How to cut your tax outgo
By restructuring your income, expenses and
investments, you can reduce your tax outgo significantly
Indians are paying too much in tax, and not
because our tax rate is high. Compared to other countries, the tax rate in
India is quite reasonable. In fact, some deft investment planning can reduce
the tax on an annual income of `10 lakh to barely `35,000.
Yet, a lot of Indians end up paying a much
higher tax rate. Tax filing data from last year shows that the average taxpayer
doles out 3035% more in tax compared to a taxpayer who has optimised his
liability. Are you among those who are not able to save tax? Does the wide gap
between your gross income and the net take-home pay bother you? In this new
section, tax experts from Taxspanner.com will analyse your income and
investments and suggest ways to optimise your tax outgo.
Optimising
your tax
Your quest for a lower tax begins with making
your salary structure tax friendly. Not everyone has this option but a lot of
companies give their employees the freedom to define the benefits they want
within a broad framework.
Our first case this week is 38-year-old marketing
professional Sanjeev Gupta. His income is roughly `11.35 lakh a year and
another `34,000 comes from other sources. Despite availing the full tax
benefits under Section 80C, he still pays about `65,000 as tax. The culprit: a
very high basic salary, no exemption on house rent allowance and a fat fully
taxable special allowance.
We do not want to touch the basic salary because
it would affect other benefits. Gupta could ask his company to reduce his
special allowance from `96,000 (`8,000 a month) to `40,000. Instead, the
company can put `52,000 in the NPS on his behalf. Under Section 80CCD(2), up to
10% of the basic salary contributed to the NPS by the employer is tax
deductible. This deduction is over and above the `1.5 lakh under Section 80C.
The remaining `4,000 of the special allowance
can be given to him in the form of food coupons. This will be a tax-free perk
for Gupta, who can use these food coupons for buying food items at select
outlets affiliated to the coupon issuer. Replacing the special allowance with
NPS and food coupons will save Gupta more than `11,000 in taxes.
Rejigging
investments, deductions
This year's budget offers an additional
deduction of `50,000 for investments in the NPS under Section 80CCD(1b). If he
can invest the full `50,000 in NPS, Gupta can prune his tax further by `10,000.
But he should note that this money will get locked for the next 22 years. NPS
does not allow partial withdrawals before retirement at 60 except in very dire
circumstances.
He also needs to rejig his existing investments.
He has invested in fixed deposits and made some short-term capital gains from
stocks. Given that he is in the 20% bracket, Gupta should avoid tax inefficient
investments. Instead he should park his money in short-term debt funds. The
gains will be taxed only at the time of withdrawal. He should also avoid
shortterm investments in stocks. If he holds for a year, the gains are
tax-free.
Gupta's employer offers a `3 lakh medical cover
to his family. However, he should also buy a health cover independently that
will cover his family even if he changes jobs. A floater cover of `3 lakh will
cost them around `12,600. An annual medical check-up for both husband and wife
is also a good idea, which will cost them around `5,000. This entire expense of
`17,600 is tax deductible under Section 80D. It will cut his tax by around
`3,500.
Car
on lease
Though his company does not offer such an
option, taxpayers like Gupta can also go for a company-leased car to reduce
their tax. Instead of paying EMIs out of post-tax income, they can ask for a
company-leased car as part of their compensation package. The company pays the
EMIs while the employee uses the car. If the EMI is `12,000 a month, the
taxable perk value is only `1,800.
Sudhir Kaushik.ET18MAY15
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