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SECTION 80C of Income Tax Act, 1961, allows deduction from gross total income for various investments and expenditures. To avail maximum tax deduction under section (u/s) 80C of the I.T.Act, you must plan the savings and investments well. Here is a list of ten smart tips for tax planning to maximize the tax break under section 80C: 1. Consider tax saving investments as part of overall investment plan As per conventional wisdom, most of us look at investments as mere tools to save tax under section 80C rather than as a means to achieve our long term goals. It is not a correct approach. You need to change your perspective and consider tax plan as an integral part of your financial plan. 2. Never postpone your tax planning till the end of the financial year Make it a practice to do your tax planning at least thrice a year rather than making it an end of the financial year exercise (which is the general convention). Prepare a tax savings plan at the very beginning of the financial year by making a rough estimate of your income and savings and revise it in the middle of the year and finally at the end of year. With a little practice, everybody can learn to do his or her tax calculations. Besides, don’t leave your tax saving investments under Section 80C till the very end of financial year. Plan them in advance and spread the payments throughout the year to avoid any year-end cash flow problem. Also ensure that you get TDS deducted from your salary -- based on your estimated income -- uniformly through out the year rather than during the last 3 months. All the above steps will help you in planning your taxes and investments well in advance and smoothing out your cash flow so that you are not caught off guard at the end of the year. 3. Don’t exceed the limit of Rs 1 lakh under Section 80C Most of us never keep in mind the ceiling of 1 lakh while making investments for the purpose of claiming tax deduction under section 80C of the I.T. Act. But any amount invested over and above the maximum limit under section 80C unnecessarily gets blocked without providing any tax benefits. That money could have been channeled into more productive investments. Therefore, don’t overdo your tax saving investments under section 80C. Always keep in mind the maximum limit under section 80C while making investments for the purpose for claiming tax benefit. Besides, don’t forget that limit of Rs 1 lakh includes both sections 80C and 80CCC.
4. Before making any further investments under Section 80C, know your existing commitments Certain expenses and investments that are eligible for the section 80C tax benefit are unavoidable. Therefore, from the maximum limit of Rs 1 lakh under section (u/s) 80C , first deduct your existing tax saving expenditure and investments such as PF contribution, life Insurance premium (existing policies), principal repayment of home loan (if any), tuition fees, accrued interest on NSCs and any other tax saving obligations. Furthermore, you also need to take into account any other non-80C tax breaks or deductions from GTI (gross total income) such as education loan under section 80E and rent paid u/s 80GG. For a complete list, please read “Looking Beyond Section 80C”. The non-section 80C deductions wouldn’t reduce your section 80C limit but would go towards reducing your taxable income. After deducting the above, probably there won’t be any elbow room left, but if there is still some scope, make further investments under section 80C. 5. Choose investments wisely Just because making investments in eligible instruments save taxes under section 80C of the I.T. Act should not be a good enough reason to choose an investment. There are many tax saving options available under section 80C such as PPF, NSC, 5 year Bank FDs, senior citizen saving scheme (SCSS), Mutual funds pension plans, Ulips, ELSS and 5-year post office time deposit scheme. A brief overview of all the tax saving instruments and investment avenues is given in the post "Section 80C Tax Saving Options & Investment Avenues". While deciding on a tax saving and investment scheme, one has to keep in mind various considerations such as the time-horizon, the lock in period, risk and return factor, taxability of returns and cash flow needs. And don’t neglect to consider your risk profile. For example, if you are a risk taker you can consider ELSS but if you are risk averse you should consider assured return schemes. Furthermore, you should also be aware of section 80C limitations, which are mentioned in the post, "The Other Side of Section 80C - Conditions & Restrictions". 6. Compare investments on post-tax yield and not pre-tax yield Most investors look at pre-tax returns but taxes can be a significant drag on returns. The impact of taxation is such that even a pre-tax return of 12% is no match for post-tax return of 8% (considering maximum marginal tax rate of 33.99%). Therefore, don’t get carried away with gross/pre-tax returns. Take the tax angle into account and make your investment decisions based on post-tax returns. For instance, suppose that an investment u/s 80C provides you with a gross return of 10 per cent annually but if the same is taxable, the effective post tax return becomes 6.60 per cent based on maximum marginal tax rate of 33.99%. 7. Invest in ELSS The best option available under section 80C is ELSS (these are similar to diversified equity funds but with additional benefit of tax break under section 80C) provided you are
not risk averse, as already discussed. Furthermore, among all the tax saving options under section 80C of the Income Tax Act,1961, ELSS has the minimum lock in period – just 3 years. For details, please see ELSS - The Best Tax Saving Option Under Section 80C. 8. Always invest in a PPF, even if you don’t want PPF is a great investment option u/s 80C but you might not be interested as it doesn’t score too well on liquidity. Nevertheless, remember to open a PPF account and invest at least the minimum amount of Rs 500 even if it is not on your investment radar. This will help you to take advantage of this account after 10-12 years because by that time the original lock in period of 15 years will get reduced to just 3-5 years. A few salient features of Public Provident Fund (PPF) have been mentioned in the post, NSC or PPF - How to Decide? and certain tips to followed while investing in PPF are discussed in the post How to Invest in PPF. 9. Never invest in an insurance plan Sadly, most of us look at insurance as a tax planning tool rather than a risk management tool. It is better to pay tax rather than investing in insurance to avail deduction under section 80C of Income Tax Act. The tax you save by investing in insurance (and getting deduction under 80C) gets more than offset by the long term costs you incur by investing in insurance plans. Thus, remember never to mix your tax planning and insurance planning. Separate your insurance needs from your tax savings and investment needs. Buy life insurance, but never invest in it. Ensure that you don’t buy any more life insurance for the purpose of tax saving under section 80C because it’s the worst form of investment or tax saving you will ever make. If you want to buy insurance, go for pure term plans and forget ULIPS, money back, endowment or whole life plans. 10. Never invest in a pension plan Don’t ever invest in a pension plan. Why? Because pension plans of insurance companies involve high costs, unfavourable tax treatment (although you receive tax benefit under section 80CCC) and lack of exit options. It is better to create one’s own retirement/pension plan rather than buying it from an insurance company. Conclusion In a nutshell, goal of tax planning is to reduce your tax liability. The smarter approach is to become proactive and integrate your tax and investment planning (but keep your insurance planning separate). Besides, while making the most of section 80C, don’t forget to look at the other side of the coin. Finally, don’t forget that tax planning and saving is a year-round rather than a year-end activity.
NSC (National Savings Certificates). Investment options / avenues u/s 80C Various investment options can be broadly divided into three categories: first is equity instruments. ULIPs (Unit-linked insurance plans). it’s a mutual fund scheme investing entirely in equities and therefore has the potential to deliver the best returns. registration fees. 2. 3. 5-Yr tax-saving fixed deposits (FDs) of banks. and second is investment instruments or options such as EPF (Employee’s provident fund). The various expenses which are eligible for section 80C tax break are: 1. PPF (Public Provident Fund). . second is debt instruments and third one is life insurance and pension plans. Tuition Fees: Expenses – only tuition fees – incurred on children’s full time education in India are eligible for deduction under section 80C. 5-Yr POTD (Post office time deposits). sets out a number of options or tax-saving instruments that are eligible for tax deduction. 1961: Expenditure avenues u/s 80C I’ve already pointed out in my earlier post on section 80C tax-planning and tax saving strategies. No other charges or expenses are allowed. For further details.principal and interest. VPF (Voluntary provident fund). 1961. “ELSS – The Best Section 80C option”. While principal part is deductible under section 80C. SCSS (Senior Citizens Savings Scheme). that before making any investment to get tax break under section 80C. Mutual funds pension plans . we can divide tax-saving avenues into two categories: first is expenditure related deductions such as tuition fees and home loan principal repayment. Here’s the brief over view of various tax-saving avenues or options under section (u/s) 80C of the IT Act. Equity linked savings scheme (ELSS): Considered as the best section 80C option. and other expenses incurred for the purpose of purchase of house property are also entitled for section 80C deduction. “Making the most of Section 80C – 10 Smart Tips”. Equity Instruments: 1. Repayment of principal sum of home Loans: The EMI (Equated Monthly Installment) that you pay against your home loan comprises of two components . please read. For more details please read.Tax Savings Options & Investment Avenues Section 80C of Income Tax Act. "Housing Loan Tax Deduction: Comparison between Section 80C and Section 24(b)".Section 80C . you should first avail the concession / deduction available to you for certain expenditures incurred by you. ELSS (Equity linked savings scheme). there is a separate deduction for interest portion under section (u/s) 24(b) of Income tax Act. Broadly. NABARAD (National Bank for Agriculture and Rural Development) Rural Bonds and life insurance premium. Expenses incurred on purchase of house property: Stamp duty.
