How to Save Tax On Your Variable Pay This Year

As the financial year draws close, it's time to start planning for tax season. While variable pay can be a significant boost to your income, it also comes with additional tax implications. However, there are several strategies you can employ to minimize your tax liability on variable pay and maximize your savings.

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Tax on Variable Salary

A variable salary is a compensation structure where a portion of an employee's total earnings is based on their individual or organizational performance. Employees get variable pay in the form of bonuses or performance incentives. These incentives are offered in recognition of their contribution to the growth of the company.

Variable salary can have a significant portion of your total salary. Thus, you should have a fair assessment of the variable part of your salary so that necessary steps can be taken to minimize the tax.

How Can You Save Tax?

Many investment options are accompanied by a tax exemption provision. You can read the points given below to find out how to save tax as per your convenience:    

  1. Sections 80C

    • Life Insurance Premium – The premium paid towards your life insurance policy can be deducted under section 80C of the Income Tax Act. You can either buy a term policy or an endowment/money-back policy or ULIP, as per your needs. You are eligible to claim a tax deduction up to a maximum of Rs. 1.5 lakh on the insurance premium.

    • Tax-saving Fixed Deposit – A tax-saving fixed deposit will come with a 5-year lock-in period. It can be opened by any Indian resident. Under Section 80C, you are eligible for a tax deduction of up to Rs. 1.5 lakh.

    • PPF – A public provident fund is a long-term investment option. The deposits that you make under PPF are eligible for income tax deductions under Section 80C. The minimum investment is Rs. 500 and the maximum investment is Rs. 1.5 lakh per year. You can contribute to the fund in a maximum of 12 installments. The PPF will be helpful in building a corpus for your annuity plan as it enjoys the ‘Exempt, Exempt, Exempt’ benefit. There is no tax on the principal, interest and the maturity amount. The interest will be added to your account at the end of the financial year and will be compounded annually. The money saved in your PPF account is secure.

    • ELSS – You can invest in equity-linked savings schemes to earn higher returns. ELSS comes with a lock-in period of 3 years. The returns up to Rs. 1 lakh in the financial year are tax-free in the hands of the investor. An ELSS contribution of up to Rs. 1.5 lakh will get an income tax exemption. If you would like to achieve inflation-beating returns, you should go for ELSS.

    • NPS – The subscription to the NPS tier-I account is tax-free up to Rs. 1. 5 lakh under Section 80C. You will also get an additional Rs. 50,000 deducted under the Income Tax Act’s Section 80CCD (1b).

    • Home Loan – The principal amount up to Rs. 1.5 lakh is exempted under Section 80C. You will also be eligible for exemption up to Rs. 2 lakh on the interest paid towards the home loan. However, you should have taken the loan from a bank or recognized financial institution. The interest amount can be claimed under Section 24 of the Income Tax Act.

    • ULIP – The premium contributed towards the insurance portion of the Unit Linked Insurance Plan is exempt from income tax under section 80C. You can cover the risk and get market-related returns and enjoy income tax benefits with ULIP. You can take up to 1/3 of the corpus without tax under Section 10(10D) of the Income Tax Act. The remaining amount should be used for buying an annuity.

    • Tuition fee – You can claim a deduction of up to Rs. 1200 per year (for one child) and up to Rs. 2400 per year (for two children) towards the tuition fee exemption. In addition to that, you can claim an additional deduction under Section 80C as well. However, Section 80C will be shared by various tax-saving products like PPF, NPS, NSC and ELSS.

    • NSC – The National Savings Certificate can be purchased from a post office or bank. The principal amount is deducted from income tax under Section 80C. However, the interest earned will be taxable under the ‘income from other sources’ category. You are advised to declare the income earned on NSC on an annual basis to reduce the tax burden. You can buy NSC for 5 years or 10 years as per your convenience. A 10-year NSC will deliver a higher rate of interest.

    • Sukanya Samriddhi Yojana – This scheme is ideal to protect the interests of girl children. The account can be opened by a parent or guardian of a girl child. The girl child’s age should be less than 10 years before opening the account. The account will mature 21 years after opening the account. The account holder can go for partial withdrawal up to 50% of the balance after attaining 18 years. The deposits made under the SSY are exempt up to Rs. 1.5 lakh in a financial year.

