Tax-Saving Options for Salaried Individuals

Are you making the most of your salary by leveraging tax-saving techniques? Many people with salaried jobs miss out on great ways to lower their taxes. When you contribute to certain accounts like EPFs, PPFs, NPS, Section 80C investment accounts, etc., you use money before taxes, which means you pay less in taxes. 

It’s also important to check your paycheck withholdings to make sure they match your tax goals. You can adjust how much tax is taken out of your paycheck because the IRS allows changes throughout the year. If you withhold more, you might avoid penalties when you file your taxes. On the other hand, if you withhold less, it can create cash flow problems. These tax-saving options for salaried individuals can greatly improve their financial well-being. 

This article looks at some smart tax-saving tips for those on a fixed income. By taking action now, you can build a more stable economic future and keep more of your hard-earned money.

One of the first decisions salaried individuals must make is whether to opt for the old or new tax regime. This choice significantly impacts the availability of exemptions and deductions, which in turn affects tax savings. Let’s delve into the differences between the two regimes.

Old vs. New Tax Regime

A comparison of tax-saving options for salaried individuals under the old and new tax regimes in India reveals several significant differences in terms of deductions and exemptions that can substantially affect tax obligations.

1. Old Tax Regime

Taxpayers can efficiently lower their taxable income under the old tax regime’s numerous exemptions and deductions.

• Section 80C

Investments in tax-saving fixed deposits, the Public Provident Fund (PPF), and the Equity Linked Savings Scheme (ELSS) are eligible for a maximum deduction of ₹1.5 lakh.

• Section 80D

Deduction for family and self-health insurance premiums, with a maximum claim of ₹25,000 for those under 60 and an extra ₹25,000 for parents. The availability of the Leave Travel Allowance (LTA) and House Rent Allowance (HRA) further facilitates tax savings by providing reimbursements for lodging and travel expenses.

2. New Tax Regime

The new tax regime greatly restricts deductions while making compliance easier. The standard deduction is ₹75,000, but the majority of traditional deductions are not available to taxpayers. Only certain deductions are left, such as the standard deduction on family pension and employer contributions to the National Pension Scheme (NPS) under Section 80CCD(2). For those with significant investments or expenses that qualified for tax benefits under the previous regime, the absence of deductions may be a drawback.

Also Read: Old vs. New Income Tax Slabs for FY 2023-24 and AY 2024-25

Choosing the Old Tax System to Optimize Deductions and Exemptions

• The old tax system might offer more considerable tax savings for individuals who can take advantage of several deductions. This is particularly true for those who have significant investments and higher incomes. Effective use of deductions can reduce taxable income and, consequently, tax obligations. For instance, high-income earners are eligible to claim a variety of deductions, including additional NPS contributions, up to ₹2 lakh.

• In contrast, the new tax regime’s lower tax rates may appeal to those without significant deductions. It is better suited for individuals with lower incomes or those who prefer simplicity without having to keep track of their investments and spending.

The decision between the old and new tax regimes should ultimately be made based on each person’s unique financial situation, investment plans, and long-term financial objectives. The prospective tax savings from deductions under the previous regime should be weighed against the ease of the lower rates under the new government.

Contributions to the EPF not only help build a retirement fund but also offer attractive tax advantages. Here’s how the EPF can support your tax-saving strategy.

Employee Provident Fund (EPF)

Employers and employees are required to contribute a certain percentage of their salaries to the EPF. Usually, the employer contributes an equal amount, with the employee contributing 12%. This systematic approach to saving ensures that workers accumulate funds while also benefiting from tax savings.

• Interest and Accumulated Funds Are Tax-Free

Both the interest and the accumulated funds are tax-free. In this way, the retirement corpus can grow significantly because the contributions are not only tax-deductible but also because the interest that is collected over time is not subject to taxes.

• Tax Deductions under Section 80C

Under Section 80C of the Income Tax Act, contributions made to the EPF are deductible from taxes. Through this section, individuals can deduct up to ₹1.5 lakh for particular investments, such as EPF, during a fiscal year. As a result, regular employees can effectively lower their taxable income by contributing to their EPF.

Also Read: General Provident Fund (GPF): Features, Benefits, and Withdrawal

By utilizing these features of the EPF, salaried people can increase their retirement savings and take advantage of tax deductions, making it an essential part of efficient tax planning.

