Tax optimiser: How IT professional Garewal can pay rent to parents and be tax free

By Sudhir Kaushik of Taxspanner.com

Chandigarh-based IT professional Navneet Garewal has a modest income but still gets taxed because he is not able to avail of all the deductions available to him. Taxspanner estimates that if Garewal is able to reduce his taxable income to below Rs 5 lakh, he can be completely tax free. For this, certain taxable allowances in his pay will need to be replaced with tax-free perks. Also, he will have to claim exemption for HRA by paying rent to his father.

Income from employer

Income from other sources

Garewal lives with his parents in their house. A big reduction in taxable income is possible if he pays rent to them and claims exemption for the HRA. That will shave off Rs 2.4 lakh from his taxable income and bring him close to the Rs 5 lakh threshold. Though he doesn’t incur household expenses, the 28-year-old is not able to fully claim the deduction under Section 80C. “After paying the EMI of my car, travelling and other expenses, I don’t have enough left to save,” he says. Garewal needs to hike his tax savings by at least Rs 24,000.

Next, he should start by asking his company to include a newspaper allowance and food coupons in his compensation. These are tax free subject to reasonable limits and submission of actual bills. If he gets Rs 500 per month for books and periodicals and Rs 18,000 worth of food coupons in a year, his annual taxable income will reduce by another Rs 24,000.

Garewal invests in ELSS funds to save tax but also has some FDs from earlier years. He should avoid investing in FDs because the interest can push his taxable income above Rs 5 lakh, making him ineligible for tax relief under Section 87A.

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