Tax saving options for salaried employees

The Income Tax act provides several deductions that can help reduce one’s tax outgo. It is crucial to have an idea of those to plan taxes effectively

One of the most clichéd but most accurate sayings is- there is nothing certain but death and taxes. Salaried employees need to pay taxes on their income depending on their tax bracket. Fortunately, the Income Tax Act provides several exemptions that lets one save tax. Let’s look at tax saving options for salaried.

Tax saving options under Section 80C

Section 80C  provides options to salaried individuals to claim a deduction of Rs 1,50,000 from their total gross income for certain payments and investments. The limit for all such deductions under section 80C and its subsections are capped at Rs 1.5 lakh.  Investments and payments in 80C options beyond Rs 1.5 lakh are not eligible for tax exemptions.

First, we look at all the different avenues that are eligible for 80C exemption.

Employee provident fund: The employee’s contribution to employee provident fund is tax-deductible up to Rs 1.5 lakh under section 80C.

Public Provident Fund: PPF allows you to invest as little as Rs 500 in a year and deduction is allowed up to Rs 1.5 lakh under section 80C. Currently, PPF offers an interest rate of 7.9 per cent per annum, and the returns are guaranteed. PPF is a good option for long term investment as it has a lock-in period of 15 years. It can be extended for blocks of 5 years after maturity.

Life Insurance Premiums: Premiums paid towards life insurance policies are also eligible for 80C benefits. The deductions can be claimed for premiums paid to insure self, spouse and dependent children. Here, it is essential to note that if such policy is issued on or before March 31, 2012, the maximum premium that is eligible for deduction is 20 percent of the sum assured. For insurance policies issued after March 31, 2012, 10 percent of the sum assured is deductible.

Equity Linked Savings Schemes(ELSS): Investments in ELSS are also eligible for 80C deduction. ELSS is open-ended mutual equity mutual funds. The lock-in period for ELSS is 3 years. ELSS has the potential to deliver higher returns than other tax saving schemes since they invest in equity. However, they come with a higher risk. Also, it is recommended that you stay invested for 5-7 years to avail the benefits of long-term investment.

Sukanya Samriddhi Account: Under this scheme, you can open an account for your minor daughter till they are 10 years old. Contribution to this account is eligible for 80C deduction. Sukanya Samriddhi Account can be opened for a maximum of two girls. In the case of twins, it can be extended to the third girl child as well.

National Savings Certificate (NSC): This is a fixed income small savings scheme that can be opened through the post office. Any investment in 80C is eligible for tax deduction under section 80C. The interest is compounded annually. Currently, NSC offers 7.9 percent interest.

Five Year Bank Fixed Deposits ( FDs): Any term deposit with a tenure of 5 years is also eligible for 80C deductions.

Post Office Time Deposits of 5 years: Similar to FDs, these are also eligible for 80C benefits. Currently, the rate of return offered is 7.7 per cent.

Senior Citizen’s Savings Scheme: This scheme is only meant for senior citizens or individuals over 60 years and offers 80C deduction. Individuals above 55 but less than 60 years can also invest in this scheme if they have retired from a voluntary retirement scheme or special voluntary retirement scheme.

Unit Linked Insurance Plans (ULIPs): These are insurance products that also offer market-linked returns. Contributions to ULIP have a lock-in period of 5 years and are eligible for 80C deductions. When you buy a ULIP, you get a life cover and can also reap the benefits of long term equity investments.

Home loan principal repayment: The Equated Monthly Instalment (EMI) you pay towards your home loan consists of 2 parts- the principal and the interest. The principal amount is eligible for deduction under section 80C. Hence, if you have a home loan in your name, you can claim your entire 80C deduction from principal repayment of your home loan, and you need not invest in other tax-saving products.

There are some subsections of 80C which offers similar benefits.

Section 8CCC: This makes contributions towards certain pension funds or annuities eligible for deductions up to Rs 1.5 lakh.

Section 80CCD and Section 80CCD(1B): Any contribution to the National Pension Scheme (NPS) is also eligible for deductions under this section up to Rs 1.5 lakh. This deduction is allowed on NPS Tier 1 account. NPS Tier II accounts for government employees are also eligible for this deduction if they have a lock-in period of 3 years.  An additional deduction of Rs 50,000 is also available for NPS contributions under section 80CCD(1B) of the income tax act. This deduction is available only for Tier 1 accounts. Hence the total deduction under NPS is Rs 2 lakh. Contributions to Atal Pension Yojana (APY) are also eligible for a deduction of Rs 50,000 under this section.

80CCD(2): Under this section, a contribution from the employer of up to 10 percent of basic salary +DA is eligible for deduction over and above the limit of Rs 1.5 lakh.

Apart from section 80C and its subsections, there are other options for tax saving for salaried. Let us take a look.

Interest payment on your home loan: A homeowner can claim a deduction of up to Rs 2 lakh on the amount paid towards home loan interest if the owner is residing in that property. The same rule applies in case the property is vacant. However, if you have let out the property, the entire interest is eligible for deduction. In the July 2019 budget, the maximum amount of interest paid on a housing loan that is eligible for the deduction was increased to Rs 3.5 lakh for properties bought under the affordable housing scheme. The deadline for availing home loan under this scheme was extended to March 31, 2021, under the current budget.

Tuition fee receipts for your children: Deduction is available under section 80C for tuition fees paid towards the education of two children. The total amount available for deduction is Rs 1.5 lakh.

Health insurance premium: Premiums paid towards medical insurance offers tax benefits under section 80D of the income tax act. Higher deductions are provided for payment of medical premiums of senior citizens. If no one in the family is over 60 years, Rs 25,000 is available for deduction. Another Rs 25,000 is available for parents below 60 years. Hence the total deduction available is Rs 50,000. If either of the parents is over 60, the amount claimed towards payment of premium for parents is Rs 50,000. The premium paid toward the medical insurance of the family ( self, spouse and children) is exempt up to Rs 25,000, so the total exemption is Rs 75,000.  If the eldest member of the family is over 60 years old, then one can claim a benefit of Rs 50,000 towards the insurance premium. An additional benefit of Rs 50,000 for parents, takes the total available exemption to Rs 1 lakh.

Education loan: The entire interest pain on an education loan is eligible for deduction under section 80E of the income tax act.

Tax exemptions on your salary

There are provisions for tax exemptions that come with your salary.

House Rent Allowance (HRA) exemption: Salaried individuals who stay in a rented apartment get tax exemption from HRA. The income tax exemption received is a minimum of the following:-

  1. Total HRA received from the employer
  2. 50 percent of salary (for those living in metro cities and 40 percent of salary if living in non-metro cities
  3. Excess of rent paid over 10 percent of annual salary

Standard deduction: Employees can claim a flat Rs 50,000 as a deduction from the total income, thereby reducing tax outgo

Leave travel allowance: If an employer provides a leave travel allowance to the employee, it is exempt from tax to a certain amount, provided the vacation is in India.

Other deductions: Some employers give employees an option of encashing leaves that were allowed to be taken but not taken.  This is allowed to be claimed as an exemption to a certain extent. Some employers also provide perquisites to employees like a car, mobile phone, free accommodation and so on. Some of these perquisites are taxable, while some are available for deduction.

In Budget 2020, a new tax regime has been proposed. Under this regime, individuals who do not avail any tax exemptions will be taxed at reduced tax rates. One should compare the tax outgo under both tax regimes and then take a call.