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For those looking for a risk-free, government-backed savings option with substantial tax benefits, the Public Provident Fund (PPF) is a great choice. Let’s explore how PPF can help you save on taxes.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is an individual savings plan supported by the Indian government and designed for long-term use. In terms of tax-saving options for salaried individuals, contributing to the PPF can lower their taxable income, as it qualifies for tax deductions under Section 80C of the Income Tax Act.

EEE Status

PPF is classified as EEE (Exempt-Exempt-Exempt), which means that all contributions made to the fund, as well as the interest earned, are tax-free, and there is no tax on the maturity amount. This makes PPF one of the most tax-efficient investment options available.

Also Read: Top Investment Options in India: Mutual Funds, PPF, FDs & More

Minimum and Maximum Investments

• Minimum Investment

A minimum investment of ₹500 must be made each fiscal year in a PPF account.

• Maximum Investment

Each financial year, an amount no more tremendous than ₹1.5 lakh may be invested. Contributions can be made as a one-time gift or through monthly installments; however, the total amount should not exceed the annual cap.

Salaried individuals who utilize the PPF can secure their future financial stability while saving a significant amount on taxes. 

For investors seeking higher returns and the added benefit of tax savings, ELSS could be a profitable option. Let’s examine how ELSS contributes to tax benefits and wealth creation.

Equity Linked Savings Scheme (ELSS)

ELSS is a type of mutual fund that primarily invests in stocks. It provides individuals with the opportunity to benefit from tax advantages while investing in a diversified portfolio of equities.

• 3-Year Lock-in Period

The requirement of a 3-year lock-in period encourages long-term investing, which has the potential to generate higher returns than traditional fixed-income options, as investors must remain invested for at least this duration.

• Benefits of Tax Deduction

Under Section 80C of the Income Tax Act, contributions to ELSS can be deducted from taxable income. Individuals can deduct up to ₹1.5 lakh in a fiscal year, thereby lowering their taxable income and, in turn, their tax liability.

Also Read: Unified Pension Scheme (UPS): A New Era in Retirement Security

With its ability to generate wealth and provide tax advantages, ELSS is one of the excellent tax-saving options for salaried individuals. It also encourages long-term investment habits.

Tap Invest allows you to combine tax advantages with high-growth investment opportunities easily. Follow Tap Invest on Instagram to stay updated and learn more about our customized solutions, expert advice, and diverse portfolio options.

In addition to providing essential medical coverage, health insurance offers tax benefits. Let’s look at how paying health insurance premiums can help reduce your tax burden.

Health Insurance Premium

Financial stability against unforeseen medical costs is mainly dependent on health insurance. It lessens the burden of high healthcare costs by helping to pay for surgeries, outpatient treatments, and hospital stays. With the cost of healthcare rising, having a solid health insurance policy ensures that individuals can access necessary medical care without incurring significant out-of-pocket expenses. Furthermore, health insurance encourages policyholders to seek timely treatment, routine checkups, and preventive healthcare, thereby protecting personal finances.

• Section 80D Allows for Tax Deductions

Section 80D of the Income Tax Act allows one of these tax-saving options for salaried individuals to claim tax deductions on family and individual health insurance premiums. Under this section, individuals can deduct the premiums they have paid for policies that cover their parents, spouse, children, and themselves. The main goal of this provision is to encourage people to obtain health insurance, which will lessen the financial burden of unexpected medical expenses. It is crucial to remember that, in order to qualify for these deductions, the premiums must be paid through a method other than cash.

Also Read: Tax Deductions for Medical Expenses: Understanding Section 80DDB

• Deduction Caps for Various Age Groups

The age of the insured individuals determines the deduction limits under Section 80D. Individuals who pay premiums for themselves, their spouse, and dependent children can deduct up to ₹25,000 for the fiscal year 2023–2024. If the insured individuals are senior citizens (60 years of age or older), this cap rises to ₹50,000. Furthermore, there is an additional deduction for parent premiums of up to ₹25,000 (or ₹50,000 for senior citizens). Consequently, if a taxpayer insures themselves and their senior citizen parents, the maximum deduction can reach ₹100,000, which will significantly lower taxable income and encourage people to purchase health insurance.

