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Tax optimiser: By paying rent to father, Sirohi's HRA can become tax-free

Sudhir Kaushik of Taxspanner.com

Ahmedabad-based bank executive Arjun Sirohi pays a low tax but there is scope to cut it further. Taxspanner estimates that Sirohi can reduce his tax by over Rs 80,000 by investing in the NPS, paying rent to his parents and claiming HRA exemption and buying medical insurance for himself and his parents.

Sirohi lives in his father’s house and therefore, does not claim exemption for HRA. If he pays Rs 25,000 rent to his father per month, his entire Rs 2.44 lakh HRA can be tax free. That will bring down his tax by more than Rs 50,000. Of course, his father will be taxed for the rent he receives, after a 30% standard deduction. But since his income is not very high, the rental income will not lead to a tax burden.

Income from employer

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Income from other sources

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Some of the allowances in Sirohi’s pay package are taxable. The conveyance and medical allowances should be replaced with reimbursements of telephone bills (Rs 1,000 a month) and books and periodicals (Rs 500 a month). This will save him almost Rs 3,800 in tax.

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Next, he should ask his company for the NPS benefit under Section 80CCD(2). Up to 10% of the basic salary put in NPS is tax deductible. If his company puts Rs 4,066 (10% of his basic salary) in NPS every month, his tax will reduce by about Rs 10,100. Another Rs 10,400 can be saved if he puts Rs 50,000 in NPS on his own under Sec 80CCD(1b).

Arjun Sirohi’s tax

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Sirohi should also buy a medical insurance plan for himself and his parents. A premium of Rs 25,000 will reduce his tax by roughly Rs 5,200.

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.
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