Investing It!

Important Income Tax Acts for Saving Tax

 

The financial year is inching towards the end, and people have started signing the cheques for tax saving investments. It is the duty of every Citizen to pay tax after using all the legal means to minimize the tax burden. Hence, Tax planning becomes important to everybody falling under the taxable zone. It is also very important to select the right tax saving instrument that can serve the purpose of tax saving along with good return on investment.

 

Let’s check some important sections of Income Tax Act under which a person can save the tax:

 

SECTION 80C OF INCOME TAX ACT:

Under Sec 80C of IT Act, the upper limit is Rs 1 Lac. It includes investment related to many instruments under a single umbrella. The investment in Life insurance, PPF, NSC, and government infrastructure bonds are eligible to get a claim under this Act. It is one of the most favorite modes of investors to save the tax. If a person who comes under the category of 30%, slab, invests Rs. One Lac under Sec 80C then he/she can easily save Rs 30,000 tax. This act is applicable to the investment through following modes:

  • Investment in Life Insurance
  • PPF (Public Provident Fund)
  • NSC (National Saving Certificate)
  • For the amount of loan repayment adjusted to the principal.

80C Investment Instruments Comparison

 

Type of 80C Instrument

Lock In

Returns

Risk

Taxation on Interest/Gain

Equity Linked Savings Scheme (Mutual Fund)

3 years

Depends on Market

High

No tax

Life Insurance Premium

2 years

5-6%

Low

No tax

ULIP Premium              (at least 1/5th of the sum assured)

3 years

Depends on Market

High

No tax

PPF

15 years

8%

Low

No tax

Infrastructure Bonds

3 years (min)

6%

Risk Free

Interest is taxed

NSC (fixed returns)

6 years

8.16%

Risk Free

Interest is taxed

 Fixed Deposits(fixed returns)

5 years

8%-8.75%

Risk Free

Interest is taxed

 

SECTION 80D, (Income Tax Act 1961):

For the Mediclaim policy, one can claim a deduction of Rs 15000 to Rs 35000. This deduction is distinct from the deduction claimed under 80C.

SECTION 24 , (Income Tax Act 1961):

Rs.150000 (Upper Limit) paid towards the interest of Housing loan is allowed to be deducted from the Income to reduce the tax burden accordingly.

SECTION 80 CCF:

If a person invests in approved securities such as Infrastructure bonds, then he can get a deduction of additional Rs 20000 from the taxable income apart from deduction under 80C. However, these instruments have a definite lock-in period, which should be kept in mind before investing.

SECTION 80E

Under the Section 80E of Income Tax Act, the interest paid on the education loan for higher education of the assessee or its husband/wife or children are deductible from the taxable income of the assessee.

Distribution Of Income

It is a smart way to reduce the tax burden by distributing the income with other family members by generating income in the name of different members. It would help a person to keep income under lower tax bracket. The income distribution of Rs 160000 for men, Rs 190000 for women and Rs 240000 for a senior citizen can help a person to adjust an income up to Rs 490000 collectively. It is very necessary to get all the family member's tax assessed, to use this trick.

Planning for the Gift Tax

Gifts from the close relatives are not taxable so one can do a better planning to save the tax by using this act. Understanding the provisions of gift tax is very necessary to avoid scrutiny and penalties from IT dept.

Finally

Tax saving should not be the only purpose of a person. An investor should first analyze the overall financial planning and according to the plan, the Tax saving instrument should be selected. The investment product for tax savings should be selected for a right duration and appropriate amount, to achieve a better tax planning. When planning for tax, one should avoid reliving on a single asset class by diversifying the portfolio to multiple products; it helps in reducing the risk associated with investment instruments.

About the author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

Published Mar 07 2012

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