Representative image
Making the most of a bonus is a familiar dilemma for many salaried Indians. The instinct is to spend first and think later, but that usually ends with a higher tax outgo and very little to show for it. If you treat the bonus as a planning tool rather than extra cash, it can help close gaps in your tax-saving portfolio and build assets you might otherwise postpone.
Understanding the tax angle
Most employers deduct TDS on bonuses at a higher slab, as it forms part of your annual income. If you don’t invest strategically before the end of the financial year, a bonus simply pushes you into a larger tax liability. It is not about hiding the income but redirecting part of it to eligible tax-saving investments. The timing matters, as most of the deductions are allowed only if the money is invested during the same financial year.
Topping up Section 80C
This is usually the first place to look. Many people discover late in the year that they have not exhausted the Rs 1.5 lakh limit under Section 80C. Provident Fund contributions, children’s tuition fees, home loan principal and insurance premiums may cover part of it, but rarely the full amount. Using the bonus to fill this gap is one of the simplest ways to reduce tax.
Among tax-saving options, some families prefer PPF for stability and long-term discipline, while others lean towards equity-linked mutual funds that come with a three-year lock-in. If your EPF is already strong, directing the bonus into a PPF account can balance your portfolio. If you have a long investing horizon and are comfortable with market swings, ELSS funds can offer both tax benefit and growth potential.
Adding to NPS for extra deduction
One of the most overlooked options is the additional Rs 50,000 deduction under Sec 80CCD(1B) through the National Pension System. Although many salaried employees open an NPS account because HR encourages it, they rarely contribute beyond the employer portion. Using part of the bonus to claim the extra benefit can lower taxable income beyond the 80C limit and build retirement savings at the same time.
Story continues below Advertisement
Voluntary Provident Fund contributions
For those with EPF, increasing the bonus towards voluntary contributions works if the aim is steady, interest-bearing savings. VPF enjoys the same tax treatment as EPF within limits, and contributions are deducted from salary at source. Some use the bonus to create a buffer and then adjust monthly contributions for the remaining year, thus softening the cash-flow impact.
Health insurance and medical cover
The bonus is a good time to renew or upgrade health insurance, if you haven’t already done so. Premiums are deductible up to Section 80D, while purchasing a family floater or adding parents can increase the cover in a way that also provides tax benefits. Unlike investment products that are aggressively pushed in the bonus season, health policies serve a well-defined purpose when emergencies strike.
Home loan advantage
The bonus, in most cases, becomes a dilemma of choice between prepayment and investment for borrowers. Prepaying the principal amount of the home loan reduces the interest burden and also provides a tax deduction available under Section 80C. This also shortens the tenure of the loan, lowering the long-term cost. However, if your home loan interest rate is low and you have high-interest debt like credit cards or personal loans, clearing that debt first usually gives a better return than any tax-saving instrument.
Building liquidity
It is tempting to lock up the entire bonus in tax-saving products, but that can backfire when unexpected expenses appear. Keeping a portion aside in a liquid fund or high-yield savings option ensures you are not forced to take costly loans later. An emergency fund equal to at least three months of expenses provides more peace of mind than squeezing every rupee for tax benefit.
Avoiding common traps
The weeks after bonuses are announced see aggressive pitches for insurance-cum-investment products. Most of those promise poor returns and have long lock-ins. Buying them only to save tax often leaves people regretful. The smarter approach is to take a pause, review existing coverage, and commit only to a product that fits into your long-term plan. Putting it all together People who manage their bonus well follow one simple sequence: check their 80C status, use NPS for the extra deduction if helpful, review insurance, decide on loan prepayment, and then invest whatever remains according to goals. Clarity is the key. If you apportion the bonus with a clear purpose rather than reacting to sales pressure or impulse spending, the financial benefit continues long after the excitement of payday fades.