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“It’s already February and I haven’t done anything to save my tax, What should I do?”

This is a very common question asked by many these days. Actually answer is not that difficult, may be you are already doing part of what is required.

Income tax rules allow deductions under various sections which help us to save tax. Most important of them is 80C which allows up to Rs 1 lakh deduction. It can be done using various methods including provident Fund, Public Provident Fund, Housing loan interest, ELSS and life insurance premiums etc.

Component What can be claimed? Not allowed
PF / VPF through salary
  • This is generally cut by companies as part of your provident fund. Maximum limit is same; Rs 1 lakh
  • While employer’s contribution is tax exempted, your contribution is counted towards section 80C investments.
  • There is option to contribute through voluntary option. (VPF)
Housing loan principal including Registration / Stamp duty
  • If you are paying EMI on house loan then principal part of it can be taken as deduction under 80C
  • You need to have possession of property and certificate of ownership to claim tax deduction under 80C
  • Amount paid as stamp duty when buying  house, and the amount paid for the registration of the documents of the house can be claimed under section 80C in the year of purchase of the house

Benefit can’t be taken for under construction home.

Loan has to be from some bank or financial institution and not from family / friends.

Life insurance premium
  • Every person having dependents should have life insurance so this comes as another favourite.
  • Policy can be from any company approved by IRDA (Insurance regulatory & Development Authority)
  • Allowed for Premium paid for self, spouse and children.

Premium paid for parents is not covered.

For Single premium plans, max 20% of sum assured is allowed for deductions.

Public Provident Fund (PPF)
  • It is statutory scheme of Government of India. Accounts can be opened at post offices and various banks.
  • This scheme is for 15 years. But here interest earned is also tax free. So actual returns through PPF comes out to be much higher than normal Fixed deposits.
  • Account can be opened for self, spouse and children for 80C benefit. The contribution to the account can vary from year to year, from a minimum of Rs 500 to a maximum of Rs 100,000 in any given year.
Only deposits in current Financial year considered.
PPF in name of parents is not allowed for 80C deduction.
Mutual Fund / ELSS
  • If one has not reached the limit of Rs. 100000, then investment of the remaining amount in Equity Linked Savings Scheme (ELSS) is next best.
  • Equities provide the best, inflation-beating return in the long term. After all, what can be better than something that gives great return and helps save tax at the same time? Though lock-in period is 3 years for these schemes.
Allowed only for self. Investments in name of Spouse, children and parents are not allowed for 80C tax benefits
National Savings Certificate (NSC) and NSC interest
  • Self named NSC certificate upto limit of Rs 1 lakh is allowed for deduction.
  • Interest accrued every year is liable for tax. Though interest is also deemed to be reinvested and so eligible for tax deduction.
Certificates in name of spouse, children or parents are not allowed.
Previous year certificates are not allowed. Though NSC interest component will be considered.
Fixed Deposits
  • Fixed deposits in scheduled banks with minimum period of 5 years are eligible. (Please clarify with the bank about the eligibility of 80C deduction for individual scheme)
Not allowed if in name of spouse, children or Parents.
5 year time deposit in Post office
  • Self named five year time deposit is allowed for 80C benefits
Not allowed if in name of spouse, children or Parents.
Unit linked Insurance Plan (ULIP)
  • ULIPs cover Life insurance with some benefits of equity investments. But go through the various charges and fine prints for individual policies so that you don’t end up loosing while saving tax.
Allowed for self, spouse and children. ULIPs in name of parents are not allowed for 80C benefits.
Children Tuition fees
  • Tuition fees paid on two children’s education upto limit of Rs 1 Lakh. Even if you have more then two children, you can claim tuition fees paid of only two children.
  • Though, husband and wife both have a separate limit of two children each, so they can claim deduction upto 4 children.
Donations, Uniform fee, late fee, Transport charges, hostel charges, Mess charges, library fees, scooter/cycle/car stand charges are not allowed.
Fee for private tuition / Coaching classes is not allowed.
Senior citizen saving scheme
  • Senior citizen > 60 years can make deposits under this scheme which will be allowed for deduction under Section 80C

 

 

Long Term Infrastructure Bonds

 

Apart of 80C, another very easy and effective method is by investing in long term infrastructure bonds. Under section 80CCF, It allows another 20000 investment which will not be considered for your tax calculations.

For tax benefits it has to be self named and investment term should not be less than 10 years. Investment in name of spouse, children and parents is not allowed for this benefit.

These bonds provide interest rates in tune of 9% annually. But saving on tax of 20000 is major benefit here, which will increase effective return.

Interest earned on these bonds is not tax exempt. But it is recommended for people in 20-30% tax bracket to investment in these bonds if they don’t see any liquidity concern for them for the term of the bonds.

Again companies provide option of annual / cumulative options for interest payment. If you don’t need annual payment for your expenses then it is always better to go for cumulative option. In current times with high interest rates it also reduces reinvestment risk for investors.


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6 Comments on How to Save Tax?

  1. Very effective post!! I feel glad by finding your blog and will follow such suggestions to save tax. Thanks

  2. Akhil says:

    Thats great article. Thanks for it.

  3. admin1 says:

    Infrastructure bonds are now not applicable as form of tax saving instrument. Government has taken back tax deduction given under section 80CCF. For more details please refer http://fintub.com/capital-mark.....y-2012-13/

  4. admin1 says:

    Please find continuation of this article at http://fintub.com/tax-india/wh.....save-more/ for more details about tax saving.

  5. S.Jeyaram says:

    Very useful points are there. One can understand easily the ways to save the tax. From this year (FY 2012-13) onwards the Infrastructure bond scheme is gone. It is very bad to Middle / Salary class people.
    Thanks for the article.

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