It’s that time of year again. Salaried tax-payers have to complete the annual ritual of submitting proofs of tax-saving investments made during the financial year to their employers in January or February.
At the beginning of every financial year, in April, employers ask their employees to declare their proposed investments. You also have to indicate the tax regime you wish to choose — the old, with-exemptions one, or the simpler new tax regime, which is now the default option. As per finance ministry data, 72 percent of taxpayers have already shifted to the new tax regime in FY 2023-24.
You also need to indicate the tax deductions you intend to claim, so that the employer can take these into account while computing the income tax to be docked from the employee’s salary. And in January or February, employees have to submit proof of having actually made these investments to enable employers to finalise the tax to be deducted over the last three months of the financial year.
The tax planning process ought to begin in April, rather than at the last minute just before submitting the proof. Nevertheless, many still end up repeating the same mistake every year. “Taxpayers must plan ahead to maximise tax deductions. While the government is incentivising the new tax regime, the fact remains that the old structure promotes disciplined savings, contributing to taxpayers’ overall goal-based planning,” says Sudhir Kaushik, Co-Founder, TaxSpanner.com, a tax consultancy.
Some of the most popular tax-saving avenues under section 80C, which offers deductions of up to Rs 1.5 lakh, include equity-linked saving schemes (ELSS), Sukanya Samriddhi Account (SSA), Public Provident Fund (PPF) and five-year tax-saver bank fixed deposits, among others.
| Tax-saver instruments | Lock-in/maturity period | Returns |
| Equity-linked Saving Scheme (ELSS) | 3 years | Market-linked |
| National Pension System (NPS) | Till the age of 60** | Market-linked |
| Sukanya Samriddhi Account (SSA) | 21 years post account opening/once the girl child turns 18* | 8.2% per annum |
| Public Provident Fund (PPF) | 15 years** | 7.1% per annum |
| National Saving Certificates (NSC) | 5 years | 7.7% per annum |
| Senior Citizens' Saving Scheme (SCSS) | 5 years** | 8.2% per annum, payable quarterly |
| National/post office time deposits | 5 years** | 7.5% per annum |
| Tax-saver bank fixed deposits^ | 5 years | 6.5-7.5% per annum |
| Notes: 1. *Account will mature after 21 years from the date of opening or at the time of the girl’s marriage once she turns 18, though no closure will be permitted one month prior to, or three months after, the date of marriage; Premature withdrawals will be permitted after the girl turns 18 or passes the 10th grade. 2. Partial withdrawals/premature closures permitted under certain circumstances/subject to conditions. 3. ^SBI's interest rates for five-year term deposits, which will be applicable to its five-year tax-saver FDs as well. |
Also read: Old vs new (simplified): Which income tax regime will help you save more on tax outgo?
However, instead of blindly investing or buying life insurance policies to claim deduction under section 80C, you need to first consider if you need to make additional investments at all. Even if you are completing your tax-planning process at the last minute, here are five tax-saving hacks that will take you closer to your financial goals:
National Pension System (NPS)
Private sector employees who contribute up to 10 percent of their basic salary plus dearness allowance, if any, to the National Pension System (NPS) are eligible for deductions under section 80 CCD(1) of the Income Tax Act under the old regime. This is subject to the overall 80 C limit of Rs 1.5 lakh. Moreover, they can contribute an additional Rs 50,000 to NPS to claim the tax break under section 80 CCD(1B).
However, Kaushik believes that it’s the corporate NPS deduction under section 80CCD(2) that can significantly reduce your taxes. “You must sign up if your employer offers this option. This is available under both the regimes,” he says. Under the old one, the employer’s contribution of up to 10 percent of your basic salary is exempt from tax. Under the new regime, this goes up to 14 percent.
According to analytics and advisory firm Taxmann’s calculations, employees who earn up to Rs 8.21 lakh and opt for corporate NPS under the new regime will not have to pay any tax, subject to some conditions. “Corporate NPS, if offered by the employer, is a good way of reducing your tax outgo under both regimes. The limit was increased to 14 percent under the new regime in the July budget. Now, whether or not employers allow this increased deduction during the year is dependent on the employers’ internal policies,” says Abhishek Soni, CEO and Co-Founder, TaxWin, a tax consultancy.
There is another point you need to bear in mind. “Employers allow you to give your tax declaration at the beginning of the financial year. But even if your employer does allow you to do this in January, do note that you can maximise your tax benefits if you start earlier in the financial year,” says Kuldip Kumar, Partner, Mainstay Tax Advisors.
Also read: Top five changes in income tax rules in 2024
PF, home loan principal
Despite an increase in financial literacy, many salaried people leave investing in tax-saving investments for the last minute. Blindly investing to exhaust the Rs 1.5 lakh limit under section 80 C without taking into account existing investments can lead to needless exposure to instruments that do not offer liquidity until maturity.
Equity-linked saving schemes (ELSS), for instance, have a lock-in period of three years. It is five years in the case of unit-linked insurance policies (Ulips) and tax-saving fixed deposits (FDs). “Your (employee's) provident fund (PF) contribution is eligible for tax deduction under this section, as is the home loan principal you've repaid. Yet, many taxpayers ignore these and scout for ELSS, tax-saving FDs, etc, come January, resulting in over-investment in instruments that come with a lock-in,” says Kaushik.
Children’s tuition fees
This only requires you to preserve copies of your children’s tuition fees paid during the year. Under section 80 C, you can avail of tax deductions for school / college tuition fees paid for up to two children, subject to a maximum of Rs 1.5 lakh; both spouses can avail of this deduction separately to optimise the tax break.
For instance, if the tuition fee paid is Rs 2.5 lakh, the wife can claim deductions of up to Rs 1.5 lakh and the husband can utilise the balance Rs 1 lakh. Moreover, even your kid’s nursery tuition fees would be eligible for deduction. However, donations, school bus fees, charges for extra-curricular, etc, will not qualify for this.
Medical expenses for senior citizens
Under section 80D, deduction of the health insurance premium is a popular tax break. However, senior citizens who do not have health insurance can avail of deductions of up to Rs 50,000 on medical expenses incurred during the financial year. If their children fund these expenses, they too will qualify for the tax benefits.
Tax-saving with the help of employers
You can, provided your employer offers such options, restructure your salary to claim reimbursements and minimise your tax impact. “If the employer provides a car to the employee for personal and official use, it is taxed at a concessional rate at Rs 1,800 / 2,400 per month, depending on the cubic capacity,” says Kumar
Such reimbursement-linked tax-savings can slash your outgo substantially. “Tax-free perquisites and employee benefits offered by employers can help even those with a cost-to-company (CTC) of, say, Rs 20 lakh reduce their tax outgo to zero under the old regime,” says Kaushik.
Choose the tax regime carefully
Most employers do not give the option of switching between regimes during the financial year — typically, you have to make the decision in April. However, you can switch when filing your returns in July. “Ensure that you avail of all the deductions you are entitled to when you file your returns and claim refund on the excess tax withheld by your employer,” advises Kumar.
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