Friends,
This financial year is going to be completed on 31st March. Everybody will be in planning How to Save Income Tax ? Here we will discuss all about Tax Planning. We should meet our tax obligations every year as responsible citizens. However, the law allows certain “tax-deductible” savings and we owe it to ourselves to benefit from these options, which could translate into future savings. Every citizen has a fundamental duty to pay taxes honestly and a fundamental right to avail of all the tax incentives that the government provides. Therefore, through prudent tax planning, not only can income-tax liability be reduced but a better future can also be ensured through compulsory savings in government and other schemes. Let us take a look at how one can achieve successful tax planning to enjoy optimum benefits.
Knowing the brackets
Everybody who earns an income falls under a particular and pre-defined “tax bracket”. It is important to keep in mind that your “taxable income”, or income after deduction, defines your tax bracket, and this could be lower than the amount of money you have earned over the year. According to the current income tax law, for Instance, if your taxable income is Rs 6,00,000 for the year, you would fall within the Rs 5,00,000 to Rs 8,00,000 tax bracket. You would have to pay the fixed sum for this slab, which is Rs 34,000 (ie, 10 % of earlier slab of 1,60,000 – 5,00,000 ) plus 20% of the amount that exceeds Rs. 5,00,000 . In this case , this excess amount would be Rs 1,00,000. Thus your total income tax for the year would be Rs 34,000 + Rs 20,000 = Rs. 54,000.
Tax savings options
The February- March months are significant in regard to submission of investment declaration/details for the financial year, and every taxpayer is hard at work trying to meet the deadline on time. Although one has the option of making the necessary investments after the deadline, it may mean paying more income tax deducted at source (TDS). Moreover, claiming the refund after filing the tax return before July the following year may turn out to be a tedious and hectic affair.
Therefore, the obvious question in everyone’s mind is what should I do to make use of the tax breaks that I am legally allowed? Well, to begin with, there is the deduction under Section 80C of the Income Tax Act, 1961, which includes a wide-range of investments and savings benefits.
What is Section 80C
In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act . Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000.
This financial year is going to be completed on 31st March. Everybody will be in planning How to Save Income Tax ? Here we will discuss all about Tax Planning. We should meet our tax obligations every year as responsible citizens. However, the law allows certain “tax-deductible” savings and we owe it to ourselves to benefit from these options, which could translate into future savings. Every citizen has a fundamental duty to pay taxes honestly and a fundamental right to avail of all the tax incentives that the government provides. Therefore, through prudent tax planning, not only can income-tax liability be reduced but a better future can also be ensured through compulsory savings in government and other schemes. Let us take a look at how one can achieve successful tax planning to enjoy optimum benefits.
Knowing the brackets
Everybody who earns an income falls under a particular and pre-defined “tax bracket”. It is important to keep in mind that your “taxable income”, or income after deduction, defines your tax bracket, and this could be lower than the amount of money you have earned over the year. According to the current income tax law, for Instance, if your taxable income is Rs 6,00,000 for the year, you would fall within the Rs 5,00,000 to Rs 8,00,000 tax bracket. You would have to pay the fixed sum for this slab, which is Rs 34,000 (ie, 10 % of earlier slab of 1,60,000 – 5,00,000 ) plus 20% of the amount that exceeds Rs. 5,00,000 . In this case , this excess amount would be Rs 1,00,000. Thus your total income tax for the year would be Rs 34,000 + Rs 20,000 = Rs. 54,000.
Tax savings options
The February- March months are significant in regard to submission of investment declaration/details for the financial year, and every taxpayer is hard at work trying to meet the deadline on time. Although one has the option of making the necessary investments after the deadline, it may mean paying more income tax deducted at source (TDS). Moreover, claiming the refund after filing the tax return before July the following year may turn out to be a tedious and hectic affair.
Therefore, the obvious question in everyone’s mind is what should I do to make use of the tax breaks that I am legally allowed? Well, to begin with, there is the deduction under Section 80C of the Income Tax Act, 1961, which includes a wide-range of investments and savings benefits.
What is Section 80C
In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act . Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000.
The Section 80C Umbrella
It is important for the tax payers to note that –
• The deduction of investments and savings is applicable on the gross total income.
• Deduction is available only to individuals or HUFs.
• Deduction is available on the basis of specified qualifying investments / contributions / deposits / payments made by the taxpayer during the previous year.
• The maximum amount deductible is Rs. 1,00,000. Moreover, the aggregate amount of deduction under Section 80C, 80CCC (pension plans) and 80CCD (pension scheme) cannot exceed Rs. 1,00,000.
