Do you believe in ‘Karma’, which says good deeds do not go in vain? If no, you may start believing in the good old saying once you finish reading this write-up.
The third quarter of this fiscal year is over. Soon you will receive (or might already have received) an email from the accounts department to submit proof of your investments. If you have exaggerated the investment declaration in the 1st quarter, it’s time for tax planning for the last quarter. Before you start looking for “best tax saving mutual funds” on search engines, it is important to first understand the payment and investment options which can help you reduce your tax burden by claiming certain tax deductions.
Section 80C of the Income Tax Act is regarded as one of the most useful provisions to save tax. It permits a taxpayer to legitimately save tax up to Rs 45,000 if his income falls in the higher tax bracket of 30%. This deduction is allowed when one makes investments in mutual funds, insurance policies, FDs, PPF, etc. This Section provides a long list of acceptable investments and expenditures which shall allow a deduction of up to Rs 1.5 lakh in a financial year.
If you scrutinize the statements of bank accounts, credit cards and salary slips, you may find various debit entries which are actually blessings in disguise. These debit entries can be towards various expenditures and investments which are eligible for Section 80C deductions. If you have made payments during the year in respect of following essentials, you can claim them as deductions under Section 80C.
This is an essential expenditure for any taxpayer who has kids. Any amount paid by an individual as tuition fees to any university, college, educational institution in India for full-time education of his/her 2 children qualifies for deduction under Section 80C. The expression ‘tuition fees’ will not include any amount paid by the individual towards development fees, donation or payment of similar nature. The deduction is allowed only for full-time education in a formal educational institute. No deduction is allowed for the tuition fees paid in any coaching institute. Even though no investment is made, yet one can claim the deduction for such children’s tuition fees.
Though it is not mandatory for high-paid employees to contribute to PF, yet they can opt for voluntary contribution. If an employer makes any deduction from an employee’s salary towards contribution to PF, it shall be eligible for deduction under this Section. Deduction is allowed for any contribution made by an employee out of his salary a Statutory Provident Fund and Recognised Provident Fund account. No deduction is allowed for contribution made by employer to the employee’s provident fund.
Re-payment of housing loan by way of monthly instalments or EMIs has two components – Principal repayment and interest. Deduction under Section 80C is allowed for the re-payment made towards the principal amount. Deduction with respect to interest component can be claimed as deduction under Section 24 and Section 80EE, subject to certain conditions. There are certain conditions under Section 80C following which deduction will be provided with respect to the principal repayment.
Firstly, deduction shall be allowed only when the loan is taken for the purpose of purchase or construction of a house property. Any loan taken for the purpose of repairs or modification will not be allowed.
Secondly, the house property should not be sold within 5 years from the end of the financial year in which the possession of such property was obtained. If it is sold before completion of 5 years, the deduction allowed earlier under this section shall be treated as income of individual for the year in which property is transferred.
The individual can take life insurance policies for himself or for his spouse or children (dependent or independent). The premium actually paid by him during the year is eligible for deduction. The deduction is allowed only for life insurance policies and not for other type of policies, i.e., theft, accident policies, etc.
If an individual pays exorbitant premium for an insurance cover, the deduction shall not be allowed for the entire premium. Such cap has been placed to allow tax deductions to genuine users only. The deduction to be allowed for the life insurance premium shall be limited to 10% of the capital sum assured, if the insurance policy is issued on or after 01-04-2012. If the insurance policy is issued on or before 31-03-2012, the deduction shall be limited to 20% of the capital sum assured.
If a life insurance policy is discontinued within 2 years, the deduction allowed in earlier years shall be disallowed and shall be added back in the year in which policy is terminated.
The Public Provident Fund (PPF) is a tax-free investment avenue which is open to all resident individuals. Amounts deposited in PPF accounts are eligible for tax deduction under Section 80C. Maximum contribution of Rs 1,50,000 can be made by an individual in a PPF account. An investor can open accounts in the name of wife, children or himself.
The investments and expenditures enumerated above require monthly or quarterly outgo. If you find these items in bank statements and salary slips, you may not be required to make any further investments to fully claim the deduction of Rs 1.5 lakh under Section 80C. The table given below explains how the entire limit of Rs 1.5 lakh can be utilized without making any further investments.
Deductions from monthly income may pinch your take home salary, but ultimately it brings cheer at the year-end when you look at the figure of tax you have saved with these investment decisions. And that is ‘Karma’.
(By CA Naveen Wadhwa, GM, R&D, Taxmann.com and CA Shivi Agarwal, Assistant Manager, Taxmann.com)