Gurugram-based financial consultant Kaustav Chandra earns well, but also pays a high tax because his pay structure is not tax friendly and he doesn’t avail of all the deductions available to him. Taxspanner estimates that Chandra can save more than Rs.1 lakh in tax if his pay structure is rejigged to include some tax-free perks, his company extends the NPS benefit to its employees and he also invests in the scheme on his own.
Chandra should start by asking for the LTA, which is tax free if claimed twice in a block of four years. If he gets an LTA of Rs 1 lakh, his annual tax will reduce by almost Rs.31,200. He should also ask for a gadget allowance to compensate for the work related expenses he has to incur due to the work-from-home rule. A monthly allowance of Rs.10,000 will cut his annual tax by around Rs.38,000.
The tax can reduce further if his employer extends the NPS benefit. Under Section 80CCD(2), up to 10% of the basic salary put in the NPS is tax free. If Chandra’s company puts Rs.6,721 (10% of his basic pay) in the NPS every month, his annual tax will reduce by more than Rs.25,000. Another Rs.15,600 can be saved if he invests up to Rs.50,000 in the NPS on his own under Section 80CCD(1b). Chandra is young, so he should allocate the maximum to equity funds of the NPS for higher growth.
Chandra has about Rs.2 lakh in bank deposits and earns Rs.12,600 in interest. He should consider shifting to debt funds where the gains will be taxed at a lower rate if the investment period exceeds three years.
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