a.e. Employee’s Provident Fund (PF): PF is automatically deducted from your salary. the effective annual rate of interest is 8. only 5-Yr post-office time deposit (POTD) – which currently offers 7. Interest income is chargeable to tax.Debt Instruments: 2. If you're interested in investing in PPF.) as the rate of interest is compounded quarterly but paid annually.2009) is currently offering rate of interest of 8.f.01. The Interest is entirely taxable. premature exit is not possible.5% for general public and 9.a.000.5% per annum (p. Rate of interest is eight per cent compounded half-yearly. Likewise. Effective rate works out to be 7. 01. 7. Thus.Which is Better?”. At present. You also have the option to contribute additional amounts through voluntary contributions (VPF). two year. NABARD rural bonds: There are two types of Bonds issued by NABARD (National Bank .. 5-Yr bank fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction.0% for senior citizens on SBI tax-saving FD’s called “SBI tax saving scheme 2006 (SBITSS)” which are also same as being offered on other FDs with similar tenure.) and is tax-free.5 per cent rate of interest –qualifies for tax saving under section 80C. it becomes Rs 1601 after six years. SBI (w. 6. interest income is taxable.e. For instance.75% for senior citizens which are similar to what the bank is offering on its other fixed deposits of similar maturity. rate of interest offered on these FD’s is at par with plain vanilla FDs. Both you and your employer contribute to it. Public Provident Fund (PPF): Among all the assured returns small saving schemes. 8. 4. to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.000.a. please read “PPF vs. unclaimed interest on these deposits won’t earn any further interest. NSC. Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list. Although available for varying time duration like one year.e. three year and five year. i. Public Provident Fund (PPF) is one of the best. Current rate of interest is 9% per annum payable quarterly. first get yourself acquainted with certain practical tips and tricks to be followed while investing in PPF. Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens.71% per annum (p. Current rate of interest is 8. The interest accrued every year is liable to tax (i.5-Yr post office time deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Besides. For details. remember that unlike plain vanilla FDs. A point worth noting is that interest rate is assured but not fixed.25% per annum (p. your contribution (i.. current – as on 2nd February 2009 – applicable rate of interest on ICICI Bank ‘Tax-Saver Fixed Deposit’ is 8. National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit.. Please note that the interest is payable quarterly instead of compounded quarterly. 3. Current rate of interest is 8% tax-free and the normal maturity period is 15 years. employee’s contribution) is counted towards section 80C investments. While employer’s contribution is exempt from tax.) for general category and 8.16%. 5. If you invest Rs 1. However. Minimum amount of contribution is Rs 500 and maximum is Rs 70.e.
“5 Secrets about ULIPs” and “Best Ulips based on IRR”. There are only two such plans available in the market –Templeton India Pension Plan (TIPP) and UTI Retirement Benefit Pension Plan (UTI-RBP). Undoubtedly. the aggregate deduction allowed under section 80C and section 80CCC can’t exceed Rs one lakh. Also. commutation of pension is tax-free. However. At present. but still require a specific mention due to their immense popularity. However. . Why? Read: “10 Top Most Factors about Ulips”. “5 Common Sources of Tax-Confusion”. please don’t confuse them with pension plans of insurance companies. If you want to invest. you can expect these pension funds to deliver better returns than the assured return schemes like PPF and NSC.25% – during end of January 2008 but received a lukewarm response. please read. Pension plans of insurance companies: Contribution towards pension plans offered by insurance companies qualifies for tax benefit under section 80CCC instead of section 80C. In the long run. nevertheless. 12. ‘NABARD rural bonds’ are not open for subscription. make sure that you buy pure pension plan without a life cover. Ulips gets covered under life insurance.for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Life Insurance: Any amount paid towards life insurance premium for yourself or your family (spouse and children) is eligible for section 80C tax break. These are open-ended debt-oriented mutual fund schemes with a maximum exposure of 40% to equities. please read “How to do Section 80C tax planning”. Out of these two. only NABARD Rural Bonds qualify under section 80C. Last year NABARD opened the subscription for these bonds – 5-Yr tenure carrying coupon rate / interest rate of 8. you should avoid them. 10. However. Also note that while pension (or annuity) is taxable. invest in them only if can spare funds for the long term because premature exit is very costly. better than traditional insurance plans. 11. There are basically two kinds of pension plans offered by the insurance companies: traditional pension plans which invest mostly in fixed income products and unitlinked pension plans (ULPPs) which are more flexible. Mutual fund pension plans: Another variable return instrument available under section 80C is pension plans of mutual funds. For details. Life Insurance & Pension Plans: 9. This is the most popular investment avenue among all the tax-saving instruments but for all the wrong reasons. If you would like to know why. if you still want to invest in them to avail section 80C deduction please read. Unit linked insurance plans (ULIPs): Although.
where you are allowed interest deduction irrespective of the source of borrowing (the borrowing may be even from your family and friends). However. 3. 2.com/2008/02/tuitionfees-paid-for-children-us-80c.The Other Side of Section 80C . playschool. 2. part time course and private coaching classes not allowed 2. donations or any payment of similar nature not allowed. If the house is in the name of your family member (spouse or your parents) and you make the repayment of loan yourself. However. the housing loan interest deduction claimed under section 24(b) won’t be reversed.Conditions & Restrictions In my previous post “Section 80C Tax Saving Options & Investment Avenues” a brief overview of various expenses and investment instruments eligible for section 80C deductions is given. This post specifies those conditions & restrictions in detail: Restriction & Conditions under section 80C 1. 4. The deduction for repayment of principal of a loan is not allowed in case of commercial property. 5.. i.e. If the loan is borrowed for the purpose of reconstruction/renewal/repair. is subject to following conditions: 1. Unlike section 24(b). The property should not be sold before a period of 5 years. the entire deduction claimed under section 80C – for repayment of principal sum of the home loan – in earlier years will be deemed to be your income in the year in which you sell the property. Tuition fees: Tuition fees paid for the full time education of your two children is allowed as deduction under section 80C. it is subject to following restrictions: 1. Overseas education not allowed. For a more detailed discussion. the deduction u/s 80C won’t be allowed. Development fees.html. building fund. Self or Spouse education not allowed. then deduction under section 80C is not allowed. many specific conditions & restrictions are applicable to those expenditure and investment options mentioned in section 80C. 4. If you sell the house within a period of five years from the year in which you have started claiming home loan IT benefits. 5. Home loans: The principal component of the housing loan EMI. which is eligible for deduction under section 80C. you can read http://simpletaxindia. However.blogspot. Allowed only up to two children 3. pre-nursery and nursery tuition fees are allowed. Allowed only for full time education. the repayment of principal . However.
000. Public provident fund (PPF): While PPF is considered as one of the best option among all the assured return schemes under section 80C. section 80C deduction will not be allowed.a. it is also subject to certain limitations: 1. nor will you get any interest on the excess contribution. House registration expenses: The following expenses relating to house property are not allowed under section 80C: 1. then the qualifying amount u/s 80C stands reduced to that extent. If any investments have been made in pension plans of Insurance companies’ u/s 80CCC. 5. partial withdrawals can be made from 7th year onwards. To keep the PPF account active. Property tax or municipal tax deduction is also not available under section 80C. 4. 3.sum under section 80C is allowed only if the borrowing is from specified institutions mentioned therein. Life insurance premium paid to insure the life of your parents (Father and Mother) is not eligible for the section 80C deduction. A joint account is not permissible. 3. 3. combined overall limit u/s 80C and 80CCC is Rs 1 lakh. On maturity. 2. It is not possible to close & withdraw the entire amount before the maturity period of 15 years except in the case of death. lock-in period and the eligible persons: 1. For example suppose you open two PPF accounts: one in your name and other in the name of your minor son. Life insurance: There are certain restrictions regarding the premium. 2.Stamp duty and registration charges paid for purchase of plot of land is not allowed under section 80C. 4.000. It is available separately under section 23 while calculating net annual value of house property. Maximum contribution allowed Rs 70. 2. commute) only one-third (33%) of the corpus which is tax- . The admission fees. 2. In other words. If the amount of premium paid in any financial year exceeds 20% of the sum assured then deduction will be allowed only up to 20% of the sum assured. While ULIPs can’t be sold or terminated before 5 years. Pension plans of insurance companies: The investment in pension plans of insurance companies is subject to following limitations: 1. other life insurance policies can’t be surrendered before the premium for 2 years have been paid. However. 6.) in all the accounts clubbed together. cost of share or initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming a member is also not allowed. Here contribution to both the accounts will be clubbed for the purpose of limit of Rs 70. And if you still make a contribution in excess of Rs 70. you can withdraw (or. 3. a minimum annual investment of Rs 500 is required in all subsequent years.000 per annum (p.
