5 Best Tax saving options for salaried employees in 2023
As a salaried employee, paying taxes can take a significant chunk of your income. However, there are several tax-saving options available that can help you reduce your tax liability and save money. In this article, we will explore the top tax-saving options for salaried employees in India, including deductions under Section 80C of the Income Tax Act, 1961, health insurance premiums, medical expenses, and more. Whether you are a beginner or an experienced taxpayer, this article will provide you with valuable insights into some of the most effective ways to save on taxes and maximize your take-home pay. So, let’s dive in and discover the best tax saving options for salaried employees in India.
5 Best Tax saving options for salaried employees in India
| Tax Saving Option | Maximum Deduction | Eligibility Criteria | Benefits |
|---|---|---|---|
| National Pension System (NPS) | Rs. 1.5 lakh per annum | All taxpayers | Reduces taxable income by up to Rs. 1.5 lakh per annum and provides a retirement corpus |
| Voluntary Provident Fund (VPF) | Rs. 1.5 lakh per annum | Employees with a provident fund account | Reduces taxable income and provides retirement savings |
| Public Provident Fund (PPF) | Rs. 1.5 lakh per annum | All taxpayers | Reduces taxable income by up to Rs. 1.5 lakh per annum and provides long-term savings at a fixed interest rate |
| Equity-Linked Savings Scheme (ELSS) Mutual Funds | Rs. 1.5 lakh per annum | All taxpayers | Reduces taxable income by up to Rs. 1.5 lakh per annum and provides potential long-term returns through investment in equity markets |
| Tax Saver Fixed Deposit (FD) | Rs. 1.5 lakh per annum | All taxpayers | Reduces taxable income by up to Rs. 1.5 lakh per annum and provides fixed returns at a higher interest rate compared to regular FDs |
Note: The above table is for illustrative purposes only and the actual benefits and eligibility criteria may vary. It is recommended to consult a tax expert or financial advisor before making any investment or tax-saving decisions.
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.
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
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
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:Â Taxed as per LTCG. I.e. profit up to 1 lakh 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
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.
| Section | Description of Deduction | Limit |
| 80D | Premium paid for medical insurance | Maximum up to Rs 25,000 for non-senior citizens and Rs 30,000 in case of a senior citizen. |
| 80DD | Maintenance including medical treatment of a handicapped dependent who is a person with a disability | 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 shall be allowed. |
| 80DDB | Expenditure incurred in respect of medical treatment | Actual 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 |
| 80E | Repayment of loan taken for pursuing higher education | Maximum deduction for interest paid for a maximum of 8 years or till the such interest is paid, whichever is earlier |
| 80G | Donations to certain funds and charitable institutions | Maximum deductions allowed be 50% or 100% of the donation, subject to the stated limits as provided under this section |
| 80GG | Rent paid in respect of property occupied for residential | Maximum 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 |
| 80GGC | A contribution made to any political party or an electoral trust | Amount donated to a political party is fully exempt |
| 80U | A 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. |
| 80CCG | Rajiv 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. |
The above data shows all the tax saving options for salaried employees.
How to save maximum tax in India?
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:
- Invest 1.5 lakhs in tax savings instruments NPS, PF(EPF+VPF), ELSS funds for 80C
- Invest 50k in NPS for additional tax benefit under 80CCD
- Take HRA benefits
- Take LTA benefits
- Take house loan interest + principal benefits
What are some lesser-known ways to save income tax in India?
Apart from the commonly known tax-saving options such as Section 80C deductions, health insurance premiums, National Pension System (NPS), and Equity Linked Saving Scheme (ELSS) mutual funds, there are several lesser-known ways to save income tax in India. Here are some of them:
- Donations to charitable organizations: Donations made to charitable organizations under Section 80G of the Income Tax Act are eligible for tax deductions. Taxpayers can claim a deduction of up to 50% or 100% of the donated amount, depending on the organization and the type of donation.
- Rent paid to parents: If you are living in rented accommodation and paying rent to your parents, you can claim a deduction for the rent paid under Section 80GG of the Income Tax Act.
- Interest on education loan: Interest paid on an education loan taken for your own or your spouse/children’s higher education is eligible for tax deductions under Section 80E of the Income Tax Act.
- Medical expenses for dependents: Medical expenses incurred for the treatment of dependents, such as parents or disabled family members, are eligible for tax deductions under Section 80DD and 80DDB of the Income Tax Act.
- Home loan principal repayment: Repayment of the principal amount of a home loan is eligible for tax deductions under Section 80C of the Income Tax Act, but this deduction is often overlooked by taxpayers.
It is important to note that the eligibility criteria and limits for these tax-saving options may vary, and it is recommended to consult a tax expert or financial advisor before making any investment or tax-saving decisions. By taking advantage of these lesser-known tax-saving options, taxpayers can reduce their tax liability and maximize their take-home pay.
Final Thoughts on Best Tax saving options for salaried employees in India
In conclusion, tax-saving options are crucial for salaried employees in India to reduce their tax liability and maximize their take-home pay. By utilizing tax-saving options such as Section 80C deductions, health insurance premiums, National Pension System (NPS), Equity Linked Saving Scheme (ELSS) mutual funds, and tax-saver fixed deposits (FDs), salaried employees can save on taxes while also investing for their future.
In addition, lesser-known tax-saving options such as donations to charitable organizations, interest paid on education loans, medical expenses for dependents, and rent paid to parents can also help salaried employees save on taxes.
It is important to note that the eligibility criteria and benefits of each tax saving options for salaried employees may vary, and it is recommended to consult a tax expert or financial advisor before making any investment or tax-saving decisions.
By taking advantage of tax-saving options and planning investments and expenses wisely, salaried employees can reduce their tax liability and achieve their financial goals. So, start exploring the various tax saving options for salaried employees and make the most of them to save on taxes and secure your financial future.
FAQs on Best Tax saving options for salaried employees
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.
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.
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.
