Restructure your salary and investments to reduce your tax liability by 36%. Here’s what Imon Banerjee did

Mar 15, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Learn how simple tweaks in your salary and investments will help reduce tax liability by 36%

Imon Banerjee is employed in a multinational company and earns a handsome salary. To save on his tax outgo, he invests Rs 1.5 lakh of his income in schemes under Section 80C. He also pays health insurance premium worth Rs 20,000 and enjoys tax benefit under Section 80D.

Now with the Budget 2018, some aspects of individual taxation have changed and keeping that in mind, Imon’s salary would be restructured so as to reduce his tax liability.

Banerjee believed for a long time that he was saving the maximum possible tax outgo. That was until a friend told him that there were other tax-saving avenues, too, which could help him reduce his taxable income even further. By following his friend’s advice, Banerjee now saves his tax outgo by 36%. Let us find out what he did:

Here is Banerjee’s previous salary break-up (in Rs):

Basic salary

522,238

HRA

261,119

Special allowance

112,452

Conveyance allowance

19,200

Medical allowance

15,000

LTA

60,000

Bonus

352,000

Food coupons

24,000

Employer’s contribution to PF

62,668

Total

1,428,677

He also had other incomes (in Rs):

Interest earned from fixed deposits

15,000

STCG by selling stocks held for 5 months

40,000

Total

55,000

His taxable salary was: Basic + Special allowance + Bonus = Rs 986,690

His tax calculation was as follows (in Rs):

Income from salary

986,690

Income from Fixed Deposit interest

15,000

Income from capital gains (STCG)

40,000 taxed at 15%

Gross taxable income

1,041,690

Less: Section 80C deductions

150,000

Less: Section 80D deductions

20,000 (for self, spouse and children)

Net taxable income

871,690

Tax payable

Rs 12,500 for the initial Rs 5 lac income + Rs 6000(15% of 40000 STCG) + Rs 66338 (20% of 331,690) = Total of Rs 84,838

With his friend’s advice, Banerjee restructured his salary (in Rs):

Basic salary

522,238

 

HRA

261,119

 

Special allowance

60,228

He asked his employer to contribute 10% of his basic salary to the National Pension System (NPS) to claim further tax deduction. This reduced the taxable part of special allowance

Conveyance allowance

19,200

 

Medical allowance

15,000

 

LTA

60,000

 

Bonus

352,000

 

Food coupons

24,000

 

Employer’s contribution to PF

62,668

 

Employer’s contribution to NPS, which is tax-exempt under Section 80CCD (2d)

52,224

 

Total

1,428,677

 

Besides restructuring his salary, Banerjee also did the following:

  • He switched his fixed deposit investments to debt mutual funds, growth option so that he doesn’t need to pay DDT (dividend distribution tax). Thus, the interest he received from fixed deposits became zero.
  • The short-term capital gains he earned by selling stocks was also reduced to zero. He was advised to hold the stock for at least a year before selling them so as to avail LTCG (Long Term Capital Gain) Benefit. Thus, any gain he made would become a long-term capital gain and he would have to pay 10% tax on it, vis-à-vis the 20% current slab that he is, after 1 lakh of annual capital gain exemption. However, that would be applicable only when he redeems or switches and no effect on his taxes now.
  • He also made an additional investment of Rs 50,000 under NPS on his own. This investment earned him further deduction under Section 80CCD.

His new tax calculation looked like this (in Rs):

Income from salary

934,466 (Earlier Income from Salary – NPS contribution of Rs 52,224)

Income from other sources

0

Income from capital gains

0 (No short term. LTCG would be applicable the year of redemption only)

Gross taxable income

934,466

Less: Section 80C deductions

150,000

Less: Section 80CCD deductions

50,000

Less: Section 80D deductions

20,000 (for self, spouse and children)

Net taxable income

714,466

Tax payable

12,500 + (20% of 214,466) = 55,393

To sum up, his tax liability reduced to Rs 55,393 and he saved more than 36% on his tax outgo. Amazing what a little change can do, isn’t it?

For any additional changes after the implications of Budget 2018, Imon could have started paying health insurance premium upto Rs 50,000 for his parents, increased the fixed deposit in their name as it has tax free interest upto Rs 50,000 annually, etc. But without getting into additional investments, etc. his tax outflow has been adjusted just by tweaking his salary structure! That is something that should be looked into very carefully by every salaried individual!

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