Taxpayers like to invest, earn and save taxes at the same time. But, how does a taxpayer maximise his earnings and collect taxes at the same time? A taxpayer has various investment options available to save taxes by structuring their salary as well as investing their taxable salary.
Salary structuring:
The salary of a taxpayer would consist of various components such as:
- Basic salary
- House rent allowance (HRA)
- Leave travel allowance (LTA)
- Meal coupons
- Telephone (including broadband)
- Books and periodicals
- Gifts
A taxpayer can structure his salary components to maximise the benefit of tax exemptions. A taxpayer can submit rent receipts towards claiming an exemption for house rent allowance. Similarly, a taxpayer can submit air tickets, train tickets or taxi bills for claiming reimbursement towards leave travel allowance.
A taxpayer can also claim reimbursement towards telephone or broadband bills, books and periodicals. The meal coupons provided by the employer are tax-exempt up to Rs 26,400 annually. In a case an employer offers gifts or vouchers in cash or kind, the same are tax-free up to Rs 5,000 per year.
Tax breaks on investments:
Section 80C is the most commonly used option to save income tax. The investments are eligible for deduction up to a limit of Rs 1.5 lakh a year, enabling you to save up to Rs 46,800 in taxes annually.
While making investments, taxpayers also need to look at the taxability of the returns on investment and maturity. Taxpayers can even tie their tax investments to their financial goals. A taxpayer may have a short-term financial goal of buying a car or a long-term financial goal of buying a house. Money saved in taxes is more money earned, thereby helping you build assets.
Also Read: Investments under section 80C towards PPF and EPF
We will take you through the various tax-friendly investment options under Section 80C:
| Investment option | Range | Returns p.a. | Tax on returns | Period | Maturity taxation |
| Equity Linked Savings Scheme | Rs 500 to Rs 1.5 lakh | 12-14% | Exempt | Three years | Taxed (Capital gain or loss) |
| National Savings Certificate | Rs 100 to Rs 1.5 lakh | 8% | Taxed | Five years (VIII Issue) | Exempt |
| Public Provident Fund | Rs 500 to Rs 1.5 lakh | 7.9% | Exempt | Fifteen years | Exempt |
| Tax saver fixed deposits | Rs 100 to Rs 1.5 lakh | 6.25% to 7.5% | Taxed | Five years | Exempt |
| Sukanya Samriddhi Yojana | Rs 250 to Rs 1.5 lakh | 8.5% | Exempt | Twenty-one years | Exempt |
| National Pension Scheme (NPS) | Rs 500/Rs 1,000 p.a. to Rs 1.5 lakh | 8% to 10% | Exempt | Till retirement | Exempt |
| Unit Linked Insurance Plan | Up to Rs 1.5 lakh | 12% to 14% | Exempt | Till maturity | Exempt |
Tax break on real estate:
Apart from the above investments, taxpayers can avail a tax break on investments made in a residential house. A deduction up to Rs 1.5 lakh is available under Section 80C for housing loan repayments.
Also, most of the investments made in various options mentioned above would enable you to get an annual tax break, pool a lump sum on maturity and help create an asset like house property. An investment in house property is also entitled to an annual tax break of Rs 2 lakh towards interest payment on housing loan.
Tax break for high-income bracket:
Taxpayers in the high-income bracket can consider a contribution to NPS (National Pension Scheme) account. NPS is a long-term investment plan aimed at retirement planning. The contribution would be on your basic salary.
The scheme offers a higher deduction of up to Rs 2 lakh (including Section 80C) and helps prepare retirement funds. You can contribute during your earning years and withdraw some at the age of 60 on retirement, and you would receive 40% of the corpus via annuities.
Tax breaks – others:
| Payment | Section | Amount allowed |
| Medical insurance premium | 80D | Rs 25,000 for individual and family; Additional Rs 50,000 for senior citizen parents |
| Interest paid on loan for higher education | 80E | The actual interest paid for eight years |
| Interest paid on affordable housing loan | 80EEA | The actual interest paid up to Rs 1.5 lakh |
| Donations | 80G | 50% to 100% of the donation |
| Interest on savings bank | 80TTA/ 80TTB | Rs 10,000 under 80TTA; Rs 50,000 under 80TTB (senior citizen) |
For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in
I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.
