Pune-based software professional Jairaj Ravi earns well, but also pays a high tax because all the allowances in his salary are taxable and he has not opted for the deductions available to him. Tax Spanner estimates that Ravi can reduce his tax by around Rs.55,000 if he opts for the NPS benefit offered by his employer.
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Ravi lives in his own house and has no home loan. With very few deductions available to him, he finds it beneficial to opt for the new tax regime, where the tax slabs are wider and rates are lower. However, there are few exemptions and deductions under the new tax regime. Besides, all other allowances in his paycheque, including conveyance allowance and meal coupons, are fully taxable.
However, Ravi can still avail of the tax deduction for NPS contributions under the new regime. Under Section 80CCD(2), up to 10% of the employee’s basic salary put in the pension scheme is tax-free. This limit is higher at 14% of the basic pay under the new tax regime. Ravi should opt for the NPS benefit offered by his company. If his company puts Rs.14,318 (14% of his basic salary) in the NPS on his behalf every month, his annual tax will reduce by about Rs.53,600. However, contributions to the NPS will reduce his monthly take-home salary by about Rs.9,850.
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Ravi should also avoid investing in fixed deposits, where the interest earned is taxed at the slab rate every year. If he shifts to debt funds, the gains will be taxed at the same rate but only at the time of withdrawal. If he goes for arbitrage schemes and holds for more than a year, gains of up to Rs.1.25 lakh will be tax-free in a year.
