5 Best Tax saving options for salaried employees in 2023

Tax saving options for salaried employees. Get details of PPF, NPS, ELSS Mutual fund, Insurance tax saving options under 80C, 80D, 80CCD, etc.

This post was most recently updated on December 21st, 2022

Looking for tax saving options for salaried employees? I think it’s the least to say that saving taxes in India is in everyone’s mind. It’s generally seen around March of every year that people rush to save taxes and invest in random tax savings instruments without doing a proper analysis.

In most cases, people get lured into insurance policies to save tax which in most cases is the worst tax-saving option.

Best Tax saving options for salaried employees

In this article, we will look at the best 5 tax savings options for salaried employees and they are as below:

  1. NPS
  2. VPF
  3. PPF
  4. ELSS Mutual funds
  5. Tax saver FD

1. National Pension System – NPS

NPS has become popular recently and gaining popularity among high tax bracket taxpayers as it offers additional 50000 tax savings on top of 1.5lakhs which is offered via 80C tax savings. The benefits of NPS are as below:-

Return on investment on NPS investment: there are multiple funds you can select while applying for NPS. If you select the max allowed limit for equity fund + Govt debt fund then you can expect returns in the range of 10–12% CAGR over the long term

Liquidity: most illiquid instrument. You need to wait for retirement to get withdraw the amount.

Tax benefit: can be considered in 80C + additional tax benefit of Rs50000 via 80CCD

Taxability at maturity: part of your NPS amount is taxed.

Consider reading: how to open NPS account.

2. Voluntary provident fund – VPF

VPF is an excellent choice for salaried employees as it can be very easily contributed along with their EPF contribution. benefits of VPF are as below:-

Returns: 8.10% per year (as per current interest rates in October 2022) – Guaranteed return

Liquidity: You can withdraw the VPF amount along with your PF while changing jobs or quitting the job. You can request a partial withdrawal from your PF.

Tax benefit: comes under 80C so you can invest up to 1.5 lakhs to get tax benefit under 80C.

Taxability at maturity: No tax

3. Public provident fund – PPF

Although we prefer VPF over PPF , PPF is also a great choice for taxpayers in terms of tax savings. The benefits of PPF are as below:-

Returns: 7.1% per year (as per current interest rates in October 2022) – Guaranteed return

Liquidity: locked for 15 years

Tax benefit: comes under 80C so you can invest up to 1.5 lakhs to get tax benefit under 80C.

Taxability at maturity: No tax

4. ELSS Mutual funds

ELSS mutual funds are an excellent choice for risk-averse taxpayers. You can invest in ELSS mutual funds which have lock-in for 3 years. The benefits of ELSS mutual funds are as below:-

Returns: approx. 10–15% depending on market conditions when you withdraw after 3 years. You have the option to keep invested. in the long run, it may give you good returns.

Liquidity: can withdraw after 3 years

Tax benefit: comes under 80C so you can invest up to 1.5 lakhs to get tax benefit under 80C.

Taxability at maturity: Taxed as per LTCG. I.e. profit up to 1lakh is tax exempted anything beyond that is taxed at 20%.

Confused about how to select a mutual fund? check – How to select mutual funds India

Check out the best ELSS funds on Moneycontrol website

5. Tax saver FD

If you are looking for surety of returns then tax-saver FDs are a great choice to save tax. A few benefits of tax-saver FDs are as below:-

Returns: approx. 6.5% per year (as per current interest rates) in diff banks – Guaranteed return.

Liquidity: can withdraw after 5 years.

Tax benefit: comes under 80C so you can invest up to 1.5 lakhs to get tax benefit under 80C.

Taxability at maturity: profit added to your income for the year when the FD has matured.

Check out the tax-saving guide – Income tax exemptions for salaried employees

What are the best tax saving options for salaried employees?

The best tax-saving option depends on the investment horizon. If you are looking to save tax as well as plan for your retirement then NPS is a great choice for you. It also offers an additional 50k on top of 80C tax savings.

If you do not want to lock in your money for a long time then ELSS funds may be a good choice for you.

Here are some detailed explanations of income tax saving options in India.

Income tax saving options  in India
Full list of Tax saving options for salaried employees
Income tax saving options under 80C in India
80C tax saving options
SectionDescription of DeductionLimit
80DPremium paid for medical insuranceMaximum up to Rs 25,000 for non-senior citizens and Rs 30,000 in case of a senior citizen.
80DDMaintenance including medical treatment of a handicapped dependent who is a person with a disabilityRs 75,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh shall be allowed.
80DDBExpenditure incurred in respect of medical treatmentActual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in case of a senior citizen, whichever is lower. But for those with age 80 and above, classified as very senior citizens, the eligible deduction is Rs 80,000
80ERepayment of loan taken for pursuing higher educationMaximum deduction for interest paid for a maximum of 8 years or till the such interest is paid, whichever is earlier
80GDonations to certain funds and charitable institutionsMaximum deductions allowed be 50% or 100% of the donation, subject to the stated limits as provided under this section
80GGRent paid in respect of property occupied for residentialMaximum deduction allowed is least of the following: Rs 2,000 per month; 25% of total income; Excess of rent paid over 10% of total income
80GGCA contribution made to any political party or an electoral trustAmount donated to a political party is fully exempt
80UA person suffering from a specified disability(s)Rs 75,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh is allowed.
80CCGRajiv Gandhi Equity Savings Scheme (RGESS)The maximum deduction allowed is 50% of investments up to Rs 50,000, only for first-time investors having a total income of less than or equal to Rs 12 Lakhs.
Income tax deduction details

The above data shows all the tax saving options for salaried employees.

How do I save maximum tax?

In order to save maximum tax, you need to be able to take benefits of all the possible tax savings options. Here is a plan to save maximum tax in India:

  1. Invest 1.5 lakhs in tax savings instruments NPS, PF(EPF+VPF), ELSS funds for 80C
  2. Invest 50k in NPS for additional tax benefit under 80CCD
  3. Take HRA benefits
  4. Take LTA benefits
  5. Take house loan interest + principal benefits

What are some lesser-known ways to save income tax in India?

HUF Creation: HUF is considered a separate entity that has its own PAN No and is therefore taxed separately. This helps to separate the tax obligations of an individual from that of his family. Tax slabs of HUF are the same as that of an individual and qualify for all the tax benefits under Section 80C, 80D, 80G, 80L, and so on. It also enjoys exemptions under Sections 54 and 54F with respect to capital gains. The HUF is also entitled to claim a deduction for interest on self-occupied house property of Rs. 2, 00,000 in a year as per section 24 of the Income-tax Act.

FAQs on Best Tax saving options for salaried employees

  1. Which scheme is best for tax saving?

    For salaried employees, the best tax saving option is VPF/EPF i.e. additional contribution to your provident fund. It gives you the best-fixed returns on top of tax exemption on your investments.

  2. Which is better tax saver FD or PPF?

    PPF is always a better tax saver investment than tax saver FD because not only it gives higher interest rates but interest income from PPF is tax completely tax-free whereas interest income from tax saver FD is added to the income of the person.

  3. Is mutual fund better than PPF for tax savings?

    Over the long term equity mutual funds have given better returns than PPFs. PPF has a lock-in period of 15 years whereas mutual funds in most cases have a maximum lock-in period of only 3 years. From a liquidity perspective, mutual funds are a better investment option than PPFs. In PPF the risk factor is less compared to mutual funds.

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