tax-saving fixed deposits suffer from poor liquidity: 1. 7. For instance. Tax Saving Bank FDs can’t be pledged for loan purpose. And second is Recognised Provident Fund (RPF)under Employee's Provident Funds and Miscellaneous Provisions Act. Pension is taxable. 5-Yr Bank Fixed Deposits (FDs): While offering you same interest rates which are offered on plain vanilla FDs. Fixed deposits of non-scheduled banks are not covered. While SPF is fully exempt from tax under section 10(11). gambling etc. there are two kinds of EPF .000 per child for tuition fees b. 10 Common Income Tax Fallacies . Templeton India Pension Plan (TIPP) charges 3% exit load for early redemptions. So.exempt. premature exit before the vesting age of 58 years is subject to high exit loads. 8. Deductions permissible under section 80C to 80U are not allowed from short term capital gains chargeable under section (u/s) 111A and long term capital gains chargeable under section 112. It is because that these capital gains are already taxed at concessional rates. 10. 3. 3. 2. RPF is subject to a lock-in period of 5 years. Rs 12. Employee's Provident Fund (EPF): Basically. Rs 20.000 in respect of equity linked saving schemes (ELSS) 2. applicable for private sector employees. The following sectoral caps which existed under section 88 have been omitted from section 80C: a. card games. Unlike other plain vanilla bank FDs. Rs 10. 9. However. if your total taxable income includes any capital gains taxable under either section 111A or section 112. So. there are no sub-limits under section 80C. balance 2/3rd has to used to purchase an annuity (monthly pension) from any insurance company. The total limit under section 80C – combined with ‘pension plans of insurance companies under section 80CCC – is Rs 1 lakh. 3. let me clarify that unlike section 88. keep the above limitations in mind while doing your tax-planning to avail tax deduction under section 80C of IT Act. 1952. For more details.000 in respect of repayment of housing loan c.first is Statutory Provident Fund (SPF) applicable to government and semi-government (including universities and other specified institutions) employees. General or Common Restrictions: There are certain general limitations also: 1. which you can encash before maturity by paying a penalty – usually one per cent – tax saving FDs doesn’t allow premature encashment. please read "10 Common Income Tax Misconceptions". Mutual Fund Pension Plan: Though lock-in period for tax purposes is only 3 years. please exclude them from total income for the purpose of availing deduction u/s 80C. races. Deductions under section 80C to 80U is also not available in case of winnings from lotteries.
However.. simple interest @ 1% per month or part of the month is charged under section 234A from the due date up to the date of furnishing the return of income. you still need to file your tax return. also remember that in case you have either business loss or capital loss to be carried forward. First of all. It is our responsibility to know and understand the law. Home loan for second house property is not eligible for income tax benefits It is another popular misconception.T. So.T return is not filled before due date provided tax is already paid and you file it before the end of the relevant assessment year (i. House Loan benefits 3. For further details. let’s understand that there are two different I. Since law presumes that we are familiar with the law’s commands. The fact is that there is no interest or penalty if I. it is always advisable to file it either at the very beginning of the financial year or after the due date is over.R 1. Both the above deductions have nothing to do with the number of houses you already . TDS has already been deducted by the employer. deductions available in case of home loans.e. interest and/or penalty will be imposed. Income tax return has to be filed before the due date It is common perception that if you don’t file your income tax return by due date. please see 12 Practical Tips for Filing Income Tax Returns 2. up to 31st March). we cannot plead ignorance. otherwise you lose the benefit of carry forward. The repayment of principal is claimed as a deduction under section 80C and the deduction for interest component is allowed under section 24(b) of income tax Act under the head ‘Income from House Property’. We make a start with shattering some common misconceptions about income tax. in case tax is not paid before due date.T. so there is no need to file the return Even if the entire tax has been deducted at source by the employer and there is no more tax liability. so that you won’t have to rush at the last moment and wait in long queue. Besides. The EMI you pay is divided into two parts – principal & interest component. you need to file the return by due date. Here is the list of top ten income tax myths: Filing I.Ignorance of the law is no excuse. So let’s make a beginning to at least understand the broad provisions of income tax law which can help you in proper compliance as well as making the most of deductions and exemptions provided in the statue.
one lakh investment limit available under section 80C. though the amount may be miniscule. and withdraw the PF amount.50 lakh.have. However. It won’t cost you much time or money. 7. . the entire interest is taxable. the tax benefits you received on your own contribution u/s 80C/88 in earlier years will get forfeited) and further the employer contribution and interest received will be added to your current income subject to relief under section 89. Maximum interest exemption available on housing loan is Rs 1. Amount withdrawn from PF because of job change is exempt from tax In case you are a member of recognized provident fund and change your job before completing a period of 5 years. if the property is owned jointly.. you need to disclose it and pay tax on it.5 lakh. The only point worth remembering is that you are allowed only one house for self occupation and all other houses are deemed to be let out (even if they are lying vacant) and their notional rental income is subject to tax. the interest deduction can exceed the maximum limit of Rs 1. 4. most of people are tax evaders because it is a common practice among people not to include the interest in their taxable income which tantamount to concealment of income. 6. please see Amazing Facts about Income Tax: Taxation of Notional Income. Therefore. In fact. In such case. in case of self occupied house property also. For further details.50 lakh In case of self occupied house property. Furthermore. you can have as many number of houses (and also as many loans against them) as you wish. Legally speaking.50 lakh is exempt. however small it may be. Exemptions/Deductions 5. please read 8 Tax Considerations to Remember Before Buying a Home. there is no limit. However. but since the section was abolished around two years ago. My advice to you is to start considering it as part of your taxable income. it is eligible for deduction u/s 80C as it is deemed to have been reinvested on behalf of the holder. You have to consider it as part of your total income.e. even if exceeding Rs 1. Earlier it was allowed as deduction under section 80L. For further details. Net effect is that it does not increase your tax liability but goes towards reducing the Rs. Interest on savings account and bank fixed deposits is exempt No. entire amount of interest paid. in case of let out/deemed to be let out house property. it is taxable. Interest on National Savings Certificate (NSC) is exempt Interest on NSC is chargeable to tax on the basis of annual accrual specified in NSC rules. the maximum limit of interest deduction under section 24(b) is no doubt Rs 1. each of the co-owner is entitled for separate deduction. then all your previous years income gets recomputed as if the fund was unrecognized from the very beginning (i.
000. For instance PPF has lock-in of 15 years. NSC has lock-in of 6 years and Bank FDs have lock-in of 5 years. But unlike HRA exemption. NSC. In other words. please read "Section 80C . 9. deduction of rent paid under section 80GG is subject to certain conditions and the maximum deduction cannot exceed Rs 24. Put another way. all the deductions claimed earlier will be treated as income of the year in which surrender or termination takes place. It has been specifically mentioned in section 80C that in case of termination of ULIPs before 5 years. ULIPs.The Best Section 80C Tax Saving Option Fisher | SECTION 80C offers a wide range of tax savings options which includes PF. you can surrender them but there are tax consequences. ULIPs can be surrendered after 3 or 4 years Of course. 8. . it won’t increase your tax liability . Therefore aggregate deduction claimed earlier u/s 80C on payment of ULIP premium will be treated as “income from other sources” and you will be liable to pay tax on it. 1961. ELSS and SCSS.Tax Saving Options & Investment Avenues". LTCG on shares is always exempt Only long term capital gains arising from listed shares sold through a stock exchange are exempt. Shortest Lock-in-period Better Liquidity ELSS has lowest lock-in (just 3 years) as compared to all other options under section80C.just a slight reduction in 80C limit. PPF. deduction for rent paid is not allowed In such cases. If employer does not pay HRA or if you are a self-employed person. off-market transactions are not eligible for this exemption. For further details. Stability The initial lock-in period of 3 years make ELSS quasi close-ended.So. Here are 3 reasons why ELSS is considered as the best tax-saving investment option under section 80C: 1. For a brief over view of various instruments available under section 80C. please read Unravelling the Ulips: 5 Secrets You Should Know About 10. start including it in your taxable income. you can claim deduction under section 80GG which is similar to section 10(13A) under which HRA exemption is claimed. it is an open-ended for subscription purposes but for redemption purpose it becomes openended only after 3 years of investment. Equity linked saving scheme (an open-ended mutual fund) popularly known as ELSS is one of most important tax saving avenue made available to tax payers to enjoy the tax deduction under section (u/s) 80C of Income Tax Act. ELSS .
