Tax-saving ideas: Do this to reduce tax to zero

Pune-based software professional Vinay Makhija pays a low tax even though his salary structure is not tax-friendly and he doesn’t claim all the deductions available to him. TaxSpanner estimates that Makhija can reduce his tax to zero if he opts for the NPS benefit offered by his company and also invests in the scheme on his own.

Makhija’s taxable income before deductions is Rs.11.39 lakh. If the net income (after all deductions and exemptions) is reduced to less than Rs.5 lakh, he can claim full tax relief under Section 87A. Makhija pays rent and claims HRA exemption for Rs.2.84 lakh. He also invests the maximum Rs.1.5 lakh under Section 80C. With the standard deduction of Rs.50,000, this brings down his net taxable income to a little over Rs.7 lakh.

He can bring it down further by opting for the NPS benefit offered by his company. Under Section 80CCD(2), up to 10% of the basic put in NPS is tax-free. If his company puts Rs.5,016 (10% of his basic pay) in the NPS every month, his taxable income will reduce by Rs.60,200. It can reduce by another Rs.50,000 if he invests in the scheme on his own under Section 80CCD(1b). At 27, Makhija should put the maximum 75% in equity funds.

Next, he should ask his company for some basic tax-free perks, such as reimbursement of fuel or conveyance expenses, newspaper allowance and food coupons. If he gets Rs.24,000 (Rs.2,000 a month) for conveyance, newspaper allowance of Rs.9,000 (Rs.750 a month) and food coupons worth Rs.22,000 per year, his taxable income will reduce by Rs.55,000.

If Makhija buys medical insurance for himself and his parents, his net taxable income will fall below Rs.5 lakh, thus making it fully tax-free.

WRITE TO US FOR HELP
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.

Vinay Makhija, a software professional based in Pune, manages to pay low taxes despite having a salary structure that is not tax-friendly and not claiming all available deductions. TaxSpanner suggests that Makhija can potentially reduce his tax liability to zero by taking advantage of the NPS benefit provided by his company and making additional investments in the scheme.

Makhija’s taxable income, before deductions, is Rs.11.39 lakh. By ensuring that his net income (after deductions and exemptions) is below Rs.5 lakh, he can claim full tax relief under Section 87A. Makhija currently pays rent and claims HRA exemption of Rs.2.84 lakh, in addition to investing the maximum Rs.1.5 lakh under Section 80C. With the standard deduction of Rs.50,000, his net taxable income reduces to slightly over Rs.7 lakh.

He can further reduce his taxable income by opting for the NPS benefit provided by his company. Under Section 80CCD(2), up to 10% of his basic pay put into NPS is tax-free. If his company contributes Rs.5,016 (10% of his basic pay) to NPS monthly, his taxable income will decrease by Rs.60,200. Additionally, further reduction of Rs.50,000 can be achieved if he makes personal investments in the NPS under Section 80CCD(1b). Makhija, at 27, is advised to allocate the maximum 75% to equity funds.

Furthermore, he should request his company for basic tax-free perks such as reimbursed fuel or conveyance expenses, newspaper allowance, and food coupons. If he receives Rs.24,000 for conveyance, Rs.9,000 for newspaper allowance, and Rs.22,000 worth of food coupons annually, his taxable income will decrease by Rs.55,000.

Finally, if Makhija purchases medical insurance for himself and his parents, his net taxable income will fall below Rs.5 lakh, making it fully tax-free.

WRITE TO US FOR HELP
If you are paying too much tax, reach out to us at etwealth@timesgroup.com with ‘Optimise my tax’ as the subject. Our experts can guide you on how to minimize your tax burden through adjustments in your pay and investments.