How changes in salary, investments can reduce your tax out-go

Shweta Jha is 30 and works for a software firm in Pune. Her salary is reasonably high, but due to poor tax planning, she pays a very high tax. Jha can reduce her tax by nearly 32% by making a few changes in her salary and investments.

Her first move should be to get her compensation structure rejigged. Instead of giving a very high special allowance, Jha’s company should put 10% of her basic in the New Pension System (NPS). This is deductible under Sec 80CCD(2). Next, she should ask for a tax-free conveyance allowance and reimbursements of telephone and medical expenses. These three changes will bring down her tax by about Rs 28,000 .

Jha is not fully utilising the tax saving limit under Sec 80C. She should put Rs 60,000 in ELSS funds and buy a term plan for herself. This will cut her tax by another Rs 21,000. If she puts Rs 50,000 in the NPS under the newly introduced Sec 80CCD(1b), her tax will further come down by Rs 10,000.

However, putting away so much in NPS also means her take home salary will come down. Jha should also keep in mind that NPS investments cannot be withdrawn before she retires.
(Sudhir Kaushik works for Taxspanner.com)