Besides. First. 3.. It is quite well known principle in investment that equities tend to perform better than other asset classes over the long term. the five year returns (annualised) of ELSS category are still above 10 per cent even after considering the market meltdown of 2008. they certainly give better returns taking into consideration section 80C tax benefit. 2. SCSS. If you want a taste of equities to boost your overall portfolio returns. generally. Over the years. ELSS are in fact better than plain vanilla equity funds because even if the ELSS are able to generate returns at par with other equity funds. What makes these schemes special is that. Being equity oriented schemes. ELSS have the potential to provide superior returns (although unlike assured return schemes.The lock-in-period of 3 years acts as a deterrent against short term money flowing into the scheme which is a blessing in disguise. It may take a few months to a few years but sooner or later Indian equity markets are going to bounce back. The lock-in lends stability to the fund as the fund manager has enough time and freedom to invest and stick to the investment strategy without bothering about redemptions. there is nothing like ELSS which combines section 80C tax benefit with the returns of the equity funds. Almost all other options under section 80C are fixed return instruments and hence there is a ceiling on the returns that can be earned. In most of the cases e. NSC. For instance.e. have the capacity to ride the ups and downs of the capital markets).e. Best way to get equity exposure ELSS is the best way to participate in equities. Although conventional wisdom says one should avoid timing the markets. The recent correction in the stock market should be used as an opportunity to enter the markets because India’s long term growth potential is no doubt intact. 5 YR POTD (Post Office Time Deposits) etc. even the assured interest income at maturity is subject to tax which further brings down the post tax yield. they tend to out perform other equity based mutual funds.. Equity linked savings schemes are no different from the diversified equity schemes. don’t waste any more time and wait till the end of the year. the average returns from tax saving funds far outweigh the returns from all other investment avenues under section 80C. The stability and long term focus helps in generating better returns.. but it pays to enter when the markets are at a low level. So. those returns are also tax free. ELSS is the best option if you have a long term horizon (i. learn how to . It is ideal investment option for small investors as it is a simple way of investing in stock markets coupled with tax savings. returns are not guaranteed) than most of the other options available under section 80C. The fund manager can take a long term view on investments and also avoid frequent portfolio churning.g. willing to invest for the long term) and are comfortable with taking moderate risks (i. Potential for high returns ELSS offers the best returns among all investment avenues under section80C.
With equity markets are trading at such low levels. If you're finally convinced and would like to invest in an ELSS fund. 2. Among the assured return schemes. Whether returns are guaranteed/ fixed Once you invest in a NSC the interest rate gets locked-in i. which is the best tax-saving instrument under section 80C among the assured return schemes? Therefore. Not a big difference. In other words. If your section 80C limit already stands exhausted. as the economic situation demands. DO IT NOW. the net effect is that your section 80C limit gets reduced to that extent because otherwise you would have made investment in other tax-saving instruments to the extent of accrued interest on the NSC. you’re also entitled to get the deduction under section 80C for the interest accrued on NSCs. PPF vs NSC . then your posttax returns from NSC would become 6. But. Tax on returns PPF returns are tax-exempt but NSC returns are taxable. please read “ELSS: The Best Section 80C Option”) but the ELSS schemes are inherently risky. you can consider PPF (Public Provident Fund) or NSC (National Saving Certificate). this article attempts to resolve the classic dilemma: NSCs vs. because this notional interest is deemed to be reinvested. . 3.).How to Decide? Fisher | Among all the tax-saving instruments under section (u/s) 80C.prepare a tax savings plan (click here) and in case there is any scope left for further investments.48% if you fall in 20. NSC – A Comparison 1.. government can move it either downward or upward. So. can’t be changed subsequently. ELSS occupies the numero uno position (for details.. PPF. let me assure you that you won’t get a better chance to SAVE TAX as well as EARN BETTER RETURNS. depending upon the interest rate scenario. However.9 percent. So. Let’s compare them on various parameters: PPF vs. Returns While PPF offers 8% per annum (p. Interest accrued on NSC is to be included in your total income every year. make ELSS your first choice. where as in case of PPF the returns are assured but not fixed.16% per annum.e.a. if you’re not comfortable investing in ELSS. the next question is: How to decide which – PPF or NSC – is better among the two? Or.64% if your marginal tax rate is 30.6 per cent tax bracket and 5. the effective yield is 8. please read How to Invest in Best ELSS Mutual Funds. NSC offers 8% per annum compounded half yearly i.e. both PPF and NSC occupy the top slot. The recent market meltdown offers an opportunity to invest in ELSS at lower levels.
PPF carries a lock-in period of 15 years. PPF premature account closure is not permissible except in case of death. PPF requires regular investment. the actual amount depends on the balance in the account in earlier years. Liquidity While the duration of NSC is 6 year.0% Mar’03 onwards -> 8. what makes the yield differ is the fact that in case of NSC’s revised rates applies only for new purchases. Let’s see the past changes in the PPF interest rates: From 1986-87 to 1999-00 -> 12. If your existing tax saving investments exceeds the limit of Rs 1 lakh (or expected . Thus. However. we notice that PPF and NSC interest rates are changed simultaneously. the change in interest rate is always prospective and not retrospective.50% 2002-03 -> 9.e. as the interest to your PPF account gets credited every year. Let’s see: 1.00% Since 2003-04 -> 8. let’s see the past changes in NSC interest rates: Mar’01 to Feb’02 -> 9. If the tax-saving limit of Rs 1 lakh under section 80C remains under-utilized year after year. NSCs offer better liquidity than PPF. while for NSC you would have received interest @ 9. except the parameter of ‘taxability of returns’. For instance. NSC is the form of a certificate but PPF is in the form of an account and to keep it active.00% Now. 5. One time or regular investment While NSC requires one time investment. both new and existing. your PPF account would be credited with interest @ 9..00% 2000-01 -> 11. is the best option for you because in that case net tax effect (of NSCs accrued interest) is zero. on all other counts the NSCs score over PPF. In other words.However. 2.0% From the above mentioned changes in PPF and NSC interest rates.5% per annum (compounded half-yearly) for all the 6 years of it’s duration. then NSC. 9% for 02-03 and 8% since 03-04 onwards). However. 4. So. in such a case.5% Mar’02 to Feb’03 -> 9. this singular factor is big enough to tilt the balance in favour of PPF.5% for only the year 2001-02 and for subsequent years reduced interest rate would apply (i. Although partial withdrawals are allowed from the PPF account from seventh year onwards.00% 2001-02 -> 9. let’s say you invested Rs 1000 each in both PPF and NSC in March 2001. Besides. Now. NSCs returns also become tax-free. you’ve to make regular investment – a minimum amount of Rs 500 has to be deposited every year to keep the account active. so that both are at par (with a slight difference due to half yearly compounding in case of NSCs). while for PPF new interest rates apply to all accounts. no-doubt.
Finally. As regards the uncertainty associated with the PPF interest rate. for example. in the near future) as specified under section 80C. I hope the above discussion is helpful to you in resolving the dilemma between PPF and NSC. it’s a blessing in disguise. if you've decided to invest in PPF. after 3 years or 6 years. please read "How to Invest in PPF-10 Practical Tips". if you require the funds before the maturity.10 Practical Tips Fisher | (among assured return schemes) under section 80C. you’re going to require the money. for the purpose of saving money for long term goals. In such a case it is better to opt for PPF. please feel free to leave a comment. in my view.64% if you fall in the 30. I presume that by now you’re well aware of PPF ranking vis-à-vis NSC and would like to open a PPF account.9% tax bracket. is always available. 15 years lock-in period should not be a constraint. like education and marriage of children or to save for retirement – which you must – PPF is the best debt instrument after EPF (Employees Provident Fund). However. Perhaps. Besides. or borrowing against your PPF account. in emergency cases. even in such a case you should opt for NSC if your investment horizon is medium term (i. However. if you’ve any further suggestion or questions. after 6 or 7 years for your spending needs). it can’t go beyond +/. How to Invest in PPF . the liquidity factor and uncertainty associated with the PPF interest rate are two major drawbacks. it becomes 5. say. the option of making partial withdrawals. There are certain tips and Public Provident Fund (PPF) is the most popular option . No doubt. won’t you invest it some where else or spend it on some worthless things. lack of liquidity should not be a hindrance. say. we can observe that since 2003. if you invest your funds for different time duration according to your financial plan/ needs and invest only so much in PPF which you can spare for long term.e.to cross the Rs one lakh mark. In other words. Even if there is a change in near future. So. then it would have direct impact on your post-tax returns from NSCs . in this post topic of discussion is how to invest in PPF. So. there has not been any change in the PPF interest rates.1%. Why? Because even if you get back your money. However. if you just change your perception and give it another look..
