How NPS benefit in salary can increase tax savings

Delhi-based finance professional Shashank Gupta pays low tax because his salary structure is tax-friendly and he avails of several deductions and exemptions. However, there is scope to bring it down further. TaxSpanner estimates that Gupta can reduce his tax by almost half if his company offers him the NPS benefit and replaces the taxable allowances in the salary with some tax-free emoluments.

As a first step, Gupta should ask for the NPS benefit. Under Section 80CCD(2), up to 10% of the basic salary put in the NPS on behalf of the employee is taxfree. If his company puts Rs.2,960 (10% of his basic) in the NPS on his behalf every month, his annual tax will reduce by Rs.7,400. Gupta already invests in the NPS under Sec 80CCD(1b), but puts only Rs.24,000 in the scheme. If he increases this amount to Rs.50,000, he will save another Rs.5,400 in tax. At 26, Gupta should put the maximum 75% in equity funds.Gupta’s salary is tax-friendly, but he should ask for some basic tax-free allowances, such as reimbursement of telephone and newspaper bills. Newspapers and books worth Rs.500 per month and telephone allowance of Rs.500 a month will reduce his annual tax by around Rs.2,500.

More tax can be saved by taking health insurance. Gupta and his parents are covered by the group health insurance from his company, but group covers are not comprehensive. If Gupta buys health insurance for himself and his parents, a premium of Rs.40,000 will cut his tax by around Rs.8,300.Gupta has invested in fixed deposits and earns around Rs.10,000 as interest in a year. If he invests in debt funds instead of fixed deposits, he can defer the tax till withdrawal and bring down his tax outgo by almost Rs.2,100.

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Shashank Gupta, a finance professional based in Delhi, benefits from a tax-friendly salary structure and various deductions and exemptions that help him pay low taxes. Despite this, there is potential for further reduction in his tax liability. TaxSpanner’s estimation suggests that Gupta could cut his tax burden by almost half if his company provides him with the National Pension System (NPS) benefit and replaces taxable allowances with tax-free emoluments.

To start, Gupta should request the NPS benefit from his company. Under Section 80CCD(2), contributions to the NPS made by the employer on behalf of the employee, up to 10% of the basic salary, are tax-free. If Gupta’s company contributes Rs.2,960 (10% of his basic) to the NPS each month on his behalf, his annual tax could decrease by Rs.7,400. Additionally, Gupta currently invests Rs.24,000 in the NPS under Section 80CCD(1b), but increasing this amount to Rs.50,000 could save him an extra Rs.5,400 in taxes. Given his age of 26, Gupta should consider allocating the maximum of 75% towards equity funds.

Although Gupta’s salary is already tax-friendly, he could benefit from requesting basic tax-free allowances such as reimbursement for telephone and newspaper expenses. Reimbursement for newspapers and books worth Rs.500 per month, along with a telephone allowance of Rs.500 per month, could potentially reduce his annual tax by around Rs.2,500.

Further tax savings can be achieved by investing in health insurance. While Gupta and his parents are currently covered by the group health insurance offered by his company, this coverage may not be comprehensive. Purchasing additional health insurance for himself and his parents, with a premium of Rs.40,000, could reduce his tax by approximately Rs.8,300.

Gupta also earns around Rs.10,000 in interest from fixed deposits annually. By investing in debt funds instead of fixed deposits, he can defer the tax liability until withdrawal and potentially reduce his tax outlay by almost Rs.2,100.

WRITE TO US FOR HELP
Are you paying too much tax? Reach out to us at etwealth@timesgroup.com with ‘Optimize my tax’ as the subject. Our experts can provide guidance on how you can reduce your tax burden through adjustments to your income and investments.