While it is mandatory for every earning individual to pay his / her share of the Income Tax, the government has several tax saving schemes by which you can reduce your tax liability.
What is Income Tax?
The income an individual earns is subject to the Income Tax laws governing that country. The rate of Income Tax rates vary for individuals with different income levels. In other words, the Income Tax that you are liable to pay depends on your total earnings in that given year.
Income Tax (IT) slabs / brackets for Financial Year 2009-10, Assessment Year 2010-11
Rate
Income
Men
Women
Senior Citizens
0%
Less than 1,60,000
Less than 1,90,000
Less than 2,40,000
10%
1,60,001 to 3,00,000
1,90,001 to 3,00,000
2,40,001 to 3,00,000
20%
3,00,001 to 5,00,000
3,00,001 to 5,00,000
3,00,001 to 5,00,000
30%
5,00,001 and above
5,00,001 and above
5,00,001 and above
What are Tax Benefits & How do they work?
The government has certain clauses in place that allow you to save on taxes. These clauses in effect work as savings that you can utilise in your retirement.
The most well-known among these tax savings benefits and one of the main clauses that have lead to you reading this article is Sec 80C of the Income Tax Act. As per the provisions under section 80C you are allowed to show pre-defined investments up to a maximum of Rs. 1 Lakh, which are deductible from your income. This translates such that your income gets reduced by this investment amount (of up to Rs. 1 Lakh), whereby you are exempted from paying any tax on that amount.
This benefit is available to everyone, irrespective of an individuals income levels. Even if you fall in the highest tax bracket of 30%, you can still invest up to Rs. 1 Lakh, and end up saving Rs. 30,000.
What are the Sections under which one can avail Tax Benefits?
Now that we have understood what Income Tax is and its implications, we can move on to learning about the various investments that help us reduce our tax liability.
Provident Fund (PF): Most salaried individuals will be glad to know that the payments you make towards your PF are counted towards Sec 80C investments. This is a mandatory deduction for every salaried individual, which not only translates in to future savings but also tax savings.
Voluntary Provident Fund (VPF): As the name suggests, VPF enables you to increase your PF contribution over and above the statutory limit defined by your employer. This investment also counts as a deduction under section 80C.
Public Provident Fund (PPF): Investments made in a PPF can also be included in Sec 80C deduction. However, the minimum and maximum allowed investments in PPF are Rs. 500/- and Rs. 70,000/- per year respectively.
Life Insurance Premiums: The premiums that you pay towards your life insurance policy can also be included in Section 80C deduction. These deductions are only applicable on life insurance policies bought for self, spouse or children.
Note: Life insurance premium paid by you for your parents (father / mother / both) or your in-laws is not eligible for deduction under section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included under tax saving options. It is not necessary to have the insurance policy from Life Insurance Corporation (LIC) – even insurance bought from private players can be considered here.
Equity Linked Savings Scheme (ELSS): ELSS is a type of Mutual Fund (MF) scheme that has been specially created to offer tax savings. Investments made in ELSS are eligible for deduction under Sec 80C.
Home Loan (Principal Repayment): The Equated Monthly Instalments (EMI) that goes towards the repayment of your home loan is divided in to two main components, viz. the Principal and the Interest. The Principal component of the EMI qualifies for deduction under Sec 80C. (Note: The Interest component can also help reduce your Income Tax under section 24 of the Income Tax Act.)
Stamp Duty and Registration Charges for a home: The amount you pay as stamp duty and registration when buying a house, also qualifies as deduction under section 80C in the year of purchase of the house.
National Savings Certificate (NSC): The amount that you invest in National Savings Certificate (NSC) can be included in Sec 80C deductions.
Infrastructure Bonds: Investments in Bonds issued by private infrastructure companies can also be included in Sec 80C deductions.
Pension Funds: Section 80CCC allows for an investment in pension funds to be eligible for deduction. Investments under Section 80CCC are clubbed with Section 80C and subject to a limit of Rs. 1 Lakh as total deduction available.
Bank Fixed Deposits: Bank Fixed Deposits or Term Deposits that have a maturity of 5 years or more can be included for deductions under Sec 80C investment.
Senior Citizen Savings Scheme (SCSS): SCSS is a deposit scheme specially meant for elderly citizens and qualifies for deductions under section 80C.
Post Office Time Deposit Account: Similar to the Bank Fixed Deposit scheme, this fixed / term deposit offered by the Department of Posts (Government of India) through the post offices in India is eligible for deductions under section 80C if it is opened for a duration of 5 years or more.
Children’s Education Expense: Children’s Education Expense also be used to claim deductions under Sec 80C, provided you have appropriate receipts to support the same.
When is the best time to Invest?
Most of us start our investment and tax planning only in February or March, just before the Financial Year is getting over and the new Budget approaches.
Ideally, we should identify the areas you wish to investment in and start doing so right from the beginning of the financial year. This helps you make informed decisions, also earn the interest for the full financial year.
Section 80D: Save Tax and Insure your Health
Besides the investments of 1 Lakh under Section 80C, there are other options for saving tax
Section 80D: Investments made towards medical insurance premium paid qualifies for deduction under section 80D from your income up to a defined limit.
How much can you save? As per Section 80D, the premium paid for medical insurance is deductible from your income up to Rs. 15,000 per year. However, if you are a Senior Citizen (56 years and above) the limit increases up to Rs. 20,000 per year.
If you are paying the medical insurance premium for your parents, an additional deduction of Rs. 15,000 per year can be claimed under section 80D. Again, if your parents are Senior Citizens, you can claim an additional amount of Rs. 20,000.
Thus, you can deduct up to Rs. 35,000 from your taxable income for medical insurance premiums paid.
The premiums paid for self, spouse (dependent or not dependent), parents (dependent or not dependent) and children are considered for deduction under section 80D. (Note: You can not claim premiums paid for your in-laws).
Sec 80D and Hindu Undivided Family (HUF) Even when you file the Income Tax return as an HUF, the medical premiums paid for any member of the HUF can be claimed for deduction under section 80D as per the above limit. In this case, the deduction can be claimed only if the premium is paid by the HUF.
Section 80D and Private Insurers There is no restriction on who you can buy the medical insurance from. Irrespective of whether you buy medical insurance from a Public Sector Undertaking (PSU) insurer or from a Private Insurer, you can claim deduction under section 80D.
Mode of Payment Any mode of payment, except cash, is acceptable for claiming deduction under Section 80D.
Other FactorsYou must remember that the medical insurance premium has to be paid from your taxable income of that year only if you want to claim the deduction under section 80D. You should not have paid the premium from your savings or gifts received by you.
Still looking for more Tax Savings?
Section 80DD: If you have a disabled person as your dependent, and you spend for the medical treatment of that person, you can claim certain deduction. You can also claim deduction if you pay premiums towards buying certain insurance policies for them.
Section 80DDB: If you have spent on medical treatment of some specified diseases, either for yourself or some of your relatives, you can claim the amount as deductible from your income.
Section 80E: If you have taken an education loan for yourself or your relatives, and are repaying it, the interest that you pay can be claimed as deductible from your income.
Section 80G: If you donate money to charitable institutions or certain government funds, then the donations can be fully or partially deductible from your income.
Section 80GG: If you pay rent, but do not get a house rent allowance (HRA) as a part of your salary, then too you can claim the amount as deduction, subject to certain conditions.
Section 80U: If you have a disability or are handicapped, you can claim deduction under section 80U.
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