While opening a PPF account. Here are the 10 practical tips on how to invest in PPF: PPF Account Opening 1. Unlike NSC. PPF gives you full discretion to invest in installments within the range of minimum amount of Rs 500 and maximum amount of Rs 70. if you want to make investment in the name of your minor child. there won’t be any clubbing of income). Besides.12% for someone in the 33. dependent or otherwise.000.e. otherwise also PPF is among the best debt option available to you – particularly self-employed persons who don’t contribute to EPF – for retirement planning because it offers tax-free returns (current interest rate is 8% which translates into pre-tax yield of 12. Why? Please read “10 tips for section 80c tax planning”. First. Public Provident Fund (PPF) account rules allow you to open an account in the name of your spouse or children. If you decide to open a PPF account in the name of your spouse or minor child. please don’t forget to appoint a nominee. child has become major. It came to light when a reader pointed it out. The mistake is regretted. However. if by the time of maturity of PPF. the clubbing provision under section 64 (1A) becomes inoperative (i. unlike recurring deposits or mutual fund SIPs each PPF installment need not be the same. Correction (6/10/2009): As per PPF rules..e.99% tax bracket). what are the tax implications? The contribution will be deemed as gift and clubbing provisions under section 64 should apply. if you reinvest the amount somewhere else. Contribution to other PPF accounts (spouse and major children) is excluded from this limit. Making Contributions to PPF Account 4. PPF is a preferred instrument to avoid the clubbing provisions of IT Act. therefore. See comment section. You can vary . 2. the clubbing provisions becomes applicable in both the cases: spouse and minor child. son or daughter. In fact this is a very important part of making any investment or buying life insurance. the aggregate limit of Rs 70.000 is only for the account of an individual and minor combined together. exemption from wealth tax and the protection from attachment by any order or decree of court. You’re also allowed to change the nomination at any time thereafter. 3.000 in a financial year (i. there’s no income to be clubbed. On maturity of PPF account.tricks you should know before you open a PPF account so that you can realise its full potential. nothing to worry about. you should open a PPF account even if it’s not on your investment radar. bachelor or married. The only restriction is that total aggregate contribution in all the PPF accounts should not exceed Rs 70. One of the attractive features of Public Provident Fund (PPF) is the flexibility offered to you for making contributions. But as the interest on PPF is exempt. 1st April to 31st March). So. leave aside section 80C tax-break/tax-planning. Children can be major or minor. you need not invest a lump sum amount at one go. Furthermore.
Put another way. Ensure that you continue to make a minimum deposit of Rs. a minimum of Rs 500 for each such year). Otherwise. you can withdraw the entire PPF amount either in a lump sum or in installments. and withdraw it on the next day (i. Though the term of PPF account is 15 years. you can avail the facility of loan (from 3rd year to 6th year) and partial withdrawal (from 7th year onwards). 500 every year to keep the PPF account active. PPF Account Maturity 9. you have three options available to you: a) Close the PPF account and withdraw the entire amount. 7. b) Continue the PPF account without making any further contribution and earn the same rate of interest as before the maturity. keep on investing small sums on regular basis in your PPF account. Never think of making premature withdrawals. you can still continue with your Public Provident Fund (PPF) account. if ever you face a financial crunch. you’re not allowed more than one withdrawal in a financial year. Nevertheless. there’s another possibility that you’re not able to make tax-saving investments for availing the deduction under section 80C due to some temporary cash flow problem (although your financial position is ok). In such a case also you just need to rotate the funds by making a partial withdrawal from your PPF account and redepositing the amount in your PPF account. each time for another block of 5 years. if you so desire. Keep on investing in your PPF account. However. If you choose this option. you can regularize or revive the discontinued PPF account after paying the prescribed default fee along with subscription arrears (i. The only limitation is that the total number of installments in a year should not exceed twelve. 6. if you make a contribution to your PPF account on 31st March of the 16th year. 8. PPF account runs for full 15 financial years subsequent to opening and matures on 1st April of the 17th year. it becomes ‘inactive’ account and you become ineligible for loan as well as partial withdrawal. Why? Because. 1st April of the 17th year). How? Because the PPF account can be closed only after the 15 years from the end of the financial year in which it is opened.. you’ll be allowed a deduction under section 80C. rather than waiting for the end of the year to deposit the one lump sum amount. . Also. However. On maturity.e. 5. you can deposit more than one installment in a month.the amount of PPF deposit as per your convenience. PPF gives you option to extend the account beyond maturity. Make sure that you invest by the 5th of every month. In other words. interest is calculated on the lowest balance between the close of the fifth day and end of the month (though credited to your PPF account on annual basis). However.e. both the facilities are subject to certain ceiling limits. in case of PPF accounts. Furthermore. the contribution made in 16th year (even on the last day) also qualifies for section 80C tax benefit. Thus. Put another way.
extending the PPF account while continuing with fresh deposits).e. How to decide whether to close the PPF account or continue with it? The decision depends upon the facts and circumstances prevailing at the time of maturity such as your need for funds (immediate or in the near future). though you’ll continue to be eligible for section 80C deduction on fresh contributions. When closing the PPF account and withdrawing the amount.c) Continue the PPF account with fresh subscription. also note that if you choose this option. you’ve to submit form H within a period of one year of maturity. please feel free to add in the comment box. (i. PPF Interest Calculator Fisher | Photo by D-Kav I’ve designed a PPF Interest Calculator in excel sheet (which shows PPF returns and maturity value after different time periods) to help you plan your PPF investments. this PPF Returns Calculator is also only one of its kind. You would find many online PPF Returns Calculators available on the net but none of them is as good as this one. Try comparing it with other PPF Interest Calculators. make sure you do it at the beginning of a month because you are not allowed any interest for the month of withdrawal. it will adversely affect the liquidity. which is.. If you think that I’ve missed something or you’ve any other question relating to PPF. 10.. In other words. interest rate and availability of other investment opportunities. 40% gets permanently blocked for another 5 years and you can’t withdraw it even in an emergency). then you’ve access to only 60% of the account balance (at the beginning of the extended period) during the next five years (i. Similar to the ‘Income Tax Calculator’ designed earlier. the only online tax Calculator to provide you with the accurate tax liability figure (by including all the possible permutations and combination of different kinds of taxable income. Besides. as of now. Please remember that for exercising this option.e. special tax rates applicable on certain income and the various conditions and restrictions imposed on section 80 deductions). .
Recurring annual deposit means that the same amount is deposited in the PPF account every year (and in the same month).. recurring monthly deposit means that every month you’re depositing same amount in your PPF account. 2.Actually. no interest paid for a particular month if the amount is deposited after 5th of the month. then this PPF Calculator is not applicable.). use the Calculator to calculate interest earned on your PPF account if the account is opened on or after 1st April 2003. Deposit by 5th of the month: It is assumed that every deposit made by you in your PPF account is on or before 5th of a month. To simplify the PPF returns Calculation. 31 or 36 only. Applicable for PPF accounts opened on or after April 2003: PPF Calculator is based on interest rate of 8% per annum (p. If you started investing in PPF even before the month of April 2003. first you need to understand how the PPF account actually works. 26. Recurring Deposits: The second assumption is that you’re making a recurring deposit in your PPF account either annually or monthly.e. Instructions for using the PPF Calculator: 1. varying minimum duration of the PPF (ranging from 15 years 1 day to 16 years) depending upon the first month of the deposit. I had to make certain assumptions which are as follows: PPF Interest Calculator: Assumptions 1. 3. 21. However. Similarly. The same process is followed for every 5 year extension of PPF account. interest always credited to the PPF account at the end of the financial year (i.. n=16 as well as n=21) in addition to returns and the maturity value at the end of 16 years.a. the PPF (Public Provident Fund) interest calculation is a bit complicated due to various factors such as interest calculated on monthly basis but compounded on annual basis.e. In other words. 31st March). The value of N (number of years) can be 16. Before using the PPF Returns Calculator to know the maturity value and the interest earnings and to plan your future investments in the PPF account. Please see ‘10 Tips about PPF Investing’. If you extend it for another 5 years then either you keep on investing same amount of deposit for the next 5 years (put n=21) or the extension is without any further deposits (then put n=16). It means that investment in PPF account is for a minimum lock-in period of 16 year. . the Calculator will show you the PPF returns and the maturity value at the end of 21 years in both the cases (i.
