Dr. Sanjiv Agarwal

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 10,00,000 tax bracket. You would have to pay the fixed sum for this slab, which is Rs 25,000 (ie, 10 % of earlier slab of 2,50,000 – 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 25,000 + Rs 20,000 = Rs. 45,000.

Tax savings options

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.

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. 1,50,000. Moreover, the aggregate amount of deduction under Section 80C, 80CCC (pension plans) and 80CCD (pension scheme) cannot exceed Rs. 1,50,000.

Exemptions under Section 80C

Section 80 C is the mother provision containing host of exemptions  which are  available under Section 80C. Payment eligible for deduction under section 80C includes-

  • Premium on life insurance policies – Related Post- Life Insurance Premium- Eligible Amount Under Section 80C
  • Non-commutable deferred annuity plan
  • Statutory provident fund and recognized provident fund.  Related PostTaxability of Provident Fund -Recognized, Unrecognized & Statutory
  • 15-year public provident fund (PPF)- Related Post- All about PPF and Income tax benefit
  • Approved superannuation fund ,
  • National Savings Certificates, VIII issue (NSC)-  Related Post- All about NSC and Tax Benefit
  • 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- Related Post- Deduction u/s. 80C for tuition / school / education fees
  • 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 – Related Post- FAQs on Housing Loan & Income tax benefit
  • Amount deposited under the Senior Citizen Scheme (applicable from assessment years 2008-09)
  • Amount deposited in a five-year time deposit scheme in the post office (applicable from assessment years 2008-09) and
  • Sukanya Samriddhi Account (applicable from Assessment Year 2015-16).- Related Post- Sukanya Samriddhi Account– Tax and Other benefits

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 8.50% 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.

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 Rs1,50,000 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 Rs 1,50,000 limit should you consider other options.

(To Be Continued)

(Article was First Published on 02.02.2011)

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