Best 5 Tax saving options for salaried employees

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Tax saving options for salaried employees

I think it’s 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 with out doing proper analysis.

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

National Pension system – NPS

NPS has become popular recently and gaining popularity among high tax bracket tax payers as it offers additional 50000 tax savings on top of 1.5lakhs which

is offered via 80C tax savings. Benefits of NPS are as below:-

Return on 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 instruments. 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.

Check how to open NPS account.

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 is as below:-

Returns – 8.65% per year (as per current interest rates in Jan 2020) – Guaranteed return

Liquidity – You can withdraw VPF amount along with you PF while changing job or quitting the job. You can request for 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

Public provident fund – PPF

Although we prefer VPF over PPF but PPF is also a great choice for tax payers in terms of tax savings. Benefits of PPF are as below:-

Returns – 7.9% per year (as per current interest rates in Jan 2020) – 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

ELSS Mutual funds

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

Returns – approx. 10–15% depending on market condition when you withdraw after 3 years. You have an 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 how to select a mutual fund? check – How to select mutual funds India

Check out best ELSS funds here – https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/elss.html 

Tax saver FD

If you are looking for surety of returns then tax saver FDs are a great choice to save tax. 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 is the best tax saving options for salaried employees?

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

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

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. You should plan below:-

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 + principle benefits


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