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How Salaried Employees Can Make Wise Tax Investments With Limited Salary? Research Team | Posted On Thursday, February 08,2018, 07:45 PM

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How Salaried Employees Can Make Wise Tax Investments With Limited Salary?



It's that time of the year when you submit investment proofs to save tax. It is the obligation of your employer to deduct tax from your salary and pay it to the Government as Tax Deducted at Source (TDS). If you don’t submit the investment proofs, you can’t claim tax deductions and your employer will deduct tax as per the applicable tax slab. But, why wait till the last minute to make tax-saving investments?

This is not a job for the last minute. If you do smart tax planning, you can make wise tax investments, even with a limited take-home pay.

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How salaried employees make smart tax investments?

Many salaried employees face a problem. A limited take-home pay. If you don't make tax saving investments in time, you will have to pay extra taxes. This is why you need to make smart tax saving investments.

1. Make sure tax-saving investments meet financial goals

You have a limited take-home salary. You also have to save tax. Make sure that the tax saving investment you choose, meets your financial goals.

  • Avail term life insurance:

Life insurance is a must to make sure your family is well protected in case of an untimely demise. A term life insurance plan is a must as it offers risk protection. This is a pure risk protection plan, where if you meet an untimely end within the term of the plan, your loved ones get the death benefit. The premiums on this plan are quite low.

Yes, your life insurance agent advises you to avail an endowment life insurance plan. Remember, he gets high commissions on these plans. He tells you the premiums on term life plans are low and you cannot save much in tax.

Don't listen to him.  Avail a term life insurance plan which gives a high death benefit to nominees, in case of an untimely death. Yes, the premiums are low as this is a pure protection plan with no survival benefits. But, it matches your insurance needs. You can look at other tax saving investments under Section 80C to save more tax.

  • Avail health insurance

There are more tax deductions beyond Section 80C. If you avail health insurance for yourself + spouse + kids, the premiums you pay are tax deductible up to Rs 25,000 a year under Section 80D. If your parents are senior citizens, the premiums you pay on their health insurance plans, are tax-deductible under Section 80D, up to Rs 50,000 a year.

Avail a family floater health insurance plan to cover yourself + spouse + kids, and a separate health insurance plan for senior citizen parents. You avail health insurance to cover unexpected hospitalization expenses and not just to save tax.

2. Smart tax-saving investments to make for conservative investors

You have availed term life insurance and health insurance. It's now time to make smart tax-saving investments. If you are a conservative investor invest in PPF or a tax-saver FD. The monthly contributions to your EPF are also eligible for Section 80C deductions. Your employer matches your contributions, but these are not eligible for tax deductions.

PPF enjoys EEE benefits. Not only are your investments in the PPF tax-free up to Rs 1.5 Lakh a year, the interest you earn and the maturity amount are tax-free. PPF gives higher interest that Tax-saver FD. PPF interest is tax free, but Tax-saver FD interest is taxed.

Remember: PPF has a higher lock-in of 15 years, compared to a 5-year lock-in for Tax saver FD.

SEE ALSO: Which Tax Investment Suits You?

3. Smart tax-saving investments to make for aggressive investors

If you are an aggressive investor, you must consider an investment in ELSS. Most of your money is invested in stocks and has a compulsory lock-in of 3 years. ELSS forces you to stay invested in equities for the long-term, which is good as equities perform well over long periods.

You earn a limited take-home pay and investing a lump sum in ELSS at the last minute can be very difficult. Also, stock markets might be high at this time.

Invest in ELSS via SIPs which is a method of investing in mutual funds. Systematic Investment Plans popularly called SIPs, allow you to invest small amounts regularly, say once each month/fortnight in mutual funds. A new LTCG tax of 10% has been introduced on equity-oriented mutual funds, on capital gains above Rs 1 Lakh a year from April 1st 2018. You need to study the effect of this newly introduced LTCG tax in Union Budget 2018-19 on ELSS investments.

See Also: Best tax saving investment other than 80 C

You need to invest in some fixed income instruments to protect your portfolio from shocks. Invest in PPF along with the compulsory EPF contributions to save tax under Section 80C. Be Wise, Get Rich.

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