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15 January, 2013

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Pay Less Income Tax – Use Section 80C/80D before 31st March ends!!

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Pay Less Income Tax – Use Section 80C/  80D before 31st March ends!!

It’s mid of January and hopefully it has been a year with high income for you (we congratulate you for that!!) but now it is important to ensure that you plan your Income tax precisely so that there are no year-end hiccups for surprisingly large Income Tax Liability.

The best ways to ensure a perfect tax planning is by utilising the benefit of Section 80C, 80D and other relevant sections which reduces your tax liability by considerable length. This article does not aims at discussing legal provisions but just to list out the various instruments you can choose to save your tax and also get high returns on the same in these dynamic times.

What is Section 80C?

Under section 80C of the Income Tax Act, certain investments are deductible (up to a maximum of Rs 1 lakh) from gross total income. This tax exemption is available across individual tax slabs. If you earn Rs 5 lakhs per annum and make investments of Rs 1 lakh in 80c instruments then the taxable amount will be Rs 4 lakhs.
Please Note:- First check whether the forced expenditures are eligible for 80C deduction or not. Remember, only One Lac can be used, say 40K of your forced expenditure is eligible for deduction u/s 80C then you need to invest only 60K for fulfilling your Income Tax Need.

Forced Expenditure eligible for deduction u/s 80C are:-

1. Tuition Fees :- Tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether at the time of admission or thereafter to any university, college, school or other educational institution situated within India or for the purpose of full-time education of self or any two child of such individual

2. Home Loan:-  There is a provision that  the payment made for repayment of the  principal amount  (not interest payment) of the Home Loan  is eligible for a deduction under Section 80C if you have taken a home loan and you fulfill certain conditions.

3. Payment towards Provident Fund:- Salaried income tax payee are usually have a forced saving which are eligible for deduction under section 80C.    A fixed percentage of basic salary  (ranges from 8.33% 12%) is deducted by your employer towards the Employees Provident Fund (EPF).   Some employers allow higher deduction towards EPF.  Thus, you should first of all check the total amount that is expected to be deducted towards EPF during the financial year.     The total amount deducted from your salary will be eligible for investments under Section 80C.

Other Investment Options u/s 80C 
1. ELSS – Equity Linked Saving Scheme: This is one of the investments schemes specified in section 80c. As the name suggest it is a saving scheme that is based on equity (market linked) investments. Under this scheme one can invest in equities through mutual funds however there is condition of lock in period which is 3 years. A lot of mutual funds have been launched under the name of ‘Tax Saving Mutual Funds’ in order to facilitate the ELSS. These mutual funds also provide for SIP i.e. systematic investment plans where periodic contributions can be made to the fund. Since these investments are market linked they help in generating good returns but the risk factor is also there.

2. ULIP – Unit Linked Insurance Plan: This is one of the most popular section 80c investments. These are insurance plans wherein you get the benefit of life insurance cover as well as growth of your investment given in the form of premium by making them available for investment in market liked securities. ULIPs has dual benefit – Insurance Protection & Life cover. When you invest in Unit Linked Insurance Plans a part of premium is used to cover up the insurance protection while the rest of it invested in market securities like shares and bonds. Now the important thing is that plans can be chosen where major portion of your investments is used for government bonds also.

3. PPF – Public Provident Fund: This is a long term small saving scheme covered under section 80c which is backed by the central government. The interest is compounded annually and the rate of interest is around 8.5%. The investment period under PPF is 15 years and the minimum and the maximum amount of investment is Rs 500 and Rs 100000 respectively. (Earlier the maximum limit was Rs 70000). PPF account can be opened by an individual in SBI or few other nationalized banks.

4. Fixed Deposits: These are commonly referred to as ‘Tax saving fixed deposits’. Most of the banks provide these fixed deposits and the tenure of investment is 5 years. The interest earned on these fixed deposits is taxable and appropriate TDS is deducted by the banks. The interest rate varies from 8% to 9% and varies from bank to bank. Only individuals and HUFs can invest in these tax free fixed deposits. The minimum amount of investment is Rs 100 with the multiples of Rs 100 thereon and maximum if Rs 100000 in a financial year. If you are looking for section 80c eligible investment, tax free FD is very convenient option.

5. LIP – Life Insurance Premium: This refers to the investment in life insurance through Life Insurance Premiums. This is different from ULIPs in the sense that these are traditional form of LIPs that not market linked. Again the persons covered are individuals and the limit of benefit is Rs 100000, anything over and above will not qualify for deduction under section 80c.

80D – Medical Health Insurance

Under this section, health Insurance Premium paid under a scheme framed by any insurer approved by the Insurance Regulatory & Development Authority (IRDA) can be deducted upto 15,000 from your taxable income. For senior citizens, this limit is 20,000.

Under this section, an individual can claim deduction for the health insurance premium paid for self, spouse and children. He can also claim deduction upto 15,000 for the health insurance premium paid for his parents. If either of the parents are senior citizens, this limit is 20,000.  The age limit for senior citizen will be 60 from the financial year 2012-13. So, the limit can go upto 35,000 in a year.

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