Optimising tax savings: Strategies for high-income individuals
Taxes can take a big bite out of the earnings of high-income individuals, owing to higher tax brackets and surcharges. However, tax-free investments and tax saving strategies for high income earners can help reduce the tax burden.
- Table of contents
- Tax implications for high earners in India
- Old tax regime tax slabs
- New tax regime
- Investment avenues that offer tax benefit
- Other ways to reduce tax payout
- FAQs
Tax implications for high earners in India
India has two tax regimes currently, the old tax regime and the new tax regime. Here are the key differences between the two.
| Feature | Old tax regime | New tax regime |
|---|---|---|
| Tax slabs | Fewer slabs with higher tax rates | More slabs with lower tax rates |
| Deductions & exemptions | Allows various deductions and exemptions (e.g., Section 80C, 80D) | Limited deductions (mostly standard deduction) |
| Tax rates | Generally higher tax rates | Generally lower tax rates |
| Tax liability calculation | More complex due to deductions | Simpler due to fewer deductions |
| Suitable for | Individuals with high investments and deductions | Individuals with lower investments or who don't utilize many deductions |
| Tax rebate | Rebate of up Rs 12,500 for individuals with a taxable income of up to Rs. 5 lakh under Section 87A | Rebate up to Rs. 25,000 for taxable income of up to Rs. 7 lakh |
Old tax regime tax slabs
- Up to ₹2.5 lakhs: No tax
- ₹2.5 lakhs to ₹5 lakhs: 5%
- ₹5 lakhs to ₹10 lakhs: 20%
- Above ₹10 lakhs: 30%
Deductions under old regime include:
- Section 80C (Investments in PPF, life insurance, etc of up to Rs. 1.5 lakh)
- Section 80D (Health insurance premiums)
- Section 80E (Interest on loan for higher education)
- Section 80EE/EEA and Section 24(b) (Interest on home loans)
- Housing Rent Allowance (HRA)
- Standard Deduction (Rs. 50,000)
New tax regime
Simpler slabs:
- Up to Rs. 3 lakh: No tax
- Rs. 3 lakh to Rs. 6 lakh: 5%
- Rs. 6 lakh to Rs. 9 lakh: 10%
- Rs. 9 lakh to Rs. 12 lakh: 15%
- Rs. 12 lakh to Rs. 15 lakhs: 20%
- Above Rs.15 lakh: 30%
Limited deductions: Very few deductions are allowed in the new regime. Standard deduction and some professional tax exemptions are still applicable.
Investment avenues that offer tax benefit
High earners can reduce their tax liability by investing up to Rs. 1.5 lakh in financial instruments such as Provident Fund, National Savings Certificate, life insurance, Equity Linked Savings Scheme or ELSS mutual funds and others that offer deductions under Section 80C of the Income Tax Act under the old tax regime.
Employee provident fund (EPF)
EPF allows salaried employees to contribute 12% of their basic salary and DA towards retirement savings. Employers also make a matching contribution of 12%. An employee's contribution up to Rs. 1.5 lakh qualifies for tax deduction under Section 80C.
Public provident fund (PPF)
PPF is a long-term savings scheme backed by the government of India. The minimum annual contribution is Rs. 500, while the maximum amount allowed is Rs. 1.5 lakh. PPF accounts have a maturity period of 15 years, and the returns are guaranteed by the government.
Equity linked savings schemes (ELSS)
ELSS are equity mutual funds that come with the benefit of saving income tax. Investments made in ELSS up to Rs. 1.5 lakh are eligible for deduction under Section 80C. These funds have a lock-in of 3 years, which is shorter than most tax-saving options.
Life insurance premiums
The premium paid on life insurance policies for self, spouse and children qualifies for deduction under Section 80C. To maximize tax benefit, high earners can opt for policies with higher annual premiums, up to the Rs. 1.5 lakh limit.
By strategically investing in these tax-saving instruments under Section 80C, high earners can reduce their tax outgo.
National Pension Scheme
An additional deduction of up to Rs. 50,000 is available for contributions made by individuals to their NPS accounts under Section 80CCD (1B).
Other ways to reduce tax payout
Apart from Section 80C, there are a few other provisions in the Income Tax Act that high earners can use to reduce their tax liability.
- Home loan interest deduction under section 24(b)
- Donations to charities under section 80G
- Medical insurance premium under section 80D
- House rent allowance under section 10(13A) or Section 80GG
The interest paid on a home loan for a self-occupied house property can be claimed as deduction up to Rs. 2 lakh per financial year.
Donations to approved charities qualify for tax deduction under Section 80G. Deductions can be of 50% or 100% of the amount, depending on the fund.
The premium paid for health insurance policies can be claimed as deduction under Section 80D up to Rs. 25,000 or Rs. 50,000 based on age.
House rent allowance or HRA received by salaried employees is exempt from tax based on actual HRA, rent amount and income.
Conclusion
High-income individuals can reduce their tax burden through strategic investments. While more deductions are available under the old tax regime, consulting a chartered accountant will help identify the best tax optimisation strategies. Proper documentation needs to be maintained for all claims. Timely filing of returns and advance tax is also crucial for high income individuals along with diligently planning investments for tax saving.
FAQs
What is the maximum tax deduction possible under Section 80C?
The maximum deduction that can be claimed under Section 80C is Rs. 1.5 lakh in a financial year.
Can I split my Section 80C deduction across different instruments?
Yes, you can claim deduction under Section 80C from investments in multiple eligible avenues. However, the total limit remains Rs 1.5 lakh across instruments.
Are there any tax benefits for paying home loan EMIs?
Yes, the interest portion paid on home loan EMIs for a self-occupied property is eligible for tax deduction up to Rs. 2 lakhs under Section 24. However, the principal component does not get any specific tax benefit. It can be claimed under Section 80C by treating it as a repayment to self.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.