Saving Income Tax - Understanding Section 80C Deductions
Saving Income Tax - Understanding Section 80C Deductions
Saving Income Tax - Understanding Section 80C Deductions
Check out the comprehensive Financial Planning Serviceby Raag Vamdatt, or check out all products & services. This article explains how the deductions under Sec 80C of the Income Tax (IT) Act can help reduce your income tax liability. It also helps you decide where to invest to claim deductions under Sec 80C. 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. (To know more about the income tax slabs for FY 08-09 and how they put more money in your pocket, please read Income Tax (IT) Slabs / Brackets FY 2008-09 AY 200910)
Qualifying Investments
Provident Fund (PF)
The payments that you make to your PF are counted towards Sec 80C investments. For most of you who are salaried, this amount gets automatically deducted from your salary every month.Thus, its not just compulsory savings for your future, but also immediate tax savings!
Infrastructure Bonds
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.
This is a newly introduced investment class under Section 80C. Bank fixed deposits (also called term deposits) having a maturity of 5 years or more can be included in your Sec 80C investment. (Please read Fixed Deposits (FD) for saving income tax through section 80C for more on this)
Others
Apart form the major avenues listed above, there are some other things, like childrens education expense (for which you need receipts), that can be claimed as deductions under Sec 80C.
Example
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and other illustrative examples Lets say you are a male with an income of Rs. 2,50,000 for the year. Your employer has deducted Rs. 24,000 as PF. You have no housing loan, but have purchased NSC worth Rs. 10,000. 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!
Also, if you would have made the full investment of Rs. 1,00,000, the tax would have further reduced to Rs. 4,000 a saving of Rs. 20,000!
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When to Invest?
Many of us start looking for investment avenues only in February or March, just before the Financial Year is getting over.
(To understand terms like Financial Year, Assessment Year, and Previous Year better, please read Income Tax (IT) Jargon Financial Year (FY), Assessment Year (AY) and Previous Year (PY)) This is a big mistake! One, you would end up investing your money without putting proper thought to it. And secondly, you would end up losing the interest / appreciation for the whole year! 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! Happy tax planning!
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