How to restructure salary, investments to cut income tax outgo by Rs 64,557

Hyderabad-based engineer Rutuj Patil earns well, but more than a fifth of his income goes in tax even though he claims most of the deductions available to him. TaxSpanner estimates that Patil can reduce his tax by almost Rs.65,000 if his company rejigs his pay structure to include some tax-free emoluments and he increases the contribution to the NPS to 10% of his basic salary.

Patil should start with the NPS. Under Section 80CCD(2), up to 10% of the basic salary put in the NPS on behalf of the employee is tax-free, but Patil has opted for a monthly contribution of only 5% of his basic pay. If he hikes the contribution to the maximum 10%, his tax will reduce by about Rs.22,000. Since he already invests in the NPS, Patil knows how the scheme works and the allocation that suits him.

Next, Patil should ask his company to replace the taxable emoluments in his salary with some tax-free perks, such as gadget allowance and reimbursement of newspapers bills. Under Section 17(2), gadgets bought in the name of the company and given to the employee for personal use are taxed at only 10% of their value. This perk came into focus during the ‘work from home’ phase after the Covidinduced lockdown. If Patil buys items such as computers, white goods and ACs worth Rs.1.2 lakh in a year (Rs.10,000 per month), his annual tax will be reduced by around Rs.37,500. Newspapers and books worth Rs.12,000 (Rs.1,000 per month) will reduce the tax further by around Rs.3,750.

More tax can be saved if Patil invests in debt funds instead of fixed deposits. While the interest from deposits is taxed every year, the gains from debt funds are taxed only in the year of withdrawal.

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Paying too much tax? Write to us at etwealth@ timesgroup.com with ‘Optimise my tax’ as the subject. Our experts will tell you how to reduce your tax by rejigging your pay and investments.

Engineer Rutuj Patil, based in Hyderabad, earns a good income. However, more than 20% of his earnings are taken away in taxes, even after claiming all available deductions. TaxSpanner believes that by restructuring his pay to include tax-free benefits and increasing his NPS contribution to 10% of his basic salary, Patil could potentially save around Rs.65,000 in taxes.

Starting with the NPS, under Section 80CCD(2), up to 10% of the basic salary contributed to the NPS on behalf of the employee is tax-exempt. Patil currently contributes only 5% of his basic pay monthly. By increasing this contribution to the maximum of 10%, he could reduce his tax burden by approximately Rs.22,000. Having prior experience with the NPS, Patil understands the scheme and can make informed decisions regarding his investment.

Furthermore, Patil should consider replacing taxable components of his salary with tax-free allowances, such as gadget allowances and reimbursement for newspapers. As per Section 17(2), gadgets purchased in the company’s name and provided to employees for personal use are taxed at only 10% of their value. During the ‘work from home’ period due to the pandemic lockdown, this perk became particularly relevant. By purchasing items like computers, appliances, and ACs worth Rs.1.2 lakh per year (Rs.10,000 per month), Patil could potentially reduce his annual taxes by around Rs.37,500. Additionally, newspapers and books worth Rs.12,000 per year (Rs.1,000 per month) could further decrease his tax liability by about Rs.3,750.

Additionally, Patil could save more on taxes by investing in debt funds instead of fixed deposits. Unlike interest from deposits, gains from debt funds are only taxed in the year of withdrawal.

WRITE TO US FOR HELP
If you feel you’re paying too much tax, reach out to us at etwealth@timesgroup.com with ‘Optimise my tax’ as the subject. Our experts can provide guidance on how to reduce your tax burden by adjusting your pay structure and investment choices.