PPF)

5. Sukanya Samriddhi Yojana (SSY)

6. National Savings Certificate (NSC)

7. Fixed Deposit (FD)

8. Employee Provident Fund (EPF)

Please note that these benefits are available if you have chosen the “Old Tax Regime.

Important Subsections of Section 80C

Section 80C encompasses various subsections, each catering to specific investment or expense categories:

1.    80CCC:
Pertains to contributions to pension funds.

2.   80CCD(1):
Deals with contributions to the National Pension System (NPS) by employees.

3.    80CCD(1B):
Offers an additional deduction for investment in NPS.

4.    80CCD(2):
Related to employer contributions to NPS, which is over and above the 80C limit.

Understanding these subsections can help you make informed decisions about where and how much to invest or spend to maximize your tax benefits*.

Beyond Section 80C

If you are still looking for tax-saving investment avenues, there are several tax-saving instruments other than 80C to look out for.

·         Over and above the aforementioned deductions, paying health insurance premiums under section 80D permits for a deduction of up to 25,000.

·         Additionally, you can also claim for a tax deduction on your house rent allowance or get a deduction on the interest on your home loan as also for repayment of an educational loan.

·         Keeping money in your savings account also allows for a tax deduction under the section 80TTB for an interest of up to 10,000 per year.

·         Donations made to government-approved charitable institutions are also exempted from tax.

Apart from the 80C deductions, there are various deductions under Section 80 you can use to save on income tax. Tax benefits on health insurance premiums and home loan interest are a few-

• Interest paid on a home loan can be claimed as a deduction under section 24 up to Rs 2 lakhs. Section 80EE also allows you to claim a deduction of up to Rs 50,000 on home loan interest, which is over and above the limit of Section 24. 
• Any charity that is made to institutions or funds can be claimed as a deduction under section 80G.
• Interest paid on education loans is allowed as a deduction under section 80E
• Employer contribution to NPS is eligible for deduction u/s 80CCD(2) with an overall threshold of Rs 750,000 (Including Employer contribution to PF).
• Individual contributions to NPS are eligible for deduction u/s 80CCD(1B) with a limit of Rs 50,000 a year.
• Section 80GG provided a deduction for non-salaried individuals to claim a deduction of up to Rs 60,000 per annum for the rent being paid on accommodation.
• Section 80TTA provided a deduction of up to Rs 10,000 on saving bank interest for ages less than 60. For senior citizens, section 80TTB provides deductions up to Rs 50,000 on all interest incomes.

Interest on Home Loan on Let-out Property under Section 24

Under the new tax regime, interest on a home loan for self-occupied property is prohibited under section 24. Whereas interest on a home loan on the let-out property is allowed as a deduction without any upper limit. 

Transport Allowance and Conveyance allowance 

Transport allowance means the allowance given to the employee by the employer to compensate for the travel expenses incurred for commuting between his place of residence and work.

The exemption allowed, from FY 2018-19 onward, will be Rs 1,600 per month and Rs. 3,200 per month for a physically challenged employee commuting from his place of residence to the place of duty.

Conveyance allowance is granted to meet the expenditure incurred during the performance of office duty. However, conveyance allowance is exempt only to the extent of actual expenditure incurred.

Section 80 CCD(1B): By making investments in the National Pension System (NPS), individuals can claim up to Rs 50,000 deduction which is additional over and above the deduction under section 80C.

"The deduction under section 80CCD(1B) of up to Rs 50,000 is over and above the threshold limit of Rs 1.5 lakhs under section 80C. Hence combining both the deductions an individual can claim up to Rs 2 lakhs as a tax deduction under the old tax regime.

Section 80 CCD(2): Deduction under section 80 CCD(2) can only be claimed if an individual's employer (government or private) contributes to the individual's NPS account. The maximum deduction that a private sector employee can claim is 10% of his/her salary where salary means basic plus dearness allowance (DA). Government employees can claim up to 14% of salary as a deduction under section 80 CCD(2).

There is also another condition which is employer's contribution to NPS, EPF and a superannuation fund is eligible for deduction only up to Rs 7.5 lakhs in a financial year. If the total contribution by the employer exceeds Rs 7.5 Lakhs in a financial year, then the excess contribution would be taxable in the employee's hands as perquisites and any interest or dividend earned on it will also be taxable in employee's hand.

The 80CCD(2) deduction is available under the new and old tax regimes.

Section 80D: Deduction under section 80D is available only if an individual has purchased a health insurance policy for self, spouse, dependent children’s or their parents. Further, it is only available under the old tax regime.

Individuals, who are below the age of 60, can claim up to Rs 25,000 as deduction under section 80D for health insurance premium paid for self, spouse and dependent children. Further, if the individual is paying health insurance premium for parents aged below 60 years, then an additional amount i.e. Rs 25,000 can be claimed as a section 80D tax deduction.

"If an individual is paying health insurance premium for senior citizen parents (those aged 60 years or above), then instead of Rs 25,000 additional deduction the individual can claim up to Rs 50,000 additional tax deduction under section 80D.

Section 80E: Under section 80E an individual can claim deduction for interest component under an educational loan. There is no limit on the maximum amount of deduction that can be claimed under section 80E, and neither is an individual required to upload any documentary evidence for claiming such a deduction. This deduction is allowed for maximum of 8 years.

Standard deduction: A standard deduction of Rs 50,000 is available to salaried individuals under both the old and the new income tax regimes.

To conclude, although tax saving is a priority, most financial experts agree that it should be paired with a long-term financial goal. This ascertains that while you are saving on taxes, you are also focused on wealth creation. Efficient financial planning begins at the start of the financial year and not at its conclusion.