KNOWLEDGE CENTRE Tax Planning / How Much of Your Salary Should You Invest to Save Tax?

How Much of Your Salary Should You Invest to Save Tax?

You work very hard to earn a salary and there is nothing wrong if you want to reduce your tax liability. There are several legitimate ways that are beneficial in reducing your income tax.

It is common knowledge that the Income Tax (IT) Act, 1961 includes multiple sections that offer tax deductions, of which Section 80C is the most significant one. Understand how much tax you have to pay is an important step as a part of financial planning. It tell you how much you’ll need to invest to achieve your goals after tax, and if you should invest in tax-saving investments instead to achieve both of your goals.

How To Determine How Much Income Tax You Have To Pay?

Prior to calculating the amount of investments needed, it is important to determine your tax liability. First, add all the different sources of income, such as salary, interest, and capital gains. Certain items included in your salary, such as leave travel allowance (LTA), medical reimbursements, house rent allowance (HRA), and transport allowance, are not taxable. These must be deducted to determine your taxable income. The next step is to determine your tax based on the slab, which may be easily found online.

What Are The Different Types Of Tax-Saving Investments Under Section 80C?

Certain investments are eligible for tax deductions and are reduced from your income. When you deduct the value of these investments, your taxable income goes down, which thereby reduces your tax liability. However, section 80C deductions are limited to INR 1.5 lakh per annum. Here are six eligible investments:

  1. Tax-saving mutual funds
  2. Employee Provident fund (PF)
  3. Public provident fund (PPF)
  4. Life Insurance Premium
  5. Tax-Saving Fixed Deposits

Let’s look at these points in more detail:

1. Tax-Saving Mutual Funds

Tax-saving mutual funds like equity-linked savings schemes (ELSS) are one of the most popular investments under section 80C of the IT Act. These are diversified equity funds that invest a majority of its corpus in equities and related products. The minimum lock-in period for ELSS funds is three years. If you invest through a systematic investment plan (SIP), each installment is a fresh investment and subject to the minimum lock-in period. Compared to fixed income instruments, such as PPF, PF, and tax-saving fixed deposits, such tax-saving mutual funds often deliver higher returns that are beneficial for capital appreciation.

2. Employee Provident Fund (EPF)

Contributions made to your PF account are eligible for deductions and help you save tax. Generally, this amount is directly decreased from your monthly salary, which not only reduces your tax, but also contributes towards regular savings. If you increase your contribution over and above the statutory requirements, the enhanced amount will also be eligible for tax deductions.

3. Public Provident Fund (PPF)

You may open a PPF account with the post office or bank. A minimum contribution of INR 500 per annum is mandatory in this type of account. It has a 15-year lock-in period. The interests earned along with the maturity proceeds are tax-free.

4. Life Insurance Premium

Premium paid to avail of life insurance for self, spouse, and children is eligible for tax deductions. You may enjoy this benefit on multiple policies, but the maximum deduction allowed is INR 1.5 lakh per year.

5. Tax-Saving Fixed Deposits

Tax-saving fixed deposits (FDs) offered by banks are eligible for tax deductions. However, the minimum lock-in period on these FDs is five years. But, returns on FDs are lower than even liquid funds because these deposits have no equity exposure.

With a large number of investment options available, making the right decision may be confusing. However, Angel Bee’s proprietary investment engine, ARQ simplifies this task.

ARQ uses scientific and advanced quants and algorithms to analyze and evaluate different types of investments. It considers over a billion data points to find investment options that most appropriately suit your financial objectives, lifestyle, and risk appetite. The entire procedure is automated without any human intervention, ensuring you receive customized recommendations.

ARQ also analyzes your existing portfolio based on different variables. The investment engine recommends any modifications that may be necessary to meet your financial goals as well as offers recommendations that encourage you to save tax.

Download the Angel Bee app today and get personalized recommendations on your phone. Happy investing.

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