By Sudhir Kaushik of Taxspanner.com
Surat-based engineer Nitin Sharma pays a high tax because his pay structure is not tax friendly. Although he claims almost all the deductions available to him, including HRA and home loan interest, more than 15% of his income goes in tax. Taxspanner estimates that Sharma can reduce his tax by more than Rs 50,000 if he gets a few perks and the NPS benefit under Sec 80CCD(2).
Interest from FD is taxed at the normal rate while capital gains from debt funds are taxed at 20% after indexation if held for more than three years.
Sharma should start by asking his company to rejig some of his allowances. The medical allowance he gets is fully taxable now. That can be replaced by a newspaper allowance and meal coupons. If he gets a newspaper allowance of Rs 1,000 per month and food coupons worth Rs 1,833, his tax will reduce by around Rs 10,600.
Income from employer
Next, he should ask his company for the NPS benefit. Under Section 80CCD(2), up to 10% of the basic salary put in NPS is tax deductible. If his company puts Rs 5,333 (10% of his basic salary) in the NPS every month, his tax will reduce by Rs 20,000. Sharma already invests in the scheme and understands how it works.
Sharma relies on the group medical cover for himself and his family. Group covers are useful but do not cover the family if the employee leaves the job. He should buy a medical insurance plan for himself and his senior citizen parents. A premium of Rs 50,000 will reduce his tax by roughly Rs 15,600.
More tax can be saved if he shifts from fixed deposits to debt funds. Interest from fixed deposits is taxed at the normal rate while gains from debt funds are taxed at 20% after indexation provided they are held for more than three years.
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