How to get over TAX burden – 11 easy and simple ways
How to get over TAX burden – 11 easy and simple ways
Tax Rebates under Indian Income Tax Act
How many ways can a salaried person save on income tax? I mean u/s 80C, 80D etc.?
The hike in income tax exemption limit for men to Rs 1.5 lakh and for women to Rs 1.8 lakh is in effective from April 1, 2008.
Taxation of income needs to take into account two important factors – firstly, the scope of tax must be wide enough to ensure the state does not overwhelmingly rely on a set of people and secondly, the quantum of taxation must be so much as to not to offset the incentive to earn more money. However, in today’s era of complex transactions it has become even more difficult to zero in onto a particular stage in transactions to identify the point in time when the income may be assumed to have reached a person and at which juncture it is advisable to tax the income in the hands of that particular individual.
Best tax saving instruments:
Section 80C tends to be most popular since you can get an exemption of up to Rs 1 lakh on contributions to a wide range of investments.
1. Employee Provident Fund (EPF):
· Contributions to Employees Provident Fund/GPF [Many folks make the investment for full amount of Rs. 1 Lacs. You can reduce this amount from 1 Lac as this has already been invested by you on a monthly basis].
· Public Provident Fund (maximum Rs 70,000 in a year)
2. Public Provident Fund (PPF):
Popular investment and tax saving option. This scheme is a statutory scheme of the Central Government of India. This is for 15 years.
- The rate of interest is 8% compounded annually.
- Interest is totally tax free.
- Tax saving instrument under section 80C.
- Loan facility available from third year.
- Withdrawl after 7th year.
3. Bank Term Deposits:
Few Banks like HSBC, Barclays, ICICI, HDFC etc are offering very good interest rates for deposits of more than a year duration. You can get more than 8.5% return on such investments.
HSBC: 8.75% for 36 months
Barclays: 9.5% for 366 days
ICICI: 8.75% for 590 days
HDFC: 8.75% for 2 years 15 days
Kotak: 8.75% for 1 year
- For Senior Citizens, it is 0.25% to 0.5% higher
- Some Banks don’t even charge penalty in case of premature withdrawl.
- Some Banks provide monthly, quaterly, half yearly, yearly compoundedly, so the return can differ.
- Now, that there is tax benefits for 5 yrs+ Fixed Deposits under Section 80C gives lot of advantage to Fixed Deposits.
- Much safer option compared to Equities. Regular return with peace of mind.
- The above rates are as of today. They keep changing it frequently. HSBC for example, was offering more than 9% till sometime back.
This was a great option a couple of years back when the rate of interest was 9%. Coupled with tax benefit, this was an ideal investment option. However, with rate of interest being lowered and tax benefit being offered on Bank Term Deposits as well, this is no longer the best option.
4. Post Office MIS:
This is another good option right now as there is a 0.5% additional bonus that was offered recently. This is very good and safe investment for retired folks.
- Interest rate of 8% per annum payable monthly.
- Maturity period is 6 years.
- Minimum investment amount is Rs.1000/- or in multiple thereof.
- Maximum amount is Rs. 3 lakhs in a single account and Rs. 6 lakhs in a joint account.
- Premature encashment facility after one year at some penalty.
- Interest income is taxable, but no TDS.
- The Only Post Office scheme where monthly interest is payable.
5. National Savings Certificate (NSC):
Another popular investment and tax saving option.
- Rate of Interest of 8% compounded half yearly.
- Lock-in of 6 years
- A Tax saving instrument under Section 80C
- Interest is taxable but no TDS.
This was a great option a couple of years back when the rate of interest was 9%. Coupled with tax benefit, this was an ideal investment option. However, with rate of interest being lowered and tax benefit being offered on Bank Term Deposits as well, this is no longer the best option.
