Increased salary? How to plan your investment to save tax

Assessments bring joy to salaried individuals as they get more money on hand to spend more and get some relief from the high rate of inflation. However, in addition to getting more money to spend, you will have to pay more taxes if all available tax-saving avenues are not explored.

So, to avoid paying more tax due to salary increase, you should first invest in tax-saving instruments.

Archit Gupta – Founder and CEO of Clear, lists the following tax-saving options that you may want to consider:


If you have a pay rise, you must choose the right investment to save tax based on your risk tolerance. One can opt for the National Pension System (NPS), which provides an additional tax deduction of over Rs 1.5 lakh per annum under section 80C. It is a government-backed retirement savings scheme that offers asset classes such as equities, government securities, corporate debt and alternative investment funds.

NPS offers two different accounts, Tier I and Tier II. To invest in NPS, one must open a Tier I account. The second level is a voluntary account. Investors can choose the asset class based on their risk profile. However, NPS limits equity investments to 75 percent.

NPS offers tax exemption up to Rs. 50,000 per financial year under section 80CCD (1B) of the IT Act. In addition, if the employer contributes to the NPS in the name of the employee, one can claim up to 10 percent of their salary (basic salary + expensive allowance).


Suppose you fall into taxable brackets after salary increase. Based on your risk profile, you must choose an investment that is eligible for a Section 80C tax deduction. Conservative investors, for example, may invest in public provident funds (PPFs) or National Savings Certificates, which offer higher interest rates than bank FDs.

PPF qualifies for EEE (exemption-free) tax system where investments up to Rs 1.5 lakh per annum are eligible for Section 80C tax deduction. In addition, interest and amount withdrawn on maturity are tax-free.


In the case of National Savings Certificate (NSC), the interest earned is not paid to the investors but is reinvested and credited. In the first four years of the investment, the NSC’s interest section 80C became eligible for tax deduction because it was reinvested. However, in the fifth year of maturity NSC interest is taxed according to your income tax bracket.

Every quarter, the government revises interest rates on small savings schemes like PPF and NSC. PPF currently offers interest rates of 7.1 percent and NSC 6.8 percent for the April-June 2022 quarter. However, the government may raise interest rates soon.


Aggressive investors may look at the Equity Linked Savings Scheme (ELSS), which invests primarily in equities and equity-linked instruments. It has a three-year lock-in period and qualifies for Section 80C tax deduction.

One can invest in ELSS through Systematic Investment Plan (SIP). This is an advantage offered by AMC where you regularly invest a certain amount of money over time. SIP helps one to build unit purchase price, which is called avoiding rupee cost averaging and timing of equity market. In addition, long term capital gain (LTCG) up to Rs. 1 lakh from ELSS is tax free. One has to pay 10 per cent tax on ELSS to LTCG above Rs 1 lakh.


Paid employees may choose to contribute to the Voluntary Provident Fund (VPF) in addition to the Compulsory Employees Provident Fund (EPF) contribution. This is a safe investment option, and the contribution is eligible for Section 80C tax deduction. VPF currently offers an interest rate of 8.1 percent for 2021-22 FY, the highest among fixed income investments. You can contribute up to 100% of your basic salary and allowance to VPF. However, you cannot stop contributing before the original five-year term.

Interest earned on contributions to EPF or VPF above Rs. 2.5 lakhs in a financial year is taxable at the applicable tax slab rate. Only one employee’s contribution should be considered for the threshold of Rs 2.5 lakh. Also, the PF department will deduct TDS at 10 per cent on the interest deposited.

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