000 in case of annual deposits. The value of “A”. here’s a PPF Calculator that actually works! If you come across any bug in the PPF Interest Calculator or need some clarification regarding the PPF Calculator. You can also use both the Calculators to compare monthly deposits with annual deposits.So understand that n is the number of years for which you make investments in the PPF account. Anyhow. Use the one applicable to you. For example. 21. doesn’t the PPF returns calculator lose its relevance? Not at all! As already stated. The maximum value can be 12 which represents the month of December. 2 for the month of February and so on. 26. Anyway. if you make regular investment for 26 years (monthly/annually) put n=26 and you’ll know the interest earnings and the maturity value at the end of 16. So. 2. month of deposit means only the initial or first month of deposit. the actual PPF interest calculations can be seen from your PPF account statement or the passbook. just write it down in the comment box. 3. First one is applicable for monthly recurring deposits in PPF account and second one is applicable for annual recurring deposits. 4. In the 'month of deposit' ("M")column put 1 for January. your feedback and suggestions is really important for me to understand what’s working and what’s not. 31 and 36 years.833 in case of monthly deposit and Rs 70. After making so many assumptions. There are two separate PPF Interest Calculators combined into one excel sheet. the basic idea behind the Calculator is to help you get a broader view of PPF returns and to make the PPF investment planning easier for you. Also understand that in case of ‘Monthly PPF Calculator’. the amount of recurring deposit can’t exceed Rs 5. .
. college..(This is my opinion but point is not very clear) 8. 1.000. Relevant part of the section 80c is reproduced here under.. The deduction is available for Full Time courses only.. "(xvii) as tuition fees (excluding any payment towards any development fees or donation or payment of similar nature).means here tuition fees means total fees paid minus any payment towards any development fees or donation or payment of similar nature. 6.scooter/cycle/car stand charges is not allowed.Means the aggregate amount of deduction under above referred sections can not exceed Rs.TUITION FEES PAID FOR CHILDREN U/S 80C Today we will discuss important points regarding deduction available for payment of tuition fees ....... 4.. 9." on the basic of above following points are to be noted .if any left ..so admission fees is also allowed.hostel charges.we try to cover each and every aspect on the issue .. (a) to any university.. 5..so location should be in India though it can be affiliated to any foreign institutes. 1. any two children of such individual.. namely: (a) ... in the case of an individual. whether at the time of admission or thereafter..so no deduction for part time or distance learning courses.. In This section tuition fees has a wide meaning than normal parlance . Deduction for tuition Fees is available up to Rs. The Deduction is available for any two children. The limit of one lac as above is total limit u/s 80C for all type of savings . 11. 10.he will not be eligible.so no rebate for private tuitions.100000 /2. c) for the purposes of clause (xvii) of that sub-section. 3..00..or you have different opinion than of us .... (b) for the purpose of full-time education of any of the persons specified in sub-section (4) " "(4) The persons referred to in sub-section (2) shall be the following.. 7...plus section 80CCC(pension policy) plus u/s 80CCD(Contributory Pension Plan). Tuition fees paid for coaching courses for admission in professional courses or any other type of courses are not covered as that fees is not paid for FULL time eduction. This the only clause u/s 80 C where assessee can not claim tax benefit for expenditure done on himself...Means if assessee has paid tuition fess for his studies .... 12. Deduction is not available for tuition fees paid for studies of spouse. In My Opinion Transport charges . 13. The deduction is available to Individual Assessee and not for HUF. The center mention above in point 8 must be situated in India. school or other educational institution situated within India. school or other educational institution. The fees should be paid to university.....Mess charges ...library fees . b) . Building fund or any donation etc not allowed.. college.... . Que:Can Mother claim the benefit of tuition fees paid for his son/daughter.please record in comments. questions which are commonly asked regarding tuition fees eligibility u/s 80C given hereunder.
in February 2008 relates to period march to june 2008 .Ans:Assessee means both mother and father both can take the benefit u/s 80 C for amount paid by them respectively.husband and wife both have a separate limit of two children each .how much amount he can claim deduction in assessment year 2008-09? Ans: He can claim full 2000 rs in assessment year 2008-09 ..Rs(in words....son of sh Raj kumar Ojha is a bonafide student of class ...but course should be in India and a full time course Ques:My Son has been going to Play School Since 01/04/2008.Take a certificate from scholl authorities regarding full year fees on letter head with their seal. Ques:Ram has paid tuition fees for his child 2000/. rs 5000 development fees rs 5000 caution money..so in my opinion admission fees rs 8000 .....play school and nursery class fees is also covered under section 80C (circular 9/2008 & 8/2007) Ques:Ram has paid rs 36000 (rs 8000 admission fees.. Ques:If a couple have four children.hence not allowed.... how much he can claim reimbursement as well rebates/deductions in 2008-09 and 2009-10... tuition fees meaning is wide in income tax as generally perceived ..." ......so they can claim deduction for 2 children each. Ans:You can claim tuition fees paid for playway school..50lac and wife has paid 50000 then husband can claim 100000 and wife can claim 50000.....late fees is not eligible for deduction... The receipt given by the school shows quarterly fee...... as this deduction is available on the basis of payment and it may or may not be related to the period in which it has been paid. :yes . Ques:is tuition fees admissible for pre nursery class also? Ans: pre-nursery .....You can claim the tuition fees on payment basis whether relates to this financial year ...) as full year tuition fess.as it is refundable amount .they both can claim deduction for 100000 each subject to they have actually paid same amount .12000 annual charges and 6000 fees is covered for claim u/s 80C . rs 12000 annual charges and rs 6000 @rs 2000 per month for april-june 2008 fees) in dec 2008. Can I claim the fee paid during the year under Children's Education(80-C). Example is given below T o whom it may comcern " It is certified that .. & not tuition fee... ques:Are there any particular educational courses for which income tax exemption is given? Ans:No specific course defined in the Income tax act ...(pre nursury).but the break up of the fees should be obtained from the school . Ques:If a Couple has one child and paid a fees of 200000 rs can they both claim tuition fess 100000 each ? Ans.can they both claim fees for two children each? Ans:Yes ...in our school and we have received ..Development fees is not allowed and caution money.old or coming financial year..If husband has paid 1..... Ans:As explained above in the article... Ques: Is Late fees paid with tuition fees is eligible for deduction ? Ans:No.
the self-employed persons are entitled for TAX DEDUCTION under section 80GG of Income Tax Act.. salary (i. How to calculate HRA? Or. 5. place of residence will be considered and not place of working. your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%. so there is no HRA and . exempt portion of HRA is not considered as part of the taxable income whereas in case of deduction first the amount is included in your gross total income (GTI) and afterwards the deduction is allowed. HRA received. What if the place/city of residence and place/city of working is different? Good question. For example. So. How can a self-employed person claim tax benefit for the rent paid? As the self-employed person doesn’t receive any salary. For details. rent paid and the city of residence (whether metro or non-metro). if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis. indeed it is possible to claim the HRA tax exemption to the maximum extent possible as provided in the income tax law. which gets TAX EXEMPTION under section 10 (13A) of Income Tax Act. Claiming HRA Exemption 4. Whether HRA calculation to be done on monthly basis or annual basis? There are four variables in HRA tax calculations: namely. the HRA tax exemption calculation is to be done on ‘annual’ basis. In such a case for the purpose of HRA calculation. On the other hand.Tips & FAQs First. Suppose that you’re working in a factory or a company located in Sonepat (near New Delhi) while residing in New Delhi. basic pay plus DA). 3. let me clarify that for claiming HRA (house rent allowance) the correct word is EXEMPTION and not DEDUCTION. please read “How to Claim Maximum HRA Tax Exemption”. 2. What’s the difference between exemption and deduction? Well. while the persons drawing salary receives HRA . How to Claim the maximum possible tax exemption on HRA? Yes.e. for the purpose of HRA.How to Claim HRA Tax Exemption . 1961 read with rule 2A of Income Tax Rules . 1961. how much HRA is exempt from tax? Please READ “How to Calculate HRA Income Tax Exemption”. In case all of the four remain the same through out the year. Here we discuss some tips and frequently asked questions (FAQs) relating to HRA tax calculations and claiming exemption: Calculating HRA Exemption 1.
