Tax planning for salaried employees – how to save more

Published on: 9 June 2023

When planning to file tax returns and compiling various forms and slips, one thought that arises in every employee’s mind is about the tax-saving options for salaried professionals. So, if you too are wondering how to make the most of tax benefits for salaried employees, you are not alone.

The good news is that numerous means of saving tax are specified under certain sections of the Income Tax Act. However, the exemptions and deductions that you can get depend on certain factors, which include:

• Your chosen tax regime (old or new)
• Applicable tax slab
• Total taxable income

To maximise your tax deductions, you must manage your funds keeping these factors in mind. There are several ways in which you can plan to save more and reduces your taxes. 

To know more, read on. 

Top tax saving options for salaried employees

Tax planning for salaried employees requires a little forethought. By putting in some time and effort you can choose the best tax-saving avenues as per your needs. 

Here are some of the most popular means by which you can save tax as a salaried employee. 

1. Employees’ Provident Fund

Whether you work in a company employing over 20 employees or in a company that has volunteered for EPF registration, make the most of this government-backed scheme. It offers you an easy way to save for retirement with your contributions being matched by your employer up to 12% of your basic salary and dearness allowance. With an 8.15% interest rate for FY 2022-2023, you can benefit from risk-free returns.

You can also increase your monthly contribution, going up to 100% of your basic salary, via the Voluntary Provident Fund. While your EPF contributions fall under Section 80C of the IT Act, allowing you a deduction of up to ₹1.5 lacs, remember that the interest you earn is subject to taxes. As of 2021, any interest you earn from your EPF account over ₹2.50 lacs is taxable and subject to TDS. 

2. Public Provident Fund

Another important component of tax planning for salaried employees is investing in the Public Provident Fund (PPF). Unlike EPF, anyone can contribute to PPF as this is not linked to an employer. It is a great way to earn risk-free returns and save for retirement as the scheme’s tenure is 15 years. 

The PPF scheme enjoys an EEE status or triple level of exemption. At the first level, the contributions you make towards the scheme annually are exempt from tax, up to ₹1.5 lacs as per Section 80C. At the second level, the interest you earn annually is tax-free. In addition, the amount that you withdraw upon the end of your PPF tenure is also not subject to taxes. 

3. Equity Linked Savings Scheme 

While provident funds are fixed-income schemes, the Equity Linked Savings Scheme (ELSS) offers higher wealth accumulation possibilities. It is a type of mutual fund that comes with a lock-in period of three years. The scheme is called so because 65% of the asset allocation is made towards equity or equity-linked securities.

If you wish to enjoy tax benefits while earning returns that may be high enough to beat inflation, this can be the ideal investment instrument. However, remember that ELSS is subject to risk. Under Section 80C, ELSS allows you to enjoy tax benefits up to ₹1.5 lacs. Another reason why it is one of the top tax-saving options for salaried employees is that you do not have to pay any Long-Term Capital Gains tTaxif your returns are ₹1 lac and below. Additionally, if you go the dividend route, you do not pay to have any tax on what you receive. 

4. House Rent Allowance and Others  

House Rent Allowance or HRA is a component of your salary that is available to you if you live in a rented home. Under certain conditions, you can enjoy partial or full exemption on your tax liabilities towards HRA. Under Section 10(13A) of the Income Tax Act, you can deduct HRA from your taxable income. When working on tax planning as a salaried employee, note that the HRA receivables are fully taxable if you don’t live in a rented residence. 

HRA, however, isn’t the only allowance you can enjoy. Some of the other ways to access tax benefits for salaried employees are via components such as:

• Standard deduction
• Leave travel allowance 
• Meal coupons 
• Relocation allowance 
• Education allowance for kid’s fees 
• Allowances related to reimbursement of expenses for phone, newspapers and more

5. Deductions Related to Loans and Health Premiums 

Apart from salary-based allowances and investments covered under Section 80C, 80CCC and 80CCD, certain credit facilities also offer tax-saving options for salaried and non-salaried persons. If you have a home loan, you can get deductions on the principal repayment and interest payment up to the limit specified in the IT Act. If you are repaying an education loan, you can get a deduction you the interest you pay annually. 

Similarly, you can benefit from premiums you pay for health insurance policies for yourself, your spouse and kids as well as your parents, which can go up to ₹1 lac if you and your parents are above 60 years of age. What’s more, health check-ups come under this total limit (up to ₹5,000) as do premiums paid by your employer on your behalf. 

While these are some of the best tax-saving options for salaried individuals, there is a lot more you can benefit from in terms of donations, having a savings account and receiving gratuity, gifts, gym benefits and transport facilities from your employer. So, make sure to carry out tax planning for salaried employees methodically and in advance. 

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Frequently Asked Questions

How to do tax planning for salary income?

When carrying out tax planning for salaried employees, keep in mind some factors that influence your tax benefits. These include your salary structure and allowances, tax regime, taxation slab and taxable income. You can choose investments and claim deductions that maximise your tax benefits based on these factors.

How can salaried employees reduce taxes?

Salaried employees can reduce taxes by making the most of allowances and investing in tax-saving instruments such as ELSS, National Pension Scheme (NPS), tax-saving FD and more. 

How do you calculate tax for salaried employees?

To calculate tax, you need to arrive at your total taxable income. Taxable income is your gross income after subtracting all deductions, allowances and exemptions. Then, you can get the taxable amount after applying the applicable tax rate as per your slab.

How to save tax on a ₹7 lacs salary?

You will not need to pay any taxes on a salary of ₹7 lacs in FY 2023-24 as per the new tax regime. This year too, you can avoid tax completely by choosing the old regime and investing in instruments like ELSS, NPS, PPF, EPF, etc.