Point to be kept in mind while planning Tax u/s 80C

By: Manish Negi

There are various significant points which must keep in mind while planning tax under section 80C of Income Tax Act, 1961. Following are some of them:

• If assessee surrender their Life Insurance Policy within three years, then assessee has to pay the tax on the amount of deduction claimed earlier under section 80C i.e. premium paid on insurance of life.
• Investment under Post Office Time Deposit Rules, 1981 and Senior Citizen Savings Scheme Rules, 2004 is a eligible deduction under section 80C but if assessee withdrawn any amount from his account under above mentioned scheme before the expiry of five years from the date of deposit, then the amount so withdrawn shall be deemed to be income and chargeable to tax.
• If assessee terminates his participation in any Unit Linked Insurance Plan within five years, then assessee has to pay the tax on the amount of deduction claimed earlier under section 80C i.e. Contribution in the Unit-linked Insurance Plan 1971 or any Unit linked Insurance Plan of LIC Mutual Fund.
• If assessee sell their house which was purchased through home loan within five years from the date of purchase, then assessee has to pay the tax on the amount of deduction claimed earlier under section 80C i.e. repayment of principle amount of loan.

Must Read : Exemption from Filing ITR

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5 Mistakes to avoid while saving tax!

By: Prof. Bajaj

Its March knocking on the door and the same mad rush is seen everywhere. For what? To save tax of course.

Be it businessman or salaried or professionals, there is still a huge chunk who are yet to make their tax saving investments and while doing so at the last moment, are likely to make a lot of mistakes. What could be those mistakes and why should one avoid them, lets have a look:

1. Making long term commitments without considering all factors

Last year, Mr. Sunil had made a contribution of Rs. 36,000 towards PF deducted by his employer. So he bought a 15 year policy with an annual premium of Rs. 64,000 so that his Rs. 1 Lakh limit is achieved. However, this year, due to increase in his salary, his PF contribution has increased to Rs. 48,000 p.a. But still he has to pay Rs. 64,000 premium towards his policy. So, in effect, he is paying Rs. 1,12,000 this year towards 80C, however, he would be entitled for deduction of only Rs. 1 Lakh. This problem could continue further, as his salary is expected to increase every year and so would his PF contribution.

Similar story has occurred with Mr. Pramod. He had availed a home loan and was paying an EMI of Rs. 25,000 p.m. As per the repayment schedule, out of the total Rs. 3 Lakhs paid, only Rs. 71,000 was the principle and balance was interest. Thus, he purchased a ULIP with an annual premium of Rs. 29,000 and 5 years payment commitment. As we know, that every year, the principle component increases and interest component decreases, next year, he will have the principle component increased to Rs. 96,000 and will still have to pay Rs. 29,000 towards the ULIP premium.

If they had invested the balance amount of Rs. 64,000 and Rs. 29,000 in an avenue which does not compulsorily requires annual investment (Example ELSS, PPF, NSC etc) then this problem would not arise.

So its better to be careful while choosing long term commitment amount. You might be required to pay them for long, but wont be able to avail tax benefit on the same.

2. Thinking that all life insurance policies qualify for tax deduction

It is a general myth (mostly propagated by insurance agents) that a life insurance policy is the best thing for saving tax. Before agreeing or disagreeing to the same, I would like to draw your attention to something more important.

Not all life insurance policies would qualify for tax benefit u/s 80C. If you want to avail this benefit, you will have to ensure that the life risk cover is at least 5 times the premium paid by you. (This is as per the current tax laws. It could increase to 10-20 times the premium in DTC). Thus, if you think of following the first point and your agent starts pushing you for a single premium plan, first check if the plan is giving you a life risk cover of 5 times the premium or not. In most cases, single premium plans do not have this feature and would, therefore, not qualify u/s 80C.

There is another breed of products (of course insurance-cum-investment plan), which requires annual payments, gives 5 times life risk cover in the first year, but the cover drops to 1.25 times the premium paid from the second year. You need to be cautious while buying these plans, because, they will give you tax benefit in the current year. But the next year premium will not be eligible for tax deduction, but you still will have to pay the premium.

3. Not considering the other items that qualify for tax deduction

Before arriving at the amount you need to invest for tax saving, make sure you have accounted for few other less-known items which qualify u/s 80C. One of the most important amongst them is the tuition fees paid towards your children’s education. Also, if you are salaried, don’t forget to deduct the HRA, Conveyance Allowance (within the prescribed limits) before you arrive at your amount required to be invested to save tax. Seeking professional help for the same could be of great help.

4. Investing Blindly for just Tax saving

This tax saving season, many fly-by-night organisations (claiming themselves as NGOs) call and request you to donate them to save tax u/s 80G. While it is always good to do charity, it is also important that it is done for the right purpose and it is being used for the right purpose. Remember that out of the amount donated to such NGOs, only 50% would qualify for tax saving. Just to give an example, if you still have a taxable income of Rs. 10,000 on which you want to save tax. Suppose You are in a 20% tax slab. If you donate this amount to the NGO, Rs. 5000 will qualify for tax saving. So in effect, you will pay tax on the balance Rs. 5,000 i.e. Rs. 1000. Which means your tax saving is Rs. 1000 and total money going from your pocket is Rs. 11,000 (Rs.10000 Donation + Rs. 1000 tax)

As against this, if you do not donate, you just require to pay Rs. 2000 as tax. There is no tax saving, but the total money going from your pocket is only Rs. 2000. We are nowhere suggesting that you should not donate. But while donating,

[A] Don’t do it just to save tax.

