10 Best Tax Saving Options for Salaried Employees in 2023 | Schemes & Policies

During the tax filing season, salaried individuals often wonder about their tax-saving options. Besides knowing about their income components and tax slab, managing funds and saving tax is crucial. 

Fortunately, Section 80C under Income Tax laws offers a list of tax-saving investments that can provide exemptions and even tax-free income up to a maximum limit of Rs. 1.5 lakh, including fixed deposits, income insurance, and provident fund. 

Here are the top tax saving options for salaried employees seeking ways to save taxes under the Income Tax Act. 

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10 Best Tax Saving Options For Salaried Employees 

Listed below are the 10 best ways to save tax for salaried employees

Tax Saving Options for Salaried Employees

1. Equity Linked Saving Scheme 

ELSS (Equity Linked Saving Scheme) is a type of mutual fund that primarily invests in equity stocks. It comes with a mandatory lock-in period of three years. Due to the high-risk, high-return nature of equity stocks, ELSS can be an excellent tool for creating wealth. 

Besides, it is a popular investment option for tax saving among salaried individuals. The investment made towards an ELSS is deductible under Section 80C of the Income Tax Act, making it an ideal investment option. While long-term capital gains above Rs. 1 lakh are taxable, the investment made in an ELSS can still provide tax benefits.

2. Employee Provident Fund 

Employee Provident Fund (EPF) is a favoured investment option for tax-saving among salaried individuals. Established under the Employees’ Provident Fund and Miscellaneous Act, of 1952, EPF is a retirement fund that is currently managed by the Central Board of Trustees. 

You and your employer can contribute up to 12% of your salary to this fund. The amount contributed earns a fixed rate of interest, and both the accumulated funds and the interest earned are tax-free, making it an attractive investment option.

3. Life Insurance 

Life insurance is one of the best tax saving options for salaried employees. That is because it not only provides financial security but also helps in achieving long-term financial goals. 

There are different types of insurance policies, including term insurance, which provides a death benefit, and savings insurance, which is a savings plan offering guaranteed returns.

Premiums paid for life insurance policies are eligible for tax deduction under Section 80C of the Income Tax Act. Furthermore, the sum assured received on death and the survival benefit are also eligible for tax benefits under Section 10(10D) of the Act, subject to the fulfilment of conditions according to current tax laws.

4. National Pension Scheme 

The National Pension Scheme (NPS) is a government-managed investment option designed for individuals with a low-risk appetite and an interest in retirement planning. As a safe investment option, it is also a popular choice for tax-saving purposes among salaried individuals.

Contributions made towards NPS are eligible for tax benefits under Section 80C of the Income Tax Act. In addition, individuals can avail of further deductions of up to Rs. 50,000 under Section 80CCD(1b).

5. Tax Saving Fixed Deposit 

Fixed deposits (FD) are a highly sought-after investment option that not only allows your money to work for you but also provides tax saving benefits. FDs typically come with a 5-year lock-in period and offer guaranteed returns, making it a safe investment choice for those seeking security.

You can also claim tax deductions on your tax-saving FD investments under Section 80C of the Income Tax Act. 

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6. Public Provident Fund 

Investing in a Public Provident Fund (PPF) is a crucial component of a salaried individual’s income plan, as it is a government-enabled savings scheme with several tax-saving benefits. You can open a PPF account with as little as Rs. 500 and make a maximum investment of Rs. 1.5 lakh.

PPF investments are categorized under the EEE or Exempt-Exempt-Exempt status. It means that the investment amount, interest earned, and maturity sum are all exempted from tax, making it an attractive investment and tax-saving option for individuals. 

7. Health Insurance 

Due to sedentary lifestyles, long work hours, unhealthy eating habits, and other environmental factors, chronic health conditions have become prevalent. In addition, rising healthcare costs have made health insurance a necessary investment. It can protect you and your family from health issues that could result in significant financial burdens and also provide tax benefits.

You can claim tax deductions for health insurance premiums paid under Section 80D, making it an advantageous tax-saving investment option with various benefits. 

8. Rental Accommodation 

If you are living in a rented property, you can benefit from tax savings as per the rules specified in the Income Tax Act. Your salary usually includes House Rent Allowance (HRA), which is not entirely taxable. 

As part of the HRA tax exemption under Section 10(13A), subject to certain terms and conditions, you can enjoy some tax deductions as a salaried individual.

9. Gratuity 

Another tax saving option for salaried employees is Gratuity. It is a lump sum amount paid by the employer to the employee as a token of appreciation for the services rendered by them.

As per the Income Tax Act, Gratuity received by an employee is exempt from tax up to a certain limit, which is currently Rs. 20 lakhs. This exemption is available to employees who have completed a minimum of five years of continuous service with the employer. The exemption is available under section 10(10) of the Income Tax Act.

10. Unit Linked Insurance Plans 

ULIPs are a combination of investment and insurance that offer the advantage of both. By paying premiums into a ULIP, you can provide financial security to your loved ones and also invest in a variety of securities to earn returns through strategic planning.

ULIPs come under the EEE category, which implies that you can avail of tax benefits on the premiums paid, returns earned, and the sum assured on maturity, without any deductions, subject to certain conditions and the latest tax regulations. 

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FAQs on Tax Saving Options for Salaried Employees

Here are some frequently asked questions on tax saving options for salaried employees:

What is Section 80C in the Income Tax Act?

Section 80C of the Income Tax Act allows salaried employees to claim tax deductions up to Rs. 1.5 lakh on various investments, such as ELSS, PPF, NPS, tax-saving FDs, etc.

What are some of the best tax-saving options for salaried employees?

Some of the best tax saving options for salaried employees include ELSS, PPF, NPS, tax-saving FDs, ULIPs, health insurance, and HRA.

Can salaried employees claim tax deductions on the premiums paid toward their life insurance policies?

Yes, salaried employees can claim tax deductions on the premiums paid towards their life insurance policies under Section 80C of the Income Tax Act.

Can I claim tax benefits on both my health insurance premium and the premium for my parent’s health insurance policy?

Yes, you can claim tax benefits on both your health insurance premium and the premium for your parent’s health insurance policy, subject to certain conditions and limits.

Can I claim tax deductions on my home loan?

Yes, you can claim tax deductions on the principal amount of your home loan under Section 80C and on the interest paid on the loan under Section 24.

Salaried employees have various tax saving options to choose from, ranging from traditional investments like PPF, FDs, and life insurance to modern options like NPS and ULIPs. By investing in these schemes, individuals can save taxes and secure their financial future at the same time. 

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