NPS | Tax optimiser: Vaswani can use NPS to reduce tax by Rs 34,000

By Sudhir Kaushik of

Guntur-based engineer Vinay Vaswani pays a low tax because his salary structure is reasonably tax friendly. But this can be brought down further if he avails of all the deductions available to him. Taxspanner estimates that Vaswani can save more than Rs 34,000 in tax if he gets some tax-free perks, opts for the NPS benefit offered by his company and also invests in the scheme on his own. He should also buy health insurance for his parents and his family.

Income from employer


As a first step, Vaswani should opt for the NPS benefit offered by his company. Under Sec 80CCD(2), up to 10% of the basic salary put in the NPS is tax free. If his company puts Rs 3,323 (10% of his basic pay) in the NPS every month, his annual tax will be cut by Rs 8,300. Another Rs 10,400 can be saved if he invests Rs 50,000 in NPS on his own. At 35, he should allocate the maximum 75% to equity funds.


Vaswani should also ask his company to change some components of his pay. The taxable medical allowance should be replaced with a gadget allowance. A gadget allowance of Rs 25,000 (where the employee is taxed for only 10% of the value of items purchased in company’s name) will reduce the tax by around Rs 4,600.


Apart from interest from fixed deposits, Vaswani also made some short-term capital gains from stocks during the year. He should shift from fixed deposits to debt funds to avoid the tax and and keep a longer investing horizon to escape the tax on equity gains. He should also purchase health insurance for his parents and his family. A premium of Rs 35,000 will cut his tax by Rs 7,280.

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Paying too much tax? Write to us at etwealth@ with ‘Optimise my tax’ as the subject. Our experts will tell you how to reduce your tax by rejigging your pay and investments.

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