policy money at the time of retirement from service, or for any other purpose such as purchase of a house,investments, etc.
Tax and Tax Savings
What is Income Tax?
An income tax is a tax levied on the financial income of persons, corporations or other legal entities. Tax rateslevied on your income may be:
A progressive tax rate is charged based on how much you earn, which means that if youearn more you are taxed more.
A flat tax rate charges the same rate no matter how much you earn.
The regressive tax rate charges you only up to a certain level of income, for example, thefirst Rs. 90,000 of your income.In India,
progressive income tax
is levied on the income of individuals, Hindu Undivided Families (HUFs),companies (firms), co-operative societies and trusts. There are certain slabs on which income tax calculations areconsidered:
If you earn up to Rs. 1,50,000*per year, then no income tax is charged.
If you earn between Rs. 1,50,001–3,00,000 per year, the tax charged is 10% of the amount greater thanRs. 1,50,000..
If you earn between Rs. 3,00,001–5,00,000 per year, the tax charged is 20% of the amount greater thanRs. 3,00,000 + Rs. 15000.
If you earn above Rs. 5,00,000 per year, the tax charged is 30% of the amount greater than Rs. 5,00,000+ Rs. 55,000.*The basic exemption limit for women is Rs.180,000 and senior citizens is Rs.225,000.A surcharge of 10% is payable on tax for incomes exceeding Rs. 10 lakhs.
How to Save Tax?
You should always consider tax planning as a necessary exercise in your financial planning process. How muchtax you can save depends on factors like risk appetite, investment objective and tenure of investment.
Prior to the Finance Bill 2005, provisions for tax rebates fell under the gamut of Section 88. To claim tax benefitsunder this Section, you would have had to make investments of up to Rs. 1,00,000 in Public Provident Fund (PPF),National Savings Certificate (NSC), tax-saving funds (also referred to as Equity Linked Saving Schemes—ELSS)and infrastructure bonds. The problem with this Section was that there were caps on the amount you could investin each tax-saving instrument and there was no flexibility in choosing the tax-saving instruments. Section 88decided everything for you.
Enter Section 80C
In the Finance Bill 2005, Section 88 was scrapped and it gave way to the new Section 80C. Under this section, youcan invest up to Rs. 1,00,000 in tax-saving instruments, but the biggest advantage is that you can make your owninvestment choices, i.e. you can decide how to spread your investment of Rs. 1,00,000 over PPF, NSC, ELSS andinfrastructure bonds.