[B] Check the credibility of the organisation if they are putting your money to the right purpose.

5. Not Being realistic with your expectations

You have several options like PPF, LIP, NSC, ELSS, Bank FD etc for saving tax u/s 80C. Having said that, each of them have some merits and demerits over others. While choosing the investment product, take your overall financial planning into account and then make the investment. I have seen some people having expectations like, “Advise me a product for tax saving which will give me guaranteed tax-free returns of 15%. Also, there should be no lock-in for this product.”

Alas! If there existed such product, then maybe no other products were needed at all. But as on date such product does not exist, which will satisfy all these conditions. Some product will fulfil the ‘guaranteed’ part of it, and some other will fulfill the tax-free 15% part of it. So unless you are reasonable with your expectations, you will not find the right product for tax saving.

Eight simple way to plan your tax

By Ramalingam K

Eight Simple Ways to Plan your taxes. You have got only a few more months to complete this financial year. Very soon you will get a call from your company to submit the proofs for tax saving investments. So why don’t you spend some time on organising your tax plan?

1. Proper Allocation of Annual compensation

Restructuring your salary with some additional components can reduce your tax liability. This restructuring doesn’t require any additional cash outflow. The following components can be efficiently used to reduce your income tax liability.

a. Transport allowance to the extend of Rs.800 is exempt

b. Medical expenses which are reimbursed by the employer are exempt to the tune of Rs.15000

c. Food coupons like sodexo or ticket restaurant are exempt from tax up to Rs.60000

d. Individuals who are all living in a rented accommodation can include House Rent Allowance(HRA) as a part of their salary

e. Leave Travel Allowance(LTA) can be part of your salary as this can be claimed twice in a block of 4 years.

2. Effective Utilization of Tax Exemption

As far as possible utilize the maximum exemptions available under section 80 C, 80 CCF and 80 D. The maximum exemption available under section 80 C is Rs. 100000.

Under this section Rs.100000 investment or contribution can be made in PPF, NSC, Life insurance premium, 5 year FD with banks and Post offices, Mutual Fund ELSS, Principal Repayment of housing loan, and the tuition fees paid for children’s education.

Under Section 80 CCF, you can invest up to Rs.20000 in infrastructure bonds.

Under Sec 80 D, the premium paid towards the mediclaim policies are exempt. The maximum limit of exemption is Rs.15000 and for senior citizens the limit is Rs.20000 and for covering senior citizen parents there is an additional exemption to the extend of Rs.15000.

3. Properly Structure your Housing Loan

The Principal repayment of a housing loan is eligible for a deduction up to Rs.100000 u/s 80C. The interest paid on a housing loan is eligible for a deduction up to Rs.150000 u/s 24B. If the housing loan is for a sizeable amount, then it is possible that the principal repayment and interest may exceed the specified tax exemption limit. To utilise the maximum tax benefit, an individual can consider going for a joint home loan with his/her spouse or parent or sibling. This will make sure that both the co-owners can claim tax deductions in the proportion of their holding in the loan.

4. Tax Plan in Sync with Overall Financial Plan

You should not do your tax plan in isolation. You need to do it in sync with your overall financial plan. So a tax plan is not only to just save taxes and also it should assist you in achieving your other financial goals like children’s higher education, buying a home or retirement.

5. Avoid Last Minute Rush

In fact the right time to do the tax plan is the beginning of the financial year. If you postpone your tax planning even now and do it in the last minute, then you will not be able to choose the right investment. In the last minute rush, you will be forced to choose a scheme which gives the proof immediately. Is the investment sound and profitable? Is there any other better options? You will not be able to choose the best scheme and you may settle with a mediocre one.

6.Invest Some Quality Time

Before investing your money, you need to invest your time. You need to take some quality time to understand the various tax saving options and compare their benefits and limitations.

7. Check for Future Commitments

Some tax saving options like NSC or ELSS need only onetime investment. Some other tax saving options like PPF, Ulips need periodical investments year after year. You need to be careful in choosing a tax saving scheme where you need to commit for periodical future payments. You need to check on a few things like; do you need such a future commitment? Will you be able to meet the future commitments at ease? The law may change and you may not get any tax exemption for your future payments. Would you consider the scheme irrespective of tax benefit for the future payments?

8. Changed Your Job; Redo your Tax Plan

Did you switch your job in the middle of the financial year? Then you need to redo your tax plan with consolidating the income from both the companies. It is advisable to inform the new company about the income during the particular financial year from the old company. So that your new company will deduct the right amount of TDS. Otherwise you may need to pay extra tax at the end of the financial year.

Whenever you change your job, you need to have a sitting with your financial planner or tax advisor. So that the required changes in your tax plan can be done proactively.

With proper tax planning you can reduce your tax liability; save more; invest better and become wealthier.