NPS, home loan, tax-free perks can help Agrawal cut tax by over Rs 75,000

Your tax will reduce considerably if you ask your company for tax-free allowances such as telephone and newspaper bills reimbursements. 

Tushar Agrawal pays a high tax because his pay structure is not very tax friendly. The only tax-free allowance he receives is the LTA. Though he pays rent, he is able to claim exemption for only 30% of his HRA. Taxspanner estimates that Agrawal can reduce his tax by over Rs 75,000 if he takes a home loan, gets tax-free perks and invests in NPS for retirement.

Agrawal is planning to buy a house. If he takes a loan of Rs 25 lakh at 8.5% for 20 years, he will pay an interest of Rs 2.1 lakh in the first year. Though his HRA will be taxed, the home loan deduction will cut his tax by Rs 36,000. 

Next, Agrawal should ask his company for tax-free allowances such as telephone and newspaper bills reimbursements and food coupons. If he gets Rs 48,000 under these heads, his tax will reduce by about Rs 15,000. 

More tax can be saved if his company offers him the NPS benefit. Under Sec 80CCD(2d), up to 10% of the basic salary put in NPS is deductible. If his company puts Rs 3,875 in the NPS on his behalf every month, his tax will reduce by about Rs 9,500. Another Rs 10,400 can be saved if he invests Rs 50,000 in the NPS under Sec 80CCD(1b) on his own. At 27, Agrawal should opt for an aggressive allocation which puts 75% of the corpus in equities. 

Agrawal also needs to rejig his tax planning. Instead of bingeing on the PPF, he should buy a term plan of Rs 1 crore and start an SIP of Rs 5,000 in an ELSS fund. 

Income from employer

Income from other sources

All figures are in Rs 


(As published on The Economic Times wealth, August 20, 2018)