Optimize savings: Tax strategies for high-income earners in India

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

1. Tax implications under old vs new tax regime
2. Tax saving options under old tax regime
3. Tax saving options under new tax regime
4. Investment options for optimizing tax benefits
5. Other ways to reduce tax payout

Tax implications under old vs new tax regime

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

Tax saving options under old tax regime

• 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)

Tax saving options under 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.

Read Also: 3 Ways To Invest And Save Tax With Mutual Funds

Investment options for optimizing tax benefits

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.

Read Also: Equity mutual fund taxation: All you need to know

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)
• 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 charities under section 80G
• 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.Medical insurance premium under section 80D
• 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 under section 10(13A) or Section 80GG

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. Utilizing tools like a compounding calculator can enhance understanding of how investments can grow over time, contributing to effective financial planning. 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. While these strategies can help you optimize your tax savings, tools like lump sum SIP calculator can assist you in planning your investments to work towards long-term financial goals.

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.

How can I save maximum tax from my salary in India?

To optimize tax savings on your salary, utilize deductions under sections 80C (up to ₹1.5 lakh), 80D (health insurance premiums), and invest in tax-saving instruments like PPF, ELSS, and NPS. Claim HRA, and standard deduction too.
Additionally, considering a SIP calculator can help you project the long-term benefits of investing in ELSS for tax savings while also assessing the potential growth of your investments. Those who want to further optimise their return potential can consider a step-up SIP plan, which allows you to increase your investments by a fixed rate at regular intervals (such as annually), a step up SIP calculator can help investors assess how a step-up SIP can enhance their return potential when compared to regular SIPs and choose a suitable investment option.

How do we reduce taxes for high-income earners in India?

High-income earners can reduce taxes by investing in tax-saving instruments like PPF, NPS, and ELSS under section 80C. Utilize deductions under 80D for health insurance, and claim exemptions like HRA and deductions for interest on home loans.

What is the maximum deduction under section 80D?

Under section 80D, the maximum deduction allowed is ₹25,000 for health insurance premiums for self, spouse, and children. For senior citizens (60 years and above), this limit increases to ₹50,000. Additional deductions are available for insuring parents.

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.