if you’re drawing a monthly HRA of Rs 4. Can we submit rent agreement instead of rent receipt for claiming HRA? Yes. if you wish you can submit the rent agreement but it can be in addition to and not instead of the rent receipt. A lot many people think that you also require rent agreement for claiming HRA tax exemption but there is no such requirement in tax laws. please go to “4 Ways to Claim HRA exemption and House Loan Interest Deduction”. 9. 6. If your case is indeed genuine. Please note that this relaxation is only for the purpose of TDS on salary and in the regular assessment. Why not? If both of them are paying rent and landlord issues either two separate rent receipts or only one receipt specifying the amount or proportion paid by each.500 per month. For details. even the requirement of production of rent receipts have been dispensed with for the salaried employees drawing HRA (house rent allowance) up to Rs 3. please carefully note the above limit of Rs 3. 1961 read with rule 2A of Income Tax Rules –doesn’t arise. then both husband and wife are entitled for HRA exemption according to the amount of rent paid.. What evidence needs to be submitted for claiming HRA? The only evidence required for claiming HRA tax exemption is proof of rent payment (i. However.e.m. Furthermore.000 is for the amount of HRA received per month and not for the amount of rent paid. Submission of Evidence 10. you’ll have to submit the rent receipt for claiming HRA. . I don’t think your employer should have any problem in allowing HRA tax exemption. if deemed necessary. there is a separate provision in the Income Tax Act.000 per month. whereby a person not in receipt of HRA but incurring rent expenses for his residence can claim a deduction under section 80GG which is quite similar to section to 10(13A) but some additional conditions have been imposed. to take care of such a situation. 7. but paying a rent of Rs 2. first try to convince your employer and clarify his doubts. 11.000 p. if any. There is no relationship between claiming HRA exemption and claiming interest deduction for housing loan. Is it possible to claim HRA as well as home loan tax benefits? Yes. Just claim it while filing your return of income and get the refund of excess TDS deducted from your salary. Besides. What if the employer refuses to allow the HRA tax benefit? Nothing to worry about. Is it possible to claim HRA if residing in a relative’s (Parents/Spouse) house? Please read "4 Ways to Claim HRA exemption". certainly. But. tax assessing officer has the power to ask for the relevant evidence. regarding your eligibility for claiming it.consequently question of HRA exemption – under section 10 (13A) of Income Tax Act. 8. Can both the working spouses claim HRA tax benefit separately? Yes. the rent receipt issued by the landlord). For example.
14. April) and other one for the end of the financial year (i.e. there is no such requirement under the tax law./Mrs.. a typical rent receipt can be as follows: Received a sum of Rs ------vide cheque (no. please feel free to ask here in the comment box. I hope that above tax planning tips and Faqs are able to answer your queries regarding calculating and claiming HRA income tax exemption. However. at present the only documentary evidence required for claiming HRA is rent receipt.It’s quite possible that you’ve entered into a rent agreement but not paid the rent.000. . but please ensure it mentions the following relevant information: a) Amount of rent paid b) Period/month c) Mode of payment (Cheque/Cash) d) Your name e) Landlord’s name f) Landlord’s signature g) Residential address h) Date & Place i) A revenue stamp of Rs 1 for payment (both cash/cheque) exceeding Rs 5. being the rent for the month/period of ----. Is there any particular format for rent receipt? No particular format for rent receipt has been specified under the income tax law. of landlord needs to be mentioned on rent receipt? No.in respect of House no----(Mention complete address).. March).----. Date:------Place:-----Signature of Landlord (Name of Landlord) It can also be in a different wording. Whether all the 12 months rent receipts need to be submitted? Absolutely not! The basic purpose is to satisfy the DDO that you’re actually paying the rent. I’ll try my best to clarify them. Thus. or at the most 3 months (third one for the middle of the year). 12.from Mr. Whether PAN no. It will suffice if you submit rent receipts for 2 months – one for the start of the financial year (i. However. or if there are any unanswered questions.e. The evidence of actual payment of rent is only the rent receipt and not the rent agreement.-------dt------) or cash. if you still have any doubts. 13.
Non-rented accommodation i. However. It can be due to following reasons: 1. 2. your house will be treated as self-occupied and you'll get the housing loan tax concessions (i. you can’t pay rent to yourself and therefore the whole of the HRA received by you becomes taxable. For claiming HRA tax exemption under section (u/s) 10(13A) of Income Tax Act. you're not paying rent As the rent is not being paid. there are two possibilities: ..e. b. you may or may not be able to claim both the benefits. Rented accommodation i. both interest deduction u/s 24(b) and principal repayment under section 80C. There are separate provisions in the income tax Act. you stay in a rented accommodation/any other accommodation.e. You've rented your own house while you stay in a rented accommodation In such a case you'll be entitled for HRA tax exemption. read with rule 2A of Income Tax Rules.4 Ways to Get HRA Exemption Along With Home Loan Tax Benefits Fisher | AT the outset. you're paying rent In this case.. rental income from your own house will be taxed in your hands while allowing interest deduction under section 24(b) and deduction for principal repayment under section 80C.e.. Here there are two possibilities: a. for each of the two and one does not influence the other. 3. Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons You may stay at a place – it may be a different city or a different location within the same city different from the place where your own house is situated. Depending upon the particular facts and circumstances. if you stay in your own house. you can claim HRA tax exemption while your house will also be treated as self occupied house property for purpose of income tax and you'll get all the housing loan tax benefits i. 1961.e. Your house remains unoccupied while you stay in any other accommodation due to any other reason whatsoever (other than professional/employment/business reasons) Here again. However. the question of HRA tax exemption does not arise.. there still remains a possibility that even if you own a house. interest deduction under section 24 and deduction for principal repayment under section 80C). However. let me clarify that there is no direct relationship whatsoever between claiming HRA tax exemption and claiming tax breaks on home loans (interest deduction under section 24(b) and principal repayment under section 80C). Now. 1961. the only condition is that you should be living in a rented accommodation for which you should be paying rent.
e. notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C. Further. your own house will be treated as deemed to be let out and its notional rental income will be taxable in your hands. although you'll be entitled for HRA deduction. you're not entitled for HRA deduction. Rented accommodation i. you'll continue to get the interest deduction on home loan under section 24(b) and deduction for principal repayment under section 80C. According to one opinion. as regards the HRA.. for your personal convenience you live with your parents in their house while your house remains unoccupied. you're paying rent In such a case. Otherwise also. However. In case you have to leave it vacant. 4. The new house is not in your name. Also. irrespective of tax status of house i..a. and thus its notional rental income will be taxable in your hands. there is nothing wrong in paying rent to a spouse so long as it is not a sham transaction. there is a difference of opinion among tax experts regarding payment of rent to spouse. It belongs to any of your relative (spouse/parent’s) and you actually pay rent to the owner of the house. Otherwise.. Conclusion In a nutshell. the location where you stay should be at a considerable distance from your own house).e. However. In such a case also you'll be entitled for HRA tax exemption but the owner of the house who may be your spouse or parent(s) is assessable for the rental income derived from the house.In other words. your own house loses the status of self-occupied property and will be treated as deemed to be let out. if you don’t pay any rent. . Don't leave it vacant. you're not paying rent For instance. b. Even in such a case you should be either living in a different city or at different place within the same city. either stay in it or rent it out. you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment. remember that it should a genuine transaction and not a colourable device to evade tax. Furthermore.. irrespective of whether you are having your own house(s) or not. The other view is that there can’t be any commercial transaction between husband and wife. whether self-occupied/deemed to be let-out/let-out. your own house won’t be treated as self-occupied for tax purposes. Non-rented accommodation i. I tend to agree with the second view and therefore recommend that it is prudent not to indulge in such a dubious transaction which can be questioned by tax authorities and entangle you in legal disputes.e. it is always better to err on the side of caution. and not in the immediate vicinity of your house (i. Here. if you've a house. it should be only for employment/business/professional reasons.e.
private sector organizations.000 (HRA received) minus Rs 1. 40% of salary (50% if residing in a metro i. In other words. 50.000 p. Rent above 10% of basic i.m.e. In fact. Actual HRA received 2. usually. HRA received i. 25. please see 4 Ways of Claiming HRA Tax Exemption Along With Home Loan Interest Deduction. therefore. .80. 20. 50% of basic i. 15.m.000 p. Rs.How to Calculate HRA Income Tax Exemption Fisher | Almost every salaried class person receives HRA (house rent allowance) as part of the salary package irrespective of whether he is paying rent or not.000 i. According to section 10 (13A) of Income Tax Act. 20.simultaneously.000 – Rs. New Delhi. HRA constitutes the second most significant component of your CTC (cost-to-company). However. From tax planning point of view. (40% of basic) Now.000 p.000 2.000 p.HRA tax exemption and home loan interest deduction -.m. Suppose that you’re residing in Mumbai and paying a rent of Rs 20.000) 3. 1961 read with rule 2A of Income Tax Rules.. Rs. Let’s take an example.e.e. Rs 2.000 (HRA tax exempt).m. For details.. Chennai or Mumbai) Salary for the above purpose means BASIC + DA. Besides.40. after basic pay. Kolkata. and that your salary package comprises the following: Basic — Rs. 15. least of following three is exempt from tax: 1.. net taxable portion of the HRA works out to be Rs 60.000 p. doesn’t provide DA to employees. in this particular case you’re entitled for HRA tax exemption of Rs.. (per month) out of total HRA received of Rs.e.000 The least of the three is Rs 15. 20. it is better to be aware of some tax basics instead of completely relying on your employer so that you can do some of the basic tax calculations and planning yourself.. or how to calculate the tax exempt portion of the HRA.e. DA — Nil HRA — Rs.m.000 (Rs.000. the exempted amount of HRA will be least of the following three figures: 1. 5. However. Rs. some of you might also be interested in knowing how much of the HRA is actually tax exempt or deducted while computing taxable income. 20. Rent paid in excess of 10% of salary (Basic + DA) 3. I have already mentioned in detail how to claim HRA tax exemption and also further clarified all your doubts regarding claiming both -.
