Top 5 Tax-saving Tips Every Salaried Employee Should Know
The process of tax planning can be a source of anxiety for many salaried employees. Navigating through the various tax-saving options available is essential to maximise benefits and ensure financial well-being. Here’s a comprehensive guide to help salaried employees make the most of their tax-saving opportunities.
Understanding the Tax Regimes
Before diving into tax-saving strategies, it’s essential to understand the current tax regimes. Under the old tax regime, there is no tax liability on income up to ₹5 lakh, whereas the new tax regime offers tax exemption on income up to ₹7 lakh. Depending on the regime chosen, your approach to tax planning will vary.
Below are five effective methods that can significantly reduce your tax liability.
1. Home Loans: Dual Tax Benefits
Taking out a home loan offers a dual advantage when it comes to tax savings. Under Section 80C of the Income Tax Act, the principal amount of a home loan qualifies for tax exemption, up to a limit of ₹1.5 lakh. Additionally, the interest paid on a home loan is eligible for deduction under Section 24(b), with a cap of ₹2 lakh if the property is self-occupied.
This means that by utilising these provisions, you can save a substantial amount on taxes each year. Moreover, if you have a second home that is let out, the interest on the loan for that property can be deducted without any upper limit, though the overall deduction for loss under the head of income from house property is restricted to ₹2 lakh per year.
2. Employee Provident Fund (EPF): A Simple Yet Effective Tool
The Employee Provident Fund (EPF) remains one of the simplest and most effective tools for salaried individuals to save on taxes. Contributions made towards EPF are eligible for tax deduction under Section 80C, with a limit of ₹1.5 lakh. Additionally, the interest earned on EPF, up to ₹2.5 lakh per annum, is tax-free.
EPF not only helps in reducing taxable income but also ensures that you build a retirement corpus. The long-term benefits of EPF, coupled with its tax-saving potential, make it a must-have in every salaried employee’s financial planning toolkit.
3. House Rent Allowance (HRA): Optimising Rental Expenses
House Rent Allowance (HRA) is another significant component of a salaried employee's income that can be optimised for tax savings. Under Section 10(13A) of the Income Tax Act, you can claim tax exemption on HRA, provided you live in rented accommodation.
The exemption amount is determined based on the following criteria
- Up to 50% of your basic salary if you live in a metro city, or up to 40% if you reside in a non-metro area.
- The actual HRA received.
- Rent paid minus 10% of your salary.
4. Health Insurance Policy: Securing Your Health and Wealth
Investing in a health insurance policy not only provides financial security against unforeseen medical expenses but also offers tax benefits. Under Section 80D of the Income Tax Act, premiums paid towards health insurance policies for yourself, your spouse, children, and parents are eligible for tax deduction.
The maximum deduction allowed is ₹25,000 for policies covering self, spouse, and children. If you are paying the premium for senior citizen parents, the limit increases to ₹50,000. This means that by investing in a comprehensive health insurance policy, you can secure your family’s health and simultaneously reduce your tax liability.
5. Tuition Fees: Supporting Your Child’s Education
One of the lesser-known but effective tax-saving options is the deduction available on tuition fees paid for your children's education. Under Section 80C of the Income Tax Act, a deduction is allowed for tuition fees paid for up to two children. This deduction is part of the overall ₹1.5 lakh limit under Section 80C.
To claim this deduction, you need to submit the admission certificate and fee receipts from the educational institution. This provision is particularly beneficial for parents as it supports their children’s education while offering tax relief.
Strategic Planning for Maximum Savings
Tax-saving for salaried employees need not be a daunting task. By strategically utilising the provisions available under the Income Tax Act, you can significantly reduce your tax liability and increase your savings. Whether it’s through home loans, EPF, HRA, health insurance, or tuition fees, each of these methods offers a unique way to optimise your tax outgo. With the ITR deadline fast approaching, now is the time to assess your financial situation and make the most of these tax-saving opportunities.