Got a pay raise? How to plan your investments to save tax

The ratings bring cheers to the earners as they get more cash in their hands to spend more and get some relief amid high inflation. However, in addition to having more money to spend, you also have to pay more taxes, if all available tax saving possibilities are not explored.

So, to avoid paying more taxes due to rising wages, you should first invest in tax-saving instruments.

Archit Gupta – Founder and CEO Clear, lists the following tax saving options you can consider:


If you have a raise, you should choose appropriate investments to save taxes based on your risk tolerance. One can opt for the National Pension System (NPS), which provides an additional tax deduction in addition to 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. It is mandatory to open a Tier I account to invest in the NPS. Level II is a voluntary account. Investors can choose asset classes based on their risk profile. However, the NPS caps equity investments at 75%.

NPS provides a tax deduction of up to Rs 50,000 per financial year under Section 80CCD(1B) of the Information Technology Act. In addition, one can claim up to 10% of his salary (base salary + dearness allowance) if the employer contributes to the NPS on behalf of the employee.


Suppose you fall into the tax bracket after a pay raise. Depending on your risk profile, you should choose investments eligible for the Section 80C tax deduction. For example, conservative investors can invest in the Public Provident Fund (PPF) or the National Savings Certificate, which offer higher interest rates than bank FDs.

The PPF is eligible for the EEA tax scheme (exempt-exempt-exempt) where investments up to Rs 1.5 Lakh per annum are eligible for Section 80C tax deduction. In addition, interest and the amount withdrawn at maturity are tax exempt.


In the case of the National Savings Certificate (NSC), the interest earned is not paid out to investors but is reinvested and accumulated. Interest on NSC during the first four years of the investment is eligible for the Section 80C tax deduction as reinvested. However, NSC interest from the fifth year to maturity is taxed according to your tax bracket.

Every quarter, the government reviews the interest rates on small savings schemes like the PPF and the NSC. PPF is currently offering an interest rate of 7.1% and NSC an interest rate of 6.8% for the April to June quarter of 2022. However, the government may soon raise interest rates.


Aggressive investors can look to Equity Linked Savings Schemes (ELSS), which invest primarily in equities and equity-linked instruments. It has a three-year lock-up period and is eligible for the Section 80C tax deduction.

One can invest in ELSS through the Systematic Investment Plan (SIP). This is a facility offered by AMCs where you regularly invest specific amounts of money over time. The SIP helps to calculate the average of the unit’s purchase price, called Rupee Cost A Average, and avoid timing the stock market. Additionally, Long Term Capital Gains (LTCG) of ELSS up to Rs 1 Lakh is tax exempt. One has to pay 10% tax on LTCG of ELSS above Rs 1 Lakh.


Employees can opt for an investment in the Voluntary Provident Fund (VPF) in addition to the compulsory contributions to the Employee Provident Fund (EPF). This is a safe investment option and the contribution qualifies for the Section 80C tax deduction. VPF is currently offering an interest rate of 8.1% for the 2021-22 financial year, which is one of the highest among fixed income investments. You can contribute up to 100% of your base salary and high cost allowance to the VPF. However, you cannot stop contributing before the basic period of five years.

Interest received on contributions to EPF or VPF exceeding Rs 2.5 lakh during the financial year is taxable at the applicable tax rates. Only the contribution of an employee should be considered for the threshold limit of Rs 2.5 lakh. In addition, the PF department will charge TDS at 10% on interest credited.