Tax optimiser: Swami should cut PPF investment and invest in ELSS instead

By Sudhir Kaushik of Taxspanner.com

Chennai-based bank manager Sankar Swami pays a high tax because his salary is not very tax-friendly and he does not claim all the deductions available to him. Taxspanner estimates that Sankar can save almost Rs 42,000 in tax if his salary structure is rejigged and he invests in the NPS on his own.

Sankar should start by asking his company to rejig his salary structure. The transport allowance is now taxable, so it should be replaced by some other tax-free perks like newspaper allowance and telecommunications reimbursements. If his transport allowance is replaced with these tax free perks, Sankar can reduce his tax by around Rs 5,800. He will have to submit actual bills to claim the reimbursements.

Income from employer

Next, he should opt for the NPS benefit offered by his company. Under Sec 80CCD(2), up to 10% of the basic salary put in NPS is tax free. If his company puts Rs 7,283 (10% of his basic pay) in the NPS every month, his annual tax will reduce by almost Rs 22,000. Another Rs 10,400 can be saved if he invests Rs 50,000 in the NPS on his own. Sankar does not have any equity exposure, so he should allocate the maximum 75% to equity funds of the NPS.

Buying health insurance for himself and family can help save Rs 4,000 more for Sankar. Apart from this, he also needs equity exposure. A portfolio with 100% allocation to fixed income will not be able to beat inflation. Sankar should reduce his contribution to the PPF and start SIPs of Rs 3,000 in an ELSS fund to get some equity exposure.
Sankar Swami’s tax

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