Warren Buffet, one of the most successful investors and one of the wealthiest men in the world, stated, “Donot save what is left after spending, but spend what is left after saving”. He was not born rich but earned his way to the top by implementing the same along with other investment principles.
You may not be able to follow this principle, simply because you have your own priorities and limitations that take precedence over savings. However, this must not deter you from saving for your future.
Saving money does not simply mean putting some money aside for the future in a bank or in a fixed deposit (FD). Cutting down on unnecessary expenses and reducing your tax liability is savings as it directly increases your investible surplus.
If you are a salaried person and do not know how to save income tax on your salary, then there is no need to feel distressed. You are not alone in this situation; there are several people who are struggling to find the answer to this very important and common question that how can a salaried person save tax?
The first thing is to check your pay-slip for your salary break-up. There are components wherein that you can claim for theexemption while filing for your income tax. Here are six ways in which you may reduce your taxes.
1. Medical Allowance
All employers generally pay their employees a medical allowance as part of the Cost ToCompany (CTC). You are able to avail tax exemption of up to INR 15000 by submitting the medical bills, consulting fees receipts, and lab testing bills to your employer.
2. Transportation allowance
You may ask your employer to provide transportation allowance as part of your CTC. This allowance is available towards your daily commute between home and office. An amount of INR 1600 per month or INR 19,200per year is available as the tax exemption.
3. House Rent Allowance (HRA)
If you are living in a rented house then you may claim tax deductions as per the allowable rules. If you do not reside in a rented house and receive HRA as part of your salary, the entire amount is taxable.
In case you livewith your parents, you may still claim an exemption only if you pay rent to them. Furthermore, your parents must show the rent as an income on their income tax returns.
4. Food Coupons
A maximum of INR 26,400 is available asan exemption from your taxable income if you receive food coupons as a component of your salary. A daily amount of INR 55 for up to two meals may be paid as food coupons.
5. Medical Insurance
You may purchase medical insurance for self, spouse, and children. An amount of up to INR 25000 per annum paid towards medical insurance premium may be claimed as tax deductions. Moreover, if you purchase medical insurance for your parents between, an additional INR 30,000 per year is available as an exemption.
6. Section 80C investments
Lastly but most importantly, under Section 80C of the Income Tax (IT) Act, you may claim tax deductions of up to INR 1.5 lakh per annumon all eligible investments. This exemption allows you to reduce your tax liability between INR 7500(for 5% tax slab) and INR 45000(for 30% tax bracket).
You may invest in several of the investments allowed under section 80C of the IT Act. These include Public Provident Fund (PPF), National Pension System (NPS), National Savings Certificate (NSC), Equity Linked Savings Schemes (ELSS), and others. Of all the investment instruments that you can save in to benefit from the same, the ELSS funds areone of the best investment optionsfor a salaried person. This is because such funds allow you to earn market-linked returns and have the shortest lock-in period of three years.
Another feather that makes ELSS funds one of the best investment options for a salaried personis EEE (exempt-exempt-exempt). This means that not only your investments are tax-free but also the earnings and maturity benefits are also not taxable.
You may invest in ELSS funds through a Systematic Investment Plan (SIP). Under a SIP, you invest small but regular amounts at periodic intervals. This ensures a SIP is light on your wallet and enablesyou to benefit from the rupee cost averaging.
You want to know how to save income tax on your salary through ELSS investments. It is very simple and straightforward. You may either invest a lump sum amount of up to INR 1.5 lakh during the financial year. Alternatively, you may break down your investment into smaller monthly SIPs. However, ensure your entire amount is invested before 31stMarch to make you eligible for the tax exemption.
The best way on how a salaried person can save tax is to maximize your Section 80C investments. You must focus on choosing the right ELSS funds not only to save tax but also to earn higher returns. Comparing the performance of different funds over the last three to five years will help you make an informed decision today. Investing via a personalized mutual fund recommendation platform will save you time and energy to find out the perfect mutual funds that suits your needs. These platforms, such as Angel Wealth, employ AI and machine learning to find out the perfect mutual fund match for your investments.
Start investing today to save taxes.