Kar Bachao (Save Tax) !

Some people have a habit of last minute scrambling to look for the avenues available for income tax saving. Most of them understand what would be the tax implications on them at the start of the financial year itself, but procrastinate it to the far end of the year only to find themselves cash strapped thereafter for that short period. Not only this, they also do themselves injustice by putting their hard earned money in any thing that they come across and gives them tax breaks, without even analyzing and researching its suitability to them. Some opportunistic life insurance agents, the so called financial advisors, etc. are just waiting for such people to cut holes in their pockets. Smart people do the opposite and inculcate good habits of planning their investments meticulously and in a disciplined manner helping them in the long run to build up a sizeable asset.

Plan your investments at the start of the financial year. All your investment planning should be in conformity to your short term, medium term and long term goals. Only after assessing these points, you should go ahead and explore the tax saving instruments within the asset class chosen that will also help you in achieving your financial goals.

There are many sections under income tax act that can actually provide you great tax breaks depending upon your sources of income and other parameters which you should consult for with a good financial planner. Highlighted herebelow are some of the popular tax saving instruments:

Sec. 80C, 80CCF, 80D, 80G and 80E.

Sec 80C: Deduction in respect of Life insurance premium, contribution to PPF, principal repayment on home loan, etc.

You are entitled to a tax benefit provided you make investments in certain instruments which are eligible for deduction under Sec 80C of the Income Tax Act, 1961, with the maximum total exemption being Rs. 1, 00,000. That is, if your income is 5,00,000 you can claim tax exemption up to 1,00,000 which leaves you with a taxable income of 4,00,000.

Following are a few options that permit this exemption:

Instruments

 Summary

Limitations

Provident Fund

Contribution to public/ recognised provident fund

Lock-in-period of 15 years

Tax saver Mutual Funds -ELSS

Investment in any ELSS (Equity linked saving scheme)

Lock-in-period of 3 years

Principal repayment on home loan

Repayment of any loan borrowed for purchase or construction of residential house property.

Interest is exempt till 1,50,000 under section 24

Life insurance premium

Premium paid towards life insurance policy

Amount of premium not exceeding 20% of the policy sum insured

Others - tuition fees

 

  Small saving schemes

Payment made as tuition fees for your child

 

Investments in National Savings Certificate, post office savings bank account, senior citizens' savings scheme and others

1.     Should be a full-time course

2.     Maximum 2 children

Interest rates, minimum investment amount if any, lock-in-period etc would differ in case of each instrument.

Sec 80CCF: Deduction in respect of subscription to long term infrastructure bonds

 Any investments made in long term infrastructure bonds as notified by the central government shall be allowed as deduction to the extent of Rs. 20000. This is in addition to the limit of Rs. 100000 allowed under Sec 80C of the Income Tax Act, 1961.

Sec 80D: Medical Insurance Premium

Premium paid for medical insurance up to Rs. 15000 is eligible for deduction under Sec 80D; incase of senior citizens the limit is extended to Rs. 20,000.

The following table summarizes the provision:

  Description

Mediclaim premium paid in respect of

  Total deduction u/s 80D

Self, spouse & dependent children

Parents (whether dependent or not)

No one has attained the age of 65 years

15000

15000

30000

Assessee and his family less than 65 years of age and parent is a senior citizen

15000

20000

35000

Assessee and the parent attained age of 65 years

20000

20000

40000

Sec 80E: Deduction in respect of interest on loan for higher education

The amount of interest paid on loan borrowed from any financial institution or any approved charitable institution is eligible for deduction under Sec 80E of the Income Tax Act, 1961, the loan being taken for the purpose of higher education.

The provisions simplified:

Eligibility

Individuals only.

Amount

There is no limit on the interest amount.

Restrictions

Deduction is allowed for the initial year, i.e. when the individual starts making interest payments and immediately succeeding 7 years or until the interest is paid whichever is earlier.

Sec 80G: Donations to certain funds/ charitable institutions

Donations, charity need not necessarily be one-way traffic but could result in a win-win situation for both parties. To simplify it further, donations made to certain funds or charitable institutions are eligible for deduction under Sec 80G of the Income Tax Act, 1961. So while the receiving party benefits with the donation, you receive tax benefits arising from the deduction.
Institutions eligible for deduction under this section are categorized in three segments based on the amount of deduction allowed. The three segments have:

1.     100% deduction allowed without any limit

2.     50% deduction allowed without any limit

3.     a.) 100% deduction allowed of restricted amount

b.) 50% deduction allowed of restricted amount

Where restricted amount is 10% of the adjusted total income

llustration: Mr. A an individual has total income for a year amounting to Rs. 4, 00,000. He makes a donation of Rs. 1, 50,000 to an approved charitable institution. Depending on the institution he invests in, we have 4 different scenarios that explain the benefits arising in each case.