For salaried individuals who rent their homes, HRA is one of the critical components for saving on taxes. Here’s how to make the most of your HRA.

House Rent Allowance (HRA)

Below is a brief overview of one of the important tax-saving options for salaried individuals—House Rent Allowance (HRA). It covers the eligibility requirements, exemption calculations, and factors that impact the HRA exemption.

Eligibility and Formula for Section 10(13A) Exemptions

Employees must fulfill the following requirements to be eligible for the HRA exemption under Section 10(13A) of the Income Tax Act:

• Compensation Structure

The employee’s salary must include HRA. This is relevant to employment in both the public and private sectors.

• Rent Payment

If the employee lives in a residential setting, they are required to pay rent. An employee is not qualified for an HRA exemption if they live in their own home.

• Location of Residence

The rules may change depending on the city of residence, but the exemption is still applicable whether the rented accommodation is in the same town or a different one.

• Formula

The HRA exemption is computed using the following formula to determine the exempt amount:

Exempt HRA = Minimum of:

• Actual HRA received
• Rent paid in excess of 10% of the basic pay
• 50% of the basic pay if living in one of the major cities (Delhi, Mumbai, Kolkata, Chennai) or 40% if living outside of a major city.

Also Read: Tax Time for Rentals? Your Complete Guide to Income from House Property

Factors That Influence HRA Exemption

The total HRA exemption that an employee is eligible to claim depends on a number of factors:

• Pay

The exemption computation compares HRA with a percentage of the basic salary, so the primary salary component is essential.

• HRA Received

The employee’s actual HRA receipt determines the maximum exemption that can be granted.

• Rent Paid

The employee’s total rent payments impact the computation since the exemption takes into account any sum that exceeds 10% of the base pay.

• City of Residence

Whether a person resides in a metro or non-metropolitan area will affect the exemption percentage (40% or 50%), which will impact the total amount exempt.

By being aware of the requirements and factors, these tax-saving options for salaried individuals can optimize their HRA exemptions under Indian tax laws and plan their taxes more efficiently.

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Leave Travel Concession (LTC)

In tax-saving options for salaried individuals in terms of travel, Leave Travel Concession (LTC) offers tax benefits, particularly for domestic travel expenses. The requirements for tax exemption and utilization within a given block period are broken down as follows:

Guidelines for Domestic Travel Expense Tax Exemption

• Eligibility

Employees in the public and private sectors who have the allowance included in their Cost to Company (CTC) are eligible for LTC. The exemption applies only if the employee makes genuine trips within India.

• Travel Scope

Only domestic travel is eligible for the exemption; international travel is not included. Workers and their dependent parents, children, and spouses are all eligible to receive LTC benefits.

• Claim Limit

The exemption is only available for a maximum of two claims within 4 years. If one of the two claims is not used during the block, it may be carried over to the first year of the following block.

• Minimum Trip Duration

A trip should have a minimum duration of 3 days.

Also Read: Special Allowance: Meaning, Taxation, and Exemptions

Use Within a Designated Time Frame

• Present Block

The current block is from 2022 to 2025, during which LTC claims may be made. For their travel to qualify for an exemption, employees must ensure it occurs during this time.

• Carry Forward of Claims

Employees may carry over their LTC benefits to the following block if they do not use them during the designated block period. However, it expires unless utilized within the first year of the next block.

Conclusion

If you’re a salaried worker looking to lower your taxes, it’s important to explore different ways to save on your tax bill. By planning your finances wisely, you can reduce how much tax you owe and improve your overall financial situation. Learning about the deductions and exemptions available under the Income Tax Act can help and offer several tax-saving options for salaried individuals to make the most of the tax benefits from various investments.

It’s also essential to align your investment choices with your personal financial goals. To make sure your tax-saving options support your long-term plans—like saving for retirement, education, or big purchases—think about your future needs when you invest. This mindset can help you become more disciplined in saving and achieving greater financial security.

Get more out of your investments by taking calculated risks and exploring alternative investments. Use Tap Invest to invest in your future in alternate financial solutions. Why not take the next step now that you know how to maximize your returns through careful planning and wise investment choices? With Tap Invest, you can make better investment decisions that align with your individual financial goals. Invest with Tap Invest today.