• Under section 80 CCF investments in notified infrastructure bonds aggregate amount of deduction up to 20,000
Exemptions under Section 80C
Section 80 C is the mother provision containing host of exemptions which are available under Section 80C. The exemptions include-
• Premium on life insurance policies ,Non-commutable deferred annuity plan ,Statutory provident fund and recognized provident fund , 15-year public provident fund (PPF), Approved superannuation fund , National Savings Certificates, VIII issue (NSC), Unit-linked insurance plans (ULIPs) of UTI, LIC, and other insurers, Notified annuity plan of LIC, Notified units of mutual funds or UTI ,Notified pension funds set up by mutual funds or UTI, Home loan account scheme or pension fund set up by the National Housing Bank, Any scheme of a public sector company engaged in providing long-term finance for purchase / construction of residential houses in India (e.g., public deposit scheme of HUDCO), Any housing board constituted in India for the purpose of planning, development or improvement of cities / towns, Tuition fees to any university / college / educational institute in India for full-time education of two children subject to limits, Payment towards the cost of purchase / construction of a residential property, including repayment of loan taken from government, bank, co-operative bank, LIC, and National Housing Bank, Amount deposited under the Senior Citizen Scheme (applicable from assessment years 2008-09) and Amount deposited in a five-year time deposit scheme in the post office (applicable from assessment years 2008-09).
Investment options under Section 80C
Investment options with Section 80C can be segregated as follows:
Fixed-income tax savings options
If you like the safety of a steady predictable income, every month, quarter or year, then there are a number of tax-savings instruments available for you. Admittedly, returns from fixed-income instruments average about 8% a year, and the return you get from these options is also free of market risk. These are suitable for investors with a lower risk tolerance or those who should take cautious risks, such as those entering retirement.
Market-linked options
ELSS: An ELSS (equity-linked savings scheme), offered by mutual funds, is a diversified equity scheme with a three-year lock-in period, providing tax benefits under Section 80C of the IT Act. As 80-100% of the corpus in a diversified equity scheme is invested in the equity market, the performance of these funds is in line with market trends. For instance, India witnessed a spectacular bull run between 2004 and 2007, and ELSS provided compounded annual returns of 30-50% during that period, far ahead of traditional tax-savings instruments like PPF and NSC. However, in the 2008 market crash, ELSS was not spared either and witnessed severe erosion in its net asset values (NAVs).
Taking an ELSS SIP (systematic investment plan) is the best solution to counter the volatility in the markets and average out the cost of investment over time. The minimum investment in an ELSS through the SIP route is as low as Rs500. That said, tax benefits for ELSS, however, will become history once the new DTC comes into force on April1,2012.
Unit-linked insurance plans
Unit-linked insurance plans (ULIPs) help you to secure your income and your dependents’ future using a combination of equity-linked savings schemes and term insurance. You can achieve both benefits through a ULIP by paying a fixed premium every year (payable across frequencies) that qualifies for a tax break. There are two types of ULIPs—a Type I ULIP pays the higher of sum assured or fund value as death benefit while a Type II pays the sum assured as well as the fund value. The benefits from the latter are usually better.
Indirect investments
There are instruments that fall under Section 80C which do not call for direct investments and yet save taxes, such as principle repayments of home loans. At times, while setting aside Rs1,00,000 for tax-related investments, many do not take into account this element of Section 80C. Always remember that only if these payments do not help you exhaust the Rs1,00,000 limit should you consider other options.
Provident Fund & Voluntary Provident Fund
Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer’s contribution. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free.But proposed 9.5 % for fy 2010-11.
Public Provident Fund
An account can be opened with a nationalized bank or Post office. The current rate of interest is 8%, which is tax-free and the maturity period is 15 years. The minimum amount of contribution is Rs 500 and the maximum is Rs 70,000.
National Savings Certificate
These are 6-year small-savings instrument, where the rate of interest is 8% and is compounded half-yearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.
Equity-Linked Savings Scheme
Mutual funds offer you specially-created tax saving funds called ELSS. These schemes invest your money in equities and hence, return is not guaranteed. Money invested here is locked for a period of three years.
Life Insurance Premiums
Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included. Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction under Section 80C.
Home Loan Principal Repayment
Your EMI consists of two components, namely principal and interest. The principal component of the EMI qualifies for deduction under Section 80C.
Stamp Duty and Registration Charges For Home
The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year in the year of purchase of the house.
Five-Year Bank fixed deposits
Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.
Others
Apart from the above, things like children’s tuition fees expenses that can be claimed as deductions under Section 80C. However, you need receipts to claim the same.
80CCF
It is important for the tax payers to note that –
• The deduction of investments and savings is applicable on the gross total income.
• Deduction is available only to individuals or HUFs.
• Deduction is available on the basis of specified qualifying investments / contributions / deposits / payments made by the taxpayer during the previous year.
• The maximum amount deductible is Rs. 1,00,000. Moreover, the aggregate amount of deduction under Section 80C, 80CCC (pension plans) and 80CCD (pension scheme) cannot exceed Rs. 1,00,000.
