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Tips to save Income Tax on Salary

Updated on: 03 Feb, 2025 07:25 PM

1. Optimize Your Salary Structure

Tax-Free Allowances: Request your employer to structure your salary in a way that maximizes tax-free allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and special allowances.
Reimbursements: You can also reduce taxable income by claiming reimbursements for medical bills, phone bills, fuel expenses, etc.
Tax-Free Benefits: Try to maximize benefits like HRA, LTA, and other perks that are exempt from taxes.

2. Invest in Tax-Saving Instruments

Section 80C Investments: Investments under Section 80C of the Income Tax Act, such as Public Provident Fund (PPF), National Savings Certificate (NSC), Employee Provident Fund (EPF), and Tax-saving Fixed Deposits (FDs), help reduce taxable income.
Tax-Free Returns: These tax-saving instruments not only help you save on taxes but also build long-term wealth.

3. Health Insurance Under Section 80D

You can claim deductions for premiums paid for health insurance under Section 80D. This includes premiums for yourself, your spouse, children, and parents. Additionally, preventive health check-ups can also be claimed under this section.

4. Invest in Tax-Saving Mutual Funds (ELSS)

Equity Linked Saving Schemes (ELSS) are mutual funds that qualify for tax deductions under Section 80C. They offer both potential capital appreciation and tax-saving benefits. They come with a 3-year lock-in period and are a good way to invest while saving taxes.

5. Claim Tax Benefits on Retirement Benefits

Gratuity: If eligible, the gratuity amount you receive at retirement or resignation can be partially tax-exempt.
Leave Encashment: The tax-exemption rules for leave encashment vary based on government or non-government employment. Non-government employees may get exemptions up to certain limits under Section 10(10)C.

6. Utilize the New Tax Regime (After Budget 2023)

New Tax Regime (FY 2023-24): If you’re eligible, the new tax regime offers a higher rebate, especially for incomes up to ₹7 lakhs. You can take advantage of this regime if it provides you with better tax savings compared to the old regime, after considering all deductions.

7. Advance Salary and VRS (Voluntary Retirement Scheme)

Advance Salary: Under Section 89(1), tax exemption is available if you have received part of your salary in advance.
VRS: Compensation received under Voluntary Retirement Scheme (VRS) is partially exempt under Section 10(10C), provided it does not exceed ₹5 lakh.

8. Take Expert Assistance

Tax Consultants and Financial Advisors: If you want to ensure you’re optimizing your salary and investment strategies, seeking help from professionals can be beneficial. They can guide you in maximizing deductions, exemptions, and tax-saving opportunities while complying with tax laws.

9. Understand the New Tax Slabs

Tax Slab Changes: For FY 2023-24, the new tax regime has some significant changes, such as increasing the rebate to ₹7 lakh, which can make it more tax-friendly for many individuals.

By taking these steps, you can optimize your salary structure and make well-informed investments to minimize your tax liability.