Taxable income is broken down into different brackets or slabs. Second HRA calculator is to be used if there is a change in any of the four variables. But has We keep on carping about the high taxes by keeping in view only maximum marginal tax rates.HRA Tax Calculator Fisher | I’ve already dealt with the subject of HRA tax exemption quite extensively in my earlier posts – How to Calculate HRA Tax Exemption. The first HRA calculator is meant for calculating HRA tax exemption when all the four parameters remain same through out the financial year. The highest tax slab rate relative to a taxable income is called marginal tax rate. and Claiming HRA along with Home Loan Tax Benefits. What’s Your Effective Tax Rate? Fisher | What’s your tax bracket? You must have heard this question quite often. 4. However. As already pointed out in HRA FAQs. without ever giving a thought to the exemptions and deductions we avail.m. There can be increase in the basic pay and HRA received (due to annual increments or change of job). the highest rate of tax applicable on your anyone ever asked you about your effective tax burden? Did you ever thought about your effective rate of tax? Have you ever tried to calculate it? . In case you still need any clarification. each to which a different tax rate applies. it is very rare that all the four variables remain constant during the entire financial year. City of Residence (Enter "M" for Metro & "N" for Non-Metro) However. when there is change in any of the four factors. 3. I’ve prepared two HRA tax calculators. 2.m. I’ve received a few requests to develop a HRA Tax Calculator in excel to make it easier for a layman to understand and calculate. Rent paid p. Basic Pay + DA (if any) p. please feel free to ask. Put simply. HRA FAQs & Tips. You need to input the following information for calculating taxable and exempt portion of the HRA: 1. HRA tax exemption is to be computed on monthly basis. here’s a HRA tax calculator. Thus. HRA received p.m. city of residence and rent paid might also change. Taxes are determined based on your taxable income. So.
For example. the lowest tax slab rate is 10% and the highest is 30% (plus surcharge and education cess).760.g.000 taxable u/s 111A @ 15%).30. neither women nor senior-citizen) for the assessment year 2009-10 (PY 2008-09). Isn’t it revealing? Feel free to share it with others by writing in the comment box. reveals the average rate of tax for all your income (taxable as well as non-taxable). The effective tax rate refers to the actual rate of tax borne by you. not taxable) from income tax. Thus.16 per cent. There are different slab rates of tax applicable to individuals. 11. unlike corporate tax rates.99% and average rate of tax of 21. However. It is the average rate of tax which you actually pay on your total earnings / income (i. we arrive at an effective tax rate of 14.Your entire income doesn’t get taxed. you are entitled for various exemptions (e.. So.. . you need to consider your marginal tax rate. your total taxable income doesn’t get taxed at a flat rate. For example. HRA. marginal tax rates do not fully describe the impact of taxation. Let’s clarify the difference with the help of an example.e.e. both taxable plus non-taxable income). Effective Tax Rate Marginal tax rate is important because while making investment decisions. 2.6 lakh under various sections of income tax such as section 24(b) and section 80. Suppose that you’re having a total annual income of Rs 17 lakh out of which Rs 4 lakh is exempt (i. which is less than half of marginal tax rate and almost two-third of average tax rate (marginal tax rate of 33. Your ‘effective rate of tax’. if applicable and education cess). Further. Besides. finally calculate your effective tax rate.marginal or additional income is called marginal rate of tax and is the rate you pay on your last rupee of income. your taxable income comes to Rs. dividends etc) and deductions (such as section 80C and 80d) due to which your taxable income is much lower than your actual total earnings during a particular year. Marginal vs. short term capital gains under section 111A are taxed at a flat rate of 15% (plus surcharge. on the other hand. let’s say that you are entitled to deductions amounting to Rs 1. ‘Effective rate of tax’ is also different from ‘Average rate of tax’ which is average rate levied on your ‘Taxable Income’ and is calculated by dividing ‘total tax obligation’ with ‘Taxable income’. Two basic reasons for substantial difference between your marginal tax rate and your effective tax rate are: 1. It is obtained by dividing the total amount of tax paid by you by your total earnings expressed as a percentage and indicates your effective tax burden which is always lower than your maximum marginal rate. Now.e. Right now.4 lakh (which includes short term capital gains of Rs 2. Further. Furthermore. the total tax liability works out to be Rs 2. long term capital gains on sale of equity shares..12% ). there are certain other incomes which are taxed at concessional rate of tax. Based on the tax rates applicable to ‘other individual’ (i.40.
Can I take a loan to buy a plot of land? Yes. All about Section 80C . if you take a loan for construction. the tax benefits are available on both portions of the loan – the one to purchase the plot and the one taken to construct the house thereon. you can utilise the entire Rs 1. public provident fund. CEO. 2005 09:21 IST While we have often spoken about home loans.000 loan to construct. • 5 questions home loan seekers ask 3.00.000 (Rs 100. In such a case.Rs 40. You get no tax breaks if you take a loan to buy a plot of land.000 .000. 1. Will I get the applicable tax benefits? No. registration and transfer fees paid for the transfer of the plot title fall under this limit (as long as the transfer and registration amount is paid in the year in which the construction is completed). But. Now the total amount will be combined and you will get the tax benefit on the entire amount.00.000). The overall limit under Section 80C is Rs 1. pension plans -. Let's say you took a Rs 5. Section 80C The principal repayment you make on your home loan is eligible for income deduction under Section 80C.00. Harsh Roongta.000. Your taxable income drops to Rs 60. This will include certain investments -. Incidentally.00. if your house is self-occupied. There are no sub-limits within this section. you can. What will be the tax benefits for such loans and when will they be available? The tax deductions will be applicable only in the year in which the construction is completed.000. life insurance premium. The principal is the actual amount you borrow from the home loan company and does not include the interest payments.com. equity linked savings schemes of mutual funds. • Buying a home? Service tax will hit you 2. a number of our readers had queries on land loans. Let's say that your taxable income is Rs 100.000 and you repaid the home loan principal of Rs 40. Apnaloan. infrastructure bonds.000 exemption for home loan principal repayment deduction if you choose.provident fund.000 loan to buy a plot of land and a year later you took a Rs 3.and home loan principal repayment. • Section 24 Under Section 24. then you can get a tax break. clarifies your doubts on the tax impact of such loans.50. that means a loan to build a house on that plot of land.Tax benefits on a land loan Last updated on: July 29. the maximum amount of interest that can be deducted from your income is Rs 1.
• Joint home loans and tax benefits 4.As a result.000.000 (income) . Salary income: Rs 3. .00.000 This is subject to the fact that the construction of the house is completed within three years from the end of the financial year in which the first disbursement of the plot loan was taken. can I avail of the tax benefit on the loan for the plot of land too? The first tax benefits are available only in the year of completion of construction. 2000 Year in which the construction loan is first taken: April 2002 Construction completed on: April 2005 Here the tax benefits will first be available in respect of the financial year 2005-06. Let's take an example: Date on which the plot loan is bought: December 1999 End of that financial year: March 31. Will the loan for construction include the cost of all raw materials and labour? That is right.50.50. In that year.000 Interest payment on home loan: Rs 1. then the maximum limit for deduction is Rs 30. there is no maximum limit for this deduction and it also does not depend on the time taken for the construction to be completed.Rs 1.50. This deduction is available in respect of interest payable for the year in which the construction is completed and one-fifth of the interest payable prior to that year.000 Taxable income = Rs 3. If the time for construction exceeds that. If the house is given out on rent. your taxable income decreases by that amount. No tax benefits are available in respect of the principal paid back during the years in which the construction is not complete. • Can I take a home loan from my family? 5. After I commence construction.60.000 (maximum limit for interest on home loan) = Rs 2. Let's work it out. the accumulated interest (including interest on land loan as well as the construction loan) till the end of the previous year shall be taken together and one-fifth of this cumulated interest plus the interest payable for the specific year will be eligible for deduction.
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