• Under section 80 CCF investments in notified infrastructure bonds aggregate amount of deduction up to 20,000
Exemptions under Section 80C
Section 80 C is the mother provision containing host of exemptions which are available under Section 80C. The exemptions include-
• Premium on life insurance policies ,Non-commutable deferred annuity plan ,Statutory provident fund and recognized provident fund , 15-year public provident fund (PPF), Approved superannuation fund , National Savings Certificates, VIII issue (NSC), Unit-linked insurance plans (ULIPs) of UTI, LIC, and other insurers, Notified annuity plan of LIC, Notified units of mutual funds or UTI ,Notified pension funds set up by mutual funds or UTI, Home loan account scheme or pension fund set up by the National Housing Bank, Any scheme of a public sector company engaged in providing long-term finance for purchase / construction of residential houses in India (e.g., public deposit scheme of HUDCO), Any housing board constituted in India for the purpose of planning, development or improvement of cities / towns, Tuition fees to any university / college / educational institute in India for full-time education of two children subject to limits, Payment towards the cost of purchase / construction of a residential property, including repayment of loan taken from government, bank, co-operative bank, LIC, and National Housing Bank, Amount deposited under the Senior Citizen Scheme (applicable from assessment years 2008-09) and Amount deposited in a five-year time deposit scheme in the post office (applicable from assessment years 2008-09).
Investment options under Section 80C
Investment options with Section 80C can be segregated as follows:
Fixed-income tax savings options
If you like the safety of a steady predictable income, every month, quarter or year, then there are a number of tax-savings instruments available for you. Admittedly, returns from fixed-income instruments average about 8% a year, and the return you get from these options is also free of market risk. These are suitable for investors with a lower risk tolerance or those who should take cautious risks, such as those entering retirement.
Market-linked options
ELSS: An ELSS (equity-linked savings scheme), offered by mutual funds, is a diversified equity scheme with a three-year lock-in period, providing tax benefits under Section 80C of the IT Act. As 80-100% of the corpus in a diversified equity scheme is invested in the equity market, the performance of these funds is in line with market trends. For instance, India witnessed a spectacular bull run between 2004 and 2007, and ELSS provided compounded annual returns of 30-50% during that period, far ahead of traditional tax-savings instruments like PPF and NSC. However, in the 2008 market crash, ELSS was not spared either and witnessed severe erosion in its net asset values (NAVs).
Taking an ELSS SIP (systematic investment plan) is the best solution to counter the volatility in the markets and average out the cost of investment over time. The minimum investment in an ELSS through the SIP route is as low as Rs500. That said, tax benefits for ELSS, however, will become history once the new DTC comes into force on April1,2012.
Unit-linked insurance plans
Unit-linked insurance plans (ULIPs) help you to secure your income and your dependents’ future using a combination of equity-linked savings schemes and term insurance. You can achieve both benefits through a ULIP by paying a fixed premium every year (payable across frequencies) that qualifies for a tax break. There are two types of ULIPs—a Type I ULIP pays the higher of sum assured or fund value as death benefit while a Type II pays the sum assured as well as the fund value. The benefits from the latter are usually better.
Indirect investments
There are instruments that fall under Section 80C which do not call for direct investments and yet save taxes, such as principle repayments of home loans. At times, while setting aside Rs1,00,000 for tax-related investments, many do not take into account this element of Section 80C. Always remember that only if these payments do not help you exhaust the Rs1,00,000 limit should you consider other options.
Provident Fund & Voluntary Provident Fund
Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer’s contribution. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free.But proposed 9.5 % for fy 2010-11.
Public Provident Fund
An account can be opened with a nationalized bank or Post office. The current rate of interest is 8%, which is tax-free and the maturity period is 15 years. The minimum amount of contribution is Rs 500 and the maximum is Rs 70,000.
National Savings Certificate
These are 6-year small-savings instrument, where the rate of interest is 8% and is compounded half-yearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.
Equity-Linked Savings Scheme
Mutual funds offer you specially-created tax saving funds called ELSS. These schemes invest your money in equities and hence, return is not guaranteed. Money invested here is locked for a period of three years.
Life Insurance Premiums
Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included. Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction under Section 80C.
Home Loan Principal Repayment
Your EMI consists of two components, namely principal and interest. The principal component of the EMI qualifies for deduction under Section 80C.
Stamp Duty and Registration Charges For Home
The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year in the year of purchase of the house.
Five-Year Bank fixed deposits
Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.
Others
Apart from the above, things like children’s tuition fees expenses that can be claimed as deductions under Section 80C. However, you need receipts to claim the same.
80CCF
The most important factor for Saving Under Section 80 CCF is it provides additional benefit to save tax in addition to a Maximum Limit of Rs. 100000/- under section 80 C. Now you can also save tax by claiming deduction of Rs 20000/- by investing in Infrastructural Bonds.
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