Tax-saving 101 for salaried employees


When you work, you take financial responsibilities towards your life,be it via the purchase of insurance, investing, or doing your taxes. When you are doing your own taxes, it is important to know the different components of income taxes, from types of ITRs (Income Tax Returns) to financial instruments which can help you save taxes. If you are opting for the old tax regime, also known as the previous tax regime, there are several deductions and exemptions you can claim. Under Section 80C of the Income Tax, there are several tax-saving investments you can choose from to get tax deductions and exemptions. Section 80C has a maximum limit of up to Rs 1.5 lakh.

Here are some financial instruments that can help you as a salaried employee in saving tax:

Public Provident Fund

A salaried individual’s tax-saving plan is incomplete without investing in a Public Provident Fund (PPF). It is a government-enabled savings scheme. One can open a PPF account with an investment as low as Rs 500 every month. The best part about PPF is that there are tax exemptions in all aspects of it. The amount that you invest, the interest you have earned, and the maturity amount you will receive, are all exempted from tax. This makes PPF an excellent tax-saving investment for any salaried individual.

Life insurance

There are several types of life insurance an employee can choose from depending on their needs. Having a life policy is needed to safeguard the financial health of your loved ones. For tax savings, life insurance helps in saving taxes through all stages of the policy. The premiums that you pay for your life insurance are exempt from taxes under Section 80C of the Income Tax Act. The sum assured that the nominee receives in case of the demise of the policyholder is also exempt from taxes under Section 10 (10D) of the Income Tax Act. Use an income tax calculator to know the sum of tax benefits you will receive from your life insurance.

Employee Provident Fund

Employees Provident Fund (EPF) is a popular tax-saving instrument that salaried individuals choose. It is a retirement fund that was established under the Employees’ Provident Fund and Miscellaneous Act, 1952. EPFs are managed by the Central Board of Trustees. Under an EPF scheme, you and your employee need to contribute from your salary towards this fund. The maximum contribution an employee and employer can make is 12%. EPFs have a fixed rate of interest and the earnings of EPFs are exempt from taxes.

Equity Linked Savings Scheme

Equity Linked Savings Scheme (ELSS) is another tax-saving investment where the funds are usually invested in equity markets. The investments that are made in an ELSS have a lock-in period of three years. They are high risk in nature, as they deal in stocks, but often generate high returns. You can claim deductions for the money you invest through an ELSS.

National Pension Scheme

If you are looking for a tax-saving investment and have a low-risk appetite, National Pension Scheme (NPS) is a perfect option. It is an ideal choice for salaried employees who want to invest in safe funds. NPS is managed by the central government. The funds you invest here are exempt from taxes. Use an income tax calculator while doing your taxes to know the number of deductions you are claiming.

Unit Linked Insurance Plan

Unit Linked Insurance Plan is a type of life insurance with an investment component to it. When you buy a ULIP, the premiums that you pay are partly allocated towards providing you a life cover and partly invested in funds of your choice. ULIPs allow you to switch between funds. This feature makes ULIP stand out in comparison to other investments. You can invest in debt funds or equity funds based on your risk appetite. You can also switch the allocation from debt to equity and vice versa anytime you want. The amount that you pay in a ULIP as a premium is exempt from taxes. Also, the amount you receive after maturity is exempt from taxes, too.

For a salaried person, there are a variety of tax-saving options to choose from. It is advised to invest at the beginning of a financial year and avoid making any hasty last-minute investment decisions. Also, by planning investments beforehand, you can pay advance tax in installments rather than having to pay a lump sum amount at the end of the financial year.

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