Saving Income Tax – Understanding Section 80C Deductions _ Financial Planning Demystified housing benefit new claim

The income we earn is subject to income tax by the government. The rate of income tax is different for different income levels, and thus, the income tax that you pay depends on your total earnings in a given year.

Sec 80C of the income tax act is the section that deals with these tax breaks. It states that qualifying investments, up to a maximum of rs. 1 lakh, are deductible from your income. This means that your income gets reduced by this investment amount (up to rs. 1 lakh), and you end up paying no tax on it at all!

This benefit is available to everyone, irrespective of their income levels. Thus, if you are in the highest tax bracket of 30%, and you invest the full rs. 1 lakh, you save tax of rs. 30,000. Isn’t this great? (illustrative example and downloadable spreadsheet follow later in the article)

The payments that you make to your PF are counted towards sec 80C investments.Housing benefit new claim for most of you who are salaried, this amount gets automatically deducted from your salary every month.Thus, it’s not just compulsory savings for your future, but also immediate tax savings! Voluntary provident fund (VPF)

If you increase your PF contribution over and above the statutory limit (as deducted compulsorily by your employer), even this amount qualifies for deduction under section 80C. Public provident fund (PPF)

There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called equity linked savings scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under sec 80C.

Even the interest component can save you significant income tax – but that would be under section 24 of the income tax act. Please read “ income tax (IT) benefits of a home loan / housing loan / mortgage”, which presents a full analysis of how you can save income tax through a home loan.Housing benefit new claim stamp duty and registration charges for a home

The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C in the year of purchase of the house. National savings certificate (NSC)

These are also popularly called infra bonds. These are issued by infrastructure companies, and not the government. The amount that you invest in these bonds can also be included in sec 80C deductions. Pension funds – section 80CCC

This section – sec 80CCC – stipulates that an investment in pension funds is eligible for deduction from your income. Section 80CCC investment limit is clubbed with the limit of section 80C – it maeans that the total deduction available for 80CCC and 80C is rs. 1 lakh.

This also means that your investment in pension funds upto rs. 1 lakh can be claimed as deduction u/s 80CCC.Housing benefit new claim however, as mentioned earlier, the total deduction u/s 80C and 80CCC can not exceed rs. 1 lakh. Bank fixed deposits

Thus, your total qualifying investments under sec 80C are rs. 34,000. Since this is less than rs. 1 lakh, this is the amount that would get deducted from your income. Thus, you would have to pay tax on rs. 2,16,000.

The tax on rs. 2,16,000 would be rs. 17,200. If there were no investments made under section 80C, the tax on an income of rs. 2,50,000 would have been rs. 24,000. Thus, by making these investments, you end up saving rs. 6,800!

Provident fund: this is deducted compulsorily, and there is no running away from it! So, this has to be the first. Also, apart from saving tax now, it builds a long term, tax-free retirement corpus for you.

Life insurance premiums: every earning person having dependents should have adequate life insurance coverage. (for more on this, please read “ life after life – why you should buy life insurance”) therefore, life insurance premium payments are the next.Housing benefit new claim

Equities provide the best, inflation-beating return in the long term, and should be a part of everyone’s portfolio. After all, what can be better than something that gives great return and helps save tax at the same time?

Instead, decide where you want to make the investments, and start investing right from the beginning of the financial year – from april. This way, you would not only make informed decisions, but would also earn the interest for the full year from april to march!