  2. Section 80D

    Health insurance

    • Deduction for Health Insurance Premiums: Individuals can claim a deduction of up to ₹25,000 per financial year for health insurance premiums paid for themselves, their spouses, and their dependent children.

    • Increased Deduction for Senior Citizens: For individuals aged 60 years and above, the deduction limit is ₹50,000 per financial year.

    • Deduction for Preventive Health Check-ups: An additional deduction of up to ₹5,000 per financial year can be claimed for preventive health check-ups for themselves, their spouses, dependent children, and parents.

    • Deduction for Parents' Health Insurance: Individuals can claim a separate deduction of up to ₹25,000 per financial year for health insurance premiums paid for their parents. This limit increases to ₹50,000 if the parents are aged 60 years or above.

    Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax
  3. Section 24

    If you buy a property with a home loan, you can get income tax exemption on the principal and the interest. The principal is deducted from income tax under Section 80C and the interest is exempted under Section 24 of the Income Tax Act. A maximum of Rs. 2 lakh can be claimed in the financial year towards the home loan interest under Section 24.

  4. Section 80E

    The interest paid on education loan can be claimed under Section 80E of the Income Tax Act. There is no upper limit on the interest on a loan for higher education. The education loan for self, spouse and children can be claimed under Section 80E. The education loan can be availed for studying in a foreign university as well. The education loan is available to enroll in vocational courses as well. Even though you are not admitted to a full-time course, you will benefit from an educational loan.

  5. Section 80TTA

    Section 80TTA provides tax relief on interest earned from savings accounts. Under this section, individuals can claim a deduction of up to Rs. 10,000 on interest income accrued in savings accounts held with banks, cooperative societies, or post offices. This deduction is applicable to both individuals and Hindu Undivided Families (HUFs) and helps in reducing taxable income.

  6. Section 80GG

    Section 80GG caters to individuals who do not receive House Rent Allowance (HRA) from their employer but incur rental expenses. It allows for a deduction on rent paid for residential accommodation, subject to certain conditions. The deduction is limited to the least of 25% of total income, Rs. 5,000 per month, or excess of actual rent paid over 10% of total income. This section assists those without HRA to alleviate the burden of rented accommodation costs.

  7. Section 80EE

    Section 80EE focuses on providing additional relief to first-time homebuyers. It offers a deduction of up to Rs. 50,000 on interest paid on a home loan, provided certain conditions are met. This deduction is over and above the limit available under Section 24(b). It aims to encourage home ownership among individuals by easing the financial strain associated with the initial years of home loan repayment.

How to Minimize Tax?

You should choose various tax-savings instruments, as per your risk appetite and affordability. If you are young, you can go for ELSS and ULIPs so that market-oriented returns are expected in the long run. By investing in blue chip companies (in the form of equities), you can expect good returns over a long period.

If you are not sure of how the market works, you can choose to invest in mutual funds via Systematic Investment Plans (SIPs). The risk can be reduced drastically with an investment in an SIP. The ups and downs in the market will be absorbed by the SIP efficiently.

NPS and PPF are ideal options to take care of your future pension needs. The corpus built through these products can be used to buy the annuity. The PPF returns are 100% tax-free and it is a safe investment option.


There are several ways to address the tax component on variable pay. You should understand that the variable pay will also be clubbed under your total income. Thus, you should explore the best options to know effectively ‘how to save tax’. The investment portfolio should comprise both short-term as well as long-term investment plans. You can also opt for insurance products that will cover the risk and offer attractive tax exemptions.

Helpful Resources: Computation of Taxable Income


  • How much TDS is deducted on variable pay?

    TDS (Tax Deducted at Source) on variable pay is calculated based on your estimated tax liability for the financial year. The exact rate depends on your income tax slab, deductions, and exemptions. Your employer will deduct TDS from your variable pay at the prescribed rate and deposit it with the government.
  • How can I save 100% income tax?

    You cannot completely eliminate income tax, but you can significantly reduce your tax liability by taking advantage of tax deductions, exemptions, and tax-saving investments. Careful planning and consultation with a tax advisor can help you minimize your tax burden.
  • How can I avoid tax deducted from my salary?

    You cannot completely avoid TDS on your salary, as it is a mandatory requirement under the Income Tax Act. However, you can reduce the TDS amount by claiming tax deductions and exemptions.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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