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TAX SAVING INSTRUMENTS

This explains how you can get your investments to reduce your tax  liability With only two months left, the countdown timer has started. The moment has arrived for those taxpayers who are yet to take advantage of tax savings instruments to sit up. You can bring down your tax liability substantially by investing in Section 80C instruments. The amount of money invested in these instruments should be based on your income, age and risk profile.

Some tax-saving options:

Public Provident Fund (PPF)

It is an ideal investment avenue for those who seek to preserve their capital. The returns are to the tune of eight percent and are tax free. An investment in PPF up to a ceiling of Rs 70,000 is also allowed as a deduction from taxable income, under Section 80C.

Mandatory for the salaried class, Employee Provident Fund (EPF) provides tax-free returns to the tune of 8.5 percent. A deduction of up to Rs 1 lakh is allowed under Section 80C.

National Savings Certificate (NSC)

You can also invest in NSCs to avail tax deduction under Section 80C. The interest accrued every year in NSCs is deemed to be reinvested and thus eligible for Section 80C deduction.

Home loan

The principal component of the EMI towards a home loan qualifies for deduction under Section 80C. This deduction has a ceiling of Rs 1 lakh.

Infrastructure bonds
Parking Rs 20,000 in tax free infrastructure bonds can benefit you, as it provides an additional tax deduction of the invested sum. It has a lock-in period of five years and tenure of 10 years. The interest earned is subject to tax.

Medical insurance
If you are thinking of a medical insurance for yourself and your family, now is the time to act. Premiums paid on medical insurance policies for yourself, spouse and children can be deducted from your taxable income under Section 80D, up to a maximum of Rs 15,000. You can also claim a tax deduction of up to Rs 15,000 on premiums paid for health insurance cover of your parents.

Life insurance

Buying or renewing a life insurance policy allows the premiums to qualify for deduction under Section 80C of the Income Tax Act, within the overall limit of Rs 1 lakh per annum. The proceeds from a life insurance policy on maturity are exempt under Section 10(10D), subject to the condition that the premium paid in any year is not more than 20 percent of the sum assured.

Equity-linked savings schemes

Equity-linked savings schemes (ELSS) are mutual fund schemes that are eligible for deduction under Section 80C.

Impact Of Income Tax Deductions On Net Tax Liability

Tax saving allocation considered:

• Rs 1 lakh under Section 80C

• Rs 20,000 under Section 80CCL

• Rs 30,000 under Section 80D An education cess of three percent is
applicable on net tax liability. This is not included in the
calculations shown here.

CASE I: Individual earning Rs 4 lakhs per annum

In case of no investments in any tax-saving instruments:
Tax payable under 10 percent IT slab – Rs 24,000.

In case tax-saving investments are made:
Total deductions: Rs 1.5 lakhs Net taxable income: Rs 2.5 lakhs Income
tax payable: Rs 9,000 Effective tax saving: Rs 15,000

CASE II: Individual earning Rs 7 lakhs per annum

In case of no investments in any tax-saving instruments:
Tax payable under 10 percent slab: Rs 34,000 Tax payable under 20
percent slab: Rs 40,000

In case tax-saving investments are made:
Total deductions: Rs 1.5 lakhs Net taxable income: Rs 5.5 lakhs Income
tax payable: Rs 44,000 Effective tax saving: Rs 30,000

CASE III: Individual earning Rs 10 lakhs per annum

In case of no investments in any tax-saving instruments:
Tax payable under 10 percent slab: Rs 34,000 Tax payable under 20
percent slab: Rs 60,000 Tax payable under 30 percent slab: Rs 60,000

In case tax-saving investments are made:
Total deductions: Rs 1.5 lakhs Net taxable income: Rs 8.5 lakhs Income
tax payable: Rs 1.09 lakhs Effective tax saving: Rs 45,000

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