6. Insurance policies:
There are a range of life insurance products to choose from, such as term life insurance, whole life insurance, variable life insurance, universal life insurance, and variable universal life insurance. Annuities are tax-deferred investments that guarantee you regular payments at some future time, usually retirement. It is a market-linked security.
Tax benefit: Rebate under section 88
Interest or returns are not taxable
Interest rate: Depends on fund management
The Maximum investment limit is Rs 70000
Liquidity – Minimum lock-in of 2 years for participatory policies and 5 years for unit-linked.
7. Equity-linked savings schemes (ELSS):
Equity linked savings scheme (ELSS) are equity funds floated by mutual funds. This scheme is suited for young people as they have the ability to take on higher risk. The ELSS funds should invest more than 80 per cent of their money in equity and related instruments. It is ideal to invest in them when the markets are down. These funds are now open all the year round. The other way of investing in these funds could be a systematic investment, which essentially means investing a small sum regularly (monthly or quarterly). It is a market-linked security and therefore there will be risks accordingly.
They offer a 20 per cent tax rebate on investments up to Rs 10,000 in a given financial year.
Tax benefit: Rebate under section 88
Long-term capital gains tax are exempt from tax.
Returns are market linked.
The Maximum investment limit is Rs 10000.
Liquidity: Lock-in for three years.
8. Pension plan deductions:
Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed Rs. 1,00,000.
Deduction under section 80D.Under This section, a deduction up to Rs 10,000 (Rs 15,000 in case of senior citizens) is allowed in respect of premium paid by cheque towards health insurance policy, like “Mediclaim”. Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children.
Accordingly a person who is under/in 30% tax bracket can save income tax up to Rs 3,060 (or Rs. 3366 if annual income exceeds Rs 10,00,000) by paying Rs 10,000 as premium in “Mediclaim” policy in a year.
One significant point to note is that pension plan deductions under Section 80CCC are also available within the overall limit of Section 80C and if any investment is made under the former section, the qualifying amount under Section 80C stands reduced to that extent. Pension plans apart from playing a significant role in retirement planning, also offer tax benefits under a dedicated section i.e. Section 80CCC. Premiums paid for the same are eligible for deduction. It is a market-linked security.
Interest rate – Depends on fund management
The Maximum investment limit is Rs 10000.
Most insurance companies give the individual an option to withdraw a part (25-33 per cent) of this sum as a lump sum on maturity. The amount withdrawn or the cash component is tax-free.
As there is no tax rebate for those with income above Rs 500,000 it is better to invest in a retirement plan and thereby, claim the Section 80CCC deduction.
For interest or returns 2/3rd withdrawals are taxed but annuities are taxable
Liquidity – Lock-in for the term of the policy.
9. Medical insurance:
You can also look beyond Section 80C to reduce your tax liability. For instance, if you have taken a medical insurance plan for yourself, your spouse, dependent parents and dependent children, you can under Section 80D claim deduction up to Rs 15,000 for the premium paid.
For senior citizen tax payers, the limit now has been enhanced to Rs 20,000. One condition being that the premium should be paid through a cheque.
10. Medical treatment of dependent:
Expenses on the medical treatment of a dependent who is a person with a disability also qualify for tax benefits under Section 80DD. In this case, deductions up to Rs 50,000 can be claimed. A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000.
In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.
Medical treatment of specified ailments:
Deductions of expenses on medical treatment of specified ailments (such as AIDS, cancer and neurological diseases) can be claimed under Section 80DDB. The maximum amount of deduction allowed from gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on condition that no medical reimbursement is received from any insurance company or employer for this amount.
In order to claim this deduction, however, you will have to submit Form 10-1 from a specialist doctor working in a government hospital in India, confirming the treatment of the disease.
11. Interest component of home loan:
The principal repayment that borrowers make on their home loan is eligible for income deduction under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1 lakh.
Under Section 24 of the Income Tax Act, the maximum amount of interest that can be deducted from your taxable income is Rs 1.5 lakhs.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999. It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
