Smart Tax Planning Tips for Salaried Employees
When you explore the market, you will find a range of tax-saving options for salaried individuals. However, choosing the right option is important so that you can maximise tax savings to enhance your disposable income. Life insurance plans can help you save tax while providing financial security and savings. Given below are some of the most popular tax-saving options for salaried employees in life insurance -
Savings Plans
Life insurance plans, like endowment and money-back plans , provide you with dual benefits of life insurance protection and savings. Under these plans, a death benefit is paid if the life assured passes away during the policy tenure. Alternatively, if the life assured survives the policy tenure, a maturity benefit is paid.
Traditional savings plans can help you save and create a stable corpus which is not exposed to market risks. You can choose non-participating savings plans, which offer guaranteed* benefits or participating savings plans**, which offer added benefits in the form of bonus (if declared) that enhance the overall policy benefits.
Savings plans also help in saving income tax for salaried employees. The premium invested in a savings plan is eligible for Income Tax deductions up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. The maturity benefit and death benefit are also eligible for tax benefits under Section 10(10D) of the Income Tax Act 1961. The above-mentioned endowment plan tax benefits are subject to the provisions stated in the tax laws.
Market-Linked Life Insurance Plans
ULIP Plans provide the dual advantage of life insurance and market linked investments . While traditional savings plans help you create a stable corpus, ULIPs is the combination of life insurance and help you create a market-linked corpus for your financial goals where returns depend on market performance. You can choose the type of market linked fund into which you want a part of your premium to be invested. ULIPs offer a range of market linked funds which can be equity, debt, or hybrid.
There are flexible features, too, that help you manage your investments at your discretion. For instance, switching helps you change between market linked funds depending on your risk appetite , market performance and life goals.. Then there is the feature of partial withdrawal post the lock in period that allows you to make partial withdrawals from the fund value in case of emergencies.. Top-ups can help you increase your investments subject to certain terms and conditions, while premium redirections can help you change the fund allocation for future premiums.
If you stay invested in ULIPs over a long-term horizon, you can create a suitable corpus with market-linked returns. The volatility tends to smooth out over time, allowing you to build an inflation-adjusted corpus for your goals.
Similar to savings insurance plans, ULIPs offer tax-saving options for salaried individuals. The premium paid is allowed as a deduction as per Section 80C of the Income Tax Act, 1961. You can also avail of Section 10 (10D) tax exemption on your maturity amount, subject to the fulfilment of specified conditions in the tax laws.
Health Insurance
Health insurance plans help you protect your finances against medical emergencies. These plans help cover your medical bills so that you don’t face a financial strain, and you can get the best available treatment without worrying about its affordability.
When it comes to tax savings for salaried individuals, each of these plans is subject to tax benefits as per Section 80D of the Income Tax Act 1961, subject to provisions specified therein.
What to Keep in Mind During Tax Planning
When exploring tax-saving options for salaried individuals, there are some things to keep in mind for effective tax planning. These things are as follows -
- Understand the full tax implications of any investment avenue that you choose to save for your financial goals.
- Look for investment options that give the maximum tax-saving benefits.
- Plan your taxes in advance and try to beat the last-minute tax-filing rush.
- In certain cases, the availability of the tax benefit shall be subject to the fulfilment of prescribed rules. Look for such rules and fulfil them to enjoy the tax benefit.
- Choose life insurance plans that match your financial goals and would help fulfil them.
- When selecting the policy details of your life insurance policy, choose adequate coverage and a tenure that matches your goals.
- If tax planning feels challenging or if you are confused, seek professional help to get the tax provisions correct.
Key Takeaways
- Salaried individuals can explore various tax-saving options to minimise their tax outgo and maximise in-hand savings.
- While there are various tax-saving options, life insurance plans can be the right choice for the financial protection and wealth creation that they can offer.
- You can choose from savings plans, like endowment and money-back plans, to create a stable financial corpus.
- The tax benefits of ULIPs also make them a good choice. They are combination of life insurance and market-linked funds which are suitable for individuals looking to earn market-linked returns.
- A health insurance plan can also be a good choice for meeting the financial challenges of a medical emergency.
- When planning your taxes, understand the tax implications of the different options and choose a plan that best matches your needs.
Conclusion
Simple and effective choices can help salaried individuals make the most of their money and save tax, too. While the Income Tax Act 1961 have provided the rules of income tax for salaried employees, they have also listed tax-saving provisions to lower your tax liability. Life insurance plans offer tax benefits while providing life insurance protection and an avenue to save up for your financial goals. So, understand the tax benefits of life insurance plans and choose suitable ones that align with your financial needs.
FAQs
What is income tax, and why do salaried employees have to pay it?
Income tax is a direct tax that is levied on the annual income of an individual. Salaried employees earn a salary income, and this income is subject to income tax. As such, salaried individuals have to pay income tax on their gross annual income, which includes salary income and any other income that they might have earned in a financial year from other sources.
How is income tax calculated for salaried individuals in India?
Income tax is calculated according to specified tax slabs. The tax slabs specify the tax rates, which vary with income. There are two types of tax regimes - old regime and new regime - and the tax slabs are different for each regime.
What is the difference between the old and new tax regimes?
The old regime allows different types of deductions and exemptions from your gross annual income, which brings down the net taxable income. However, the tax rates are high. The new tax regime does offer low tax rates, but does not allow all the deductions and exemptions available under the old regime.
Which tax regime is better for salaried employees – old or new?
The choice of regime depends on your income, tax-saving investments and expenses that you have, and the tax liability generated under each regime. You can check your tax liability under both the old and the new regime.
What is the basic exemption limit for salaried individuals?
Under the old tax regime, the basic exemption limit for salaried individuals below 60 years is ₹2.5 lakhs. For individuals aged 60 years and above, the limit increases to ₹3 lakhs. For the new tax regime, the basic exemption limit is ₹4 lakhs1.
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