Friday, April 17, 2009

How Section 80C helps you save tax

How Section 80C helps you save tax

The financial year of 2008-09 has just closed and all of us have gone through the regime of filing taxes - something we all loathe to do.

Come March and we all make one last desperate attempt to find avenues for investments that will help us save some tax.

Frankly speaking, saving tax is not all that difficult. A systematic investment plan, may not make your income 'zero tax', but will definitely help you lighten your tax liability.

While there are several provisions, the most common option is the tax deduction instruments under Section 80C of the Income Tax Act.

And, the most popular among these contributions/investments are the Employee Provident Fund (EPF) and the Public Provident Fund (PPF).

Besides, there are some more investment instruments, which can be divided into tax saving investments and miscellaneous investments or more aptly put, payments that you inadvertently have to make, which provide you with tax benefits.

So what are the investments that fall under Section 80C?

Tax saving investments

Public Provident Fund (PPF)
Return - 8% pa,
Tenure - 15 years,
Minimum investment - Rs 500,
Maximum investment - Rs 70, 000.
Assured but not fixed returns since interest rates change as per government rules from time to time, amount invested can be deducted from taxable income.

Employee Provident Fund (EPF)
Employer and employee contribute 12% of annual income.
Out of the total 24% contribution, 8.33% is given towards a family pension plan.
The remaining portion (15.67%) grows at a rate of 9.5% per annum.
Amount invested can be deducted from taxable income.

Equity Linked Savings Schemes (ELSS)
Tenure - 3 years,
No upper limit of investment,
High earning potential,
Provides 10% to 15% returns with a good scheme, over a long term.

National Savings Certificate (NSC)
Return - 8% compounded half-yearly,
Tenure - 6 years,
Minimum investment - Rs 500,
No maximum investment limit,

Amount invested can be deducted from taxable income.

5-year fixed deposits with a bank or post office
Return - Currently between 5% and 9% depending on tenure.
Tenure should be up to a maximum of 5 years to avail tax benefits.
Amount invested can be deducted from taxable income.

Insurance and Pension Scheme

Senior Citizen Saving Schemes
Investments can be made by opening an account in a post office.
Investments need to be in multiples of Rs 1, 000 and should not exceed Rs 15 lakh.
Tenure - 5 years and can extend to 3 years,
Returns - around 7%-9% p.a.
Tax benefits only if form 15G or 15H is submitted.

Unit Linked Insurance Plans (ULIPs)
Mutual funds with an insurance component, returns depend on scheme, qualify for tax deductions irrespective of plan

Life Insurance Schemes
Returns depend on schemes, and life insurance premium payments are tax deductible

Mutual Fund Pension Plans
Returns depend on schemes and amount invested can be deducted from taxable income

Accrued interest on National Saving Certificate
Interest accrued on NSC investments provide tax benefits

Tuition fees paid for children's education (maximum 2 children)
The amount paid for the school or tuition fees can be deducted from your taxable amount

Principal component of home loan repayment
The maximum amount of home loan principal repayment eligible for deduction u/s 80C is up to Rs 100,000.

Now that you know where you can invest to obtain Section 80C benefits, you can research about each type of investment option and make your choice based on ease of liquidity, tenure, returns and tax benefits.

However, if you are planning to put all your eggs in one basket, here is abit of bad news -- Section 80C has a limit of Rs 100,000.

That is, if you have made investments of Rs 150,000 in any of the investment instruments mentioned above, only Rs 1 00,000 out of it would be eligible for deduction under Section 80C.

Also, if you are a salaried individual, the PF contributions from your company are also included in this limit. Therefore, it does not make sense to invest more than Rs 100,000 under these categories.

Another important thing that you need to keep is mind is about investing in PPF. At present, PPF investments yield a return of 8 per cent per year. However, it should be noted that the returns are assured but not fixed.

This is because the rate of return is subject to revision i.e. it can be revised upwards or downwards thereby impacting the returns.

Also, apart from Section 80C tax benefits on the amount invested, interest income from PPF investments is exempt from tax under Section 10(11) of the Income Tax Act.

Even though it is not a favoured investment instrument among individuals who are more concerned with the liquidity of their investments because of its tenure running through 15 years, PPF can be an ideal investment in case you are looking to build a corpus for long-term needs like retirement and children?s education.

There is a need for salaried individuals to devote adequate time and effort to tax planning exercise and be aware of the various benefits that they can avail of.

Starting early in terms of researching about the different investment avenues and choosing wisely from the gamut of investments available is very important ? else you end up paying higher tax.

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