How to use HRA, NPS to cut tax outgo by Rs 1.9 lakh

Delhi-based marketing manager Akshay Chopra earns well, but also pays a high tax even though his salary is tax-friendly. This is because Chopra does not claim all the deductions available to him. TaxSpanner estimates that Chopra can reduce his tax outgo by Rs.1.9 lakh if he claims exemption for house rent allowance (HRA) and his company offers him the NPS benefit.

Chopra lives in his mother’s house and, therefore, does not claim exemption for HRA. His tax can be cut significantly if he pays her rent. A monthly rent of Rs.50,000 will shave off Rs.1.5 lakh from his annual tax. Of course, his mother will be taxed for the rent she receives, but of the total Rs.6 lakh, she will be taxed only for Rs.4.2 lakh after 30% standard deduction. Also, since she is in the 20% tax bracket, the rent will lead to an additional tax liability of Rs.85,000 for her. So, Chopra stands to save Rs.65,000 in tax.

Next, Chopra should ask his company to offer the NPS benefit. Under Sec 80CCD(2), up to 10% of basic salary put in the NPS is tax-deductible. If his company puts Rs.9,528 (10% of his basic pay) in the NPS every month, his annual tax will reduce by nearly Rs.36,000. At 35, Chopra should allocate the maximum 75% of the corpus to equity funds.

Chopra’s salary structure is already quite tax-friendly, but there is scope to add some more tax-free allowances. If he gets meal coupons worth Rs.24,000 (Rs.2,000 per month), his annual tax will come down further by around Rs.7,500.

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