Tax optimiser: Why software engineer Menon should replace LTA, opt for NPS benefit to cut tax

By Sudhir Kaushik of Taxspanner.com

Pune-based software engineer Vijay Menon has a tax friendly pay structure but he is unable to claim some of the tax exemptions. Taxspanner estimates that Menon can save almost Rs 19,000 if his salary structure is rejigged and his company offers him the NPS benefit.

Menon should start by asking his company to replace the taxable medical allowances in his salary with tax-free perks such as newspaper allowance. The leave travel allowance (LTA) should also be replaced. Though LTA is normally tax free if claimed once in two years, Menon has not been able to travel due to the Covid induced lockdown. Instead, he should ask for an allowance for purchasing household goods and furnishings.


Under Section 17(2), the employee is taxed for 10% of the value of the asset. So, if he buys a gadget worth Rs 25,000, he will be taxed for Rs 2,500. Purchase of computers and laptops is not taxed. If his medical allowance and LTA are replaced with tax-free perks, Menon can save up to Rs 11,500 in tax.

Income from employer

Next, he should ask his company for the NPS benefit. Up to 10% of the basic salary put in the NPS by a company on behalf of the employee is deductible under Section 80CCD(2). If Menon’s company puts Rs 2,717 (10% of his basic pay) in the NPS every month, his annual tax will reduce by about Rs 6,800. Since he is already an investor in the NPS, he knows the allocation that suits his profile.

Some more tax can be saved by shifting from fixed deposits to mutual funds. While interest from fixed deposits is fully taxable the gains from mutual funds are taxed at a lower rate of 20% after indexation benefit if the holding period exceeds three years.

Write to us for help
Paying too much tax? Write to us at etwealth@ timesgroup.com with ‘Optimise my tax’ as the subject. Our experts will tell you how to reduce your tax by rejigging your pay and investments.