 

100% deduction without any limit

50% deduction without any limit

100% deduction of restricted amount

50% deduction of restricted amount

Adjusted total Income

4,00,000

4,00,000

4,00,000

4,00,000

Tax payable

22,000

22,000

22,000

22,000

Donation made to institutions

1, 50,000

1, 50,000

1, 50,000

1, 50,000

Amount qualified for deduction

1, 50,000

75,000

1, 50,000

75,000

Deduction under Sec 80G (restricted to 10% of income)

NA

NA

40000

40000

Taxable income post deduction

2,50,000

3,25,000

3,60,000

3,60,000

Tax payable post deduction

7,000

14,500

18,000

18,000

Note: Education cess has not been calculated

Summary

Let’s understand these deductions and its impact on your tax liability by way of the following illustration:
Mr. X and Mr. Y have total income for a year amounting to Rs. 5, 00,000 each.

Following are the particulars furnished by Mr. X

Amount

Life insurance premium paid, sum of the policy assured Rs. 2,00,000

Rs. 60,000

Contribution to public provident fund

Rs. 20,000

Tuition fee payment for 3 children pursuing a full-time course

Rs. 10,000 each

Housing loan principal repayment

Rs. 30000

Invested in ELSS mutual fund

Rs. 20,000

Invested in IDFC Infrastructure bonds

Rs. 20,000

Premium paid on Mediclaim policy

Self- Rs. 15000
Parent (senior citizen)- Rs. 20000

Donation made to Prime Minister’s National Relief Fund

Rs. 20000

 

Computation of tax liability

 

Mr. X

Mr. Y

Particulars

Amount (Rs.)

Amount (Rs.)

Amount (Rs.)

Total Income for the year

-

5,00,000

5,00,000

Deduction under Sec 80C

-

-

-

*Life insurance premium paid

40,000

-

-

Contribution to public provident fund

20,000

-

-

**Tuition fee for children pursuing a full-time course

20,000

-

-

Housing loan principal repayment

20,000

-

-

Investment in ELSS mutual fund

20,000

-

-

Deductions under Sec 80C restricted to

-

1,00,000

-

Deduction under Sec 80CCF

-

-

-

Invested in IDFC Infrastructure bonds

-

20,000

-

Deduction under Sec 80D

-

-

-

Premium paid on Mediclaim policy

-

-

-

-Self

-

15,000

-

-Parent (senior citizen)

-

20,000

-

Deduction under Sec 80G

-

-

-

***Donation made to Prime Minister’s National Relief Fund

-

20,000

-

Taxable Income after deduction

-

3,25,000

5,00,000

Tax liability

-

14,500

32,000

 

Notes:

* Restricted to 20% of the sum of the policy assured i.e. 20% of Rs. 2, 00,000. Therefore eligible amount Rs. 40,000

** Tuition fee paid is eligible for deduction under Sec 80C for maximum two children. Therefore Rs. 20000 shall be allowed.

*** Donation (this fund) eligible for 100% deduction without any limit

Education cess has not been calculated

 

The illustration above clearly states the benefits enjoyed by an investor taking advantage of the various deductions available in a planned manner.

Conclusion:

To recap, an investor requires considering his overall investment purpose rather than frantically making investments with the solitary purpose of saving tax. The idea is not just to throw light upon these deductions but also to explain the underlying concept of tax planning. Hope this provides you a leg-up in your tax saving investments.

Tax slabs for your reference:

Income tax slabs (in Rs) 2011-2012

General

Women

Senior Citizen

Very Senior Citizen

Tax Applicable

0 to 1,80,000

0 to 1,90,000

0 to 2,50,000

0 to 5,00,000

No Tax

1,80,001 to 5,00,000

1,90,001 to 5,00,000

2,50,001 to 5,00,000

-

10%

5,00,001 to 8,00,000

5,00,001 to 8,00,000

5,00,001 to 8,00,000

5,00,001 to 8,00,000

20%

Above 8,00,000

Above 8,00,000

Above 8,00,000

Above 8,00,000

30%

 

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