Monday, May 25, 2015

FINANCE SPECIAL ........................How to cut your tax outgo


How to cut your tax outgo





By restructuring your income, expenses and investments, you can reduce your tax outgo significantly

Indians are paying too much in tax, and not because our tax rate is high. Compared to other countries, the tax rate in India is quite reasonable. In fact, some deft investment planning can reduce the tax on an annual income of `10 lakh to barely `35,000.
Yet, a lot of Indians end up paying a much higher tax rate. Tax filing data from last year shows that the average taxpayer doles out 3035% more in tax compared to a taxpayer who has optimised his liability. Are you among those who are not able to save tax? Does the wide gap between your gross income and the net take-home pay bother you? In this new section, tax experts from Taxspanner.com will analyse your income and investments and suggest ways to optimise your tax outgo.
Optimising your tax
Your quest for a lower tax begins with making your salary structure tax friendly. Not everyone has this option but a lot of companies give their employees the freedom to define the benefits they want within a broad framework.
Our first case this week is 38-year-old marketing professional Sanjeev Gupta. His income is roughly `11.35 lakh a year and another `34,000 comes from other sources. Despite availing the full tax benefits under Section 80C, he still pays about `65,000 as tax. The culprit: a very high basic salary, no exemption on house rent allowance and a fat fully taxable special allowance.
We do not want to touch the basic salary because it would affect other benefits. Gupta could ask his company to reduce his special allowance from `96,000 (`8,000 a month) to `40,000. Instead, the company can put `52,000 in the NPS on his behalf. Under Section 80CCD(2), up to 10% of the basic salary contributed to the NPS by the employer is tax deductible. This deduction is over and above the `1.5 lakh under Section 80C.
The remaining `4,000 of the special allowance can be given to him in the form of food coupons. This will be a tax-free perk for Gupta, who can use these food coupons for buying food items at select outlets affiliated to the coupon issuer. Replacing the special allowance with NPS and food coupons will save Gupta more than `11,000 in taxes.

Rejigging investments, deductions
This year's budget offers an additional deduction of `50,000 for investments in the NPS under Section 80CCD(1b). If he can invest the full `50,000 in NPS, Gupta can prune his tax further by `10,000. But he should note that this money will get locked for the next 22 years. NPS does not allow partial withdrawals before retirement at 60 except in very dire circumstances.
He also needs to rejig his existing investments. He has invested in fixed deposits and made some short-term capital gains from stocks. Given that he is in the 20% bracket, Gupta should avoid tax inefficient investments. Instead he should park his money in short-term debt funds. The gains will be taxed only at the time of withdrawal. He should also avoid shortterm investments in stocks. If he holds for a year, the gains are tax-free.
Gupta's employer offers a `3 lakh medical cover to his family. However, he should also buy a health cover independently that will cover his family even if he changes jobs. A floater cover of `3 lakh will cost them around `12,600. An annual medical check-up for both husband and wife is also a good idea, which will cost them around `5,000. This entire expense of `17,600 is tax deductible under Section 80D. It will cut his tax by around `3,500.

Car on lease
Though his company does not offer such an option, taxpayers like Gupta can also go for a company-leased car to reduce their tax. Instead of paying EMIs out of post-tax income, they can ask for a company-leased car as part of their compensation package. The company pays the EMIs while the employee uses the car. If the EMI is `12,000 a month, the taxable perk value is only `1,800.
Sudhir Kaushik.ET18MAY15

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