Shetty should invest in debt funds instead of FDs to save on taxes

By Sudhir Kaushik

Asha Shetty is 30 and works for a bank. Her salary is already quite tax efficient, because she pays less than 3% of her total income in tax. Even so, she can further reduce this by making a few changes in her salary and investments. Here’s how she can save Rs 6,900 a year in tax.

Shetty should start by asking her employer to reduce the fully taxable special allowance by Rs 5,260 and instead give her a higher tax-free conveyance allowance. However, this will reduce her tax by only Rs 550. A bigger tax cut is possible if she puts Rs 50,000 in the New Pension System (NPS) under the newly introduced Sec 80CCD(1b). This will cut her tax by Rs 5,150.

Shetty also needs to rejig her investments. Instead of investing in tax-inefficient fixed deposits and NSCs, she should shift her money to debt funds. This may not be immediately possible because she has invested in tax-saving fixed deposits that cannot be prematurely closed.

Even so, she should avoid such investments in future. Debt funds are also taxable but the tax rate is lower after three years. Switching to debt funds will help her save Rs 1,238 in tax.



(The author works for Taxspanner.com)