How to reduce tax by 52% using salary perks and NPS

Understanding the intricacies of tax laws can significantly aid individuals in managing their financial affairs and in effectively reducing their tax liability. By strategically utilising salary perks and investing in the National Pension Scheme (NPS), tax obligations can be significantly trimmed. As an illustrative example, let's consider an automobile engineer based in Chennai, referred to as Mr A in this scenario.

NPS: A key instrument for tax saving

NPS is a government-initiated pension scheme aimed at encouraging individuals to save for their retirement, while also offering tax benefits under various sections of the Income Tax Act. The first step in Mr A's tax-saving journey would involve opting for the NPS benefit provided by his company. Under Section 80CCD(2), up to 10 per cent of the basic salary invested in the NPS is tax deductible. For instance, if the company contributes Rs 4,114 each month (amounting to 10 per cent of the basic salary) to the NPS, his annual tax could reduce by Rs 10,269.

He can further decrease the tax liability by investing Rs 50,000 in the NPS under Section 80CCD(1b). This strategic investment could help save another Rs 10,400, inching Mr A closer to the tax rebate eligibility threshold.

Leveraging salary perks to reduce tax

Several components of one's salary can assist in reducing taxable income. For instance, opting for meal coupons can be a good tax-saving strategy. While these coupons might not be usable in small shops, they are accepted in almost all large superstores. By availing the maximum limit of Rs 30,000 in food coupons, can reduce taxes by Rs 6,250.

Basic tax-free perks such as reimbursements for telephone bills, newspaper subscriptions, and Leave Travel Allowance (LTA) can also significantly alleviate the tax burden. Should a person receive telephone and newspaper reimbursements of Rs 24,000 per year (Rs 1,000 per month under each head), and an LTA of Rs 60,000, she could potentially reduce his tax by approximately Rs 17,500.

Health Insurance as a tax-saving tool

Health insurance premiums paid for oneself, spouse, children, and parents can be claimed as deductions under Section 80D of the Income Tax Act. Although his company provides a group health plan that covers his family and parents up to Rs 5 lakh, buying an additional health insurance policy would be beneficial. If Mr A pays an annual premium of Rs 36,000 for health insurance, he could cut tax by nearly Rs 7,500.

Mindful investment decisions

Interest from fixed deposits is taxable, but this can be avoided by opting for debt funds. Moreover, balanced mutual funds, which combine equity and debt investments, offer stability to portfolios by mitigating market volatility. They provide regular income through the interest earned on the debt component and potential capital appreciation from the equity portion, thereby making them a suitable choice for long-term wealth creation while managing risk.

Here's a table outlining all of the tax savings for Mr A: