How To Save Tax Legally in India (For Salaried Employees)

Check top 5 Legal Ways of saving taxes, If you are Salaried Employee

Let’s begin! Now, what is Income Tax? Suppose you are earning ‘x’ amount of money. Out of that, you have to give away some to the government so that it can use it for public services. Now here are some tips on How to Save Maximum Tax for Salaried Employees. The first method involves spending money a certain way and the rest 4 are by saving it. Let’s start with spending money. The Income Tax Department will give you back your money if you spend it on the following things. a. House Rent Allowance In your salary slip, you would’ve noticed there is something called ‘HRA’, House Rent Allowance. If you are paying rent, then under Section 10(13A), you get an exemption of an amount that is equal to the minimum of these 3. 1. Your HRA from your salary slip. 2. 50% of your basic (if you are living in a Metro) or 40% of your basic (if you are living in a Non-Metro) or 3. The rent paid by you – 10% of your Basic. To simplify this, let’s take an example. Suppose you earn Rs.50,000 per month. Your Basic is Rs.25,000. And according to your company policy, your HRA is 40% of your Basic, which is Rs.10,000. So we are assuming that this is how your salary slip looks like. So Option 1 is direct. HRA is Rs.10,000 which we directly picked up from your salary slip. Option 2 is the same as Option 1 because your company decided that your HRA is 40% of your Basic, which is what most companies do. Time to calculate Option 3. Let’s assume you pay Rs.7000 per month as rent. So 7000 – 2500 (10% of your Basic) = Rs.4,500 Now among 10K, 10K and 4,500, which is minimum? Obviously, Rs.4,500. So 4,500 X 12 = Rs.54,000 is your tax-exemption. Now, remember this Rs.54,000 because, towards the end in the Bonus Tip, I will show you how this Rs.54,000 will reduce your taxes. Moving from rent to home loan. Suppose you are living in your own house and have a home loan on it then congratulations because you can claim both principal and interest.

Under Section 80C, you can claim the principal and the max limit of 80C is Rs.1,50,000. Under Section 24, you can claim the interest and the max limit is up to Rs. 2,00,000. Third expense, Provident Fund. This is something, you have to contribute in, while you are working. The best part is, it comes with a tax exemption under 80C. So your PF is usually 12% of your Basic. If we take the example of this salary slip, then 12% of Rs.25,000 will be Rs.3,000. Multiply that by 12, you get Rs.36,000. Remember this Rs.36,000 also because towards the end I’ll show you how this will also reduce your tax. Fourth and the most important expense, education. Under 80E, suppose you or your spouse or your children, take an education loan then you can claim the interest until it is fully paid or for 8 years, whichever is sooner. Which means, suppose you took a loan for doing your engineering then you can claim it even while you are doing your job. 80E is for education loan but under 80C, you can also claim the tuition fees of your children. Only for the first 2 kids, ok? Because ‘Hum do hamare do!’

And finally, under 80G, you can file returns for a maximum of Rs.10,000 for contributions made to charitable institutions, relief funds. So if you have contributed to the Kerala CM Relief Fund then you can claim it now. So as you can see, there are so much tax returns you can file by spending money.

But if you are not doing any of these then don’t worry. Because the Government of India allows Tax Exemption even when you save money also. To help you decide which of these 4 saving options is best for you we are going to compare them based on 3 parameters. 1. Lock-in period, which is how long you’ll have to wait before you take out your own money. 2. Average returns which are the % of the interest you will get out of it. and 3. Tax on Maturity which is the amount of tax you’ll have to pay on the final amount that you get at the time of withdrawing your money. Let’s start with the option of Saving Money through PPF. PPF stands for Public Provident Fund which is basically a retirement fund. So if you save your money through PPF, then you can save your taxes under Section 80C. The sad part is, the Lock-in Period of PPF is 15 years and if you are in dire need of money then you can withdraw only after 5 years and only up to a certain percentage. So withdrawal is definitely a problem with PPF. The average returns are around 8% but the good part is you don’t have to pay any taxes on the final amount at the time of withdrawal. Our next option is a Tax-Saving FD, which is basically a type of Fixed Deposit that comes with a tax benefit under Section 80C. The best way to invest in a Tax-Saving FD is in a bank that has your salary account. Because that way you can automatically set up for the FD amount to directly move to your salary account after maturity without you having to do anything. Our next saving option is Health Insurance. I know what you are thinking… ‘Nothing bad will happen to me.’ But bad luck doesn’t knock on the door before coming and you wouldn’t want you or your family to spend all your savings or worse beg for money. The best part about Health Insurance is that it helps you save taxes. Under Section 80D, you can claim up to Rs.25,000 for yourself and your dependents and an additional of Rs.30,000 if both your parents are above the age of 60. If you want me to make a separate video about, ‘How to chose the best health insurance plan?’ then comment below and let me know.

Our last saving option of the day is, ELSS. Equity Linked Saving Scheme which is basically an Equity Mutual Fund with tax-benefit under 80C. The Lock-in period of ELSS is just 3 years, average returns in the past have been between 14% to 18% and the returns generated are taxable.