Tag Archives: Investment

What is Section 80C Deduction In Income Tax

Whenever we think of income tax, the first thing that immediately comes into our mind is how to save it !! One of the best options for Saving Income Taxes comes under Section 80C.

What Is Section 80C?
It is an investment option to save the tax. Government has specially promoted it for long term savings.

Limit:
The maximum limit of Rs 1 lac can be deducted from your income under Section 80C. However, there is a provision for additional Rs 20,000, solely reserved for Infrastructure Bonds. In this way if you are in highest tax bracket of 30% and you have invested upto Rs 1 lac under section 80C then you are saving Rs 30,000. For example if your salary is Rs 16 lacs per annum but you are investing Rs 1 lac in 80C then your taxable income will be Rs 15 lacs only. Even if you invest more than 1 lac in 80C, you can show only 1 lac as investment in 80C .

Investment:
Following investment options are eligible for Section 80C deduction.

Market Linked:

Fixed Income:

  • Provident Fund (PF) & Voluntary Provident Fund (VPF)
  • National Savings Certificate (NSC)
  • Infrastructure Bonds
  • Public Provident Fund (PPF)
  • 5-Yr bank fixed deposits (FDs)
  • Pension Funds – Section 80CCC
  • Senior Citizen Savings Scheme 2004 (SCSS)
  • 5-Yr post office time deposit (POTD) scheme
  • NABARD rural bonds

Others:

  • Life Insurance Premiums
  • Home Loan Principal Repayment
  • Stamp Duty and Registration Charges for a home
  • Children’s tuition fees.

Sample Calculation:

Example 1
If your Taxable Income is Rs.700000 and your yearly home loans principal repayment is Rs.40000 and you don’t have any other investments, then your Taxable Income for that financial year is Rs.700000 – Rs.40000 = Rs.660000.

Example 2
If your Taxable Income is Rs.700000 and your yearly home loans principal repayment is Rs.100000, then your Taxable Income is Rs.700000 – Rs.100000 = Rs.600000.

Example 3
If your Taxable Income is Rs.500000 and your yearly home loans principal repayment is Rs.140000, then your Taxable Income is Rs.500000 – Rs.100000 = Rs.400000. Because you can exempt maximum of one lac under this section.

So the overall conclusion is the main purpose of 80C is to encourage everybody for long term investment.But there are number of investment options under 80C so we should select the investment options very carefully. Like for younger age person, we should invest more in Market Linked Investment Avenues because by taking risk we can earn much money. On the other hand, for old aged person we should invest more in Fixed Income Investment where there is little risk.

Advertisements

SIP(Systematic Investment Plan)

Do you want to invest money on regularly basis in stock market but don’t have meaning of even a single word of dictionary named stock market.Then be happy you have an option that is SIP. It’s same like recurring deposit in which we invest a fixed amount at regular interval usually monthly or quarterly,but difference is only one that in SIP your money is invested in mutual fund.

By knowing that your money is going to be invested  in stock market,some investors may jittery about it because of recent financial crisis.But don’t worry if you are going for long term SIP investment,in any case you will get decent returns.

For Example:
Suppose Ram has decided to invest Rs. 1000 per year  in SIP just before market crash.At that time assume that the NAV(Net Asset Value , or the price of one unit of a fund) was Rs.10 . Now after four years of seeing a continuous market  fall lets assume that NAV has regained its past level of Rs 10. A stock market investor who has invested Rs 1000 in stock market will never be happy to see that his investment has not appreciated in last 4 years.

2006 2007 2008 2009 2010
Amount Invested Rs1000 Rs1000 Rs1000 Rs1000 Rs1000
NAV (Rs) Rs10 Rs8 Rs9 Rs7 Rs10
Units (Nos) 100 125 111 143 100

But now,what about SIP investor:

  • Total units purchased in 5 years (2006 to 2010) = 579
  • Present NAV = Rs.10
  • Present Value of Investment = Rs.5790
  • Input of Investment = Rs.5000
  • Profit = Rs.790(15.8%)

As aforementioned , even in market crash situation investor got profit of 15.8%.Then you can imagine for good market:).

Payment mode:

  • debited directly from your account.
  • post-dated cheques.

Hidden charges:

  • Entry load:It is a percentage of the amount you are investing but a number of mutual funds do not charge it.
  • Exit load:It is same as an entry load, except this is charged when you sell your units.It is charged if you are selling your units within a year.

Thus SIP is a good investment for long runs at least 5 years by which you are also developing saving habits and without realizing you are accumulating a great wealth. Last but not the least be sure that you can  shift from stock market to money market on short notice by which you can get benefit of booming market.

PF Vs PPF Difference Between PF(Provident Fund) and PPF(Public Provident Fund)

Earning the money is one thing, to invest the money on right things is quite another. In fact, Investing money is more important than Earning. So if you have started to earn the money, you should know that what is difference between PF (Provident Fund)/EPF (Employee Provident Fund) and PPF (Public Provident Fund).

What is PF/EPF and PPF:
EPF(Employee Provident Fund)
,as its name suggests, is available to salaried employees and is a retirement benefit scheme. Whereas in PPF ( Public Provident Fund) You need not be a salaried individual.

Amount You Can Deposit :
For PF(Provident Fund), the amount is decided by the government. At present it is 12% of  an employee’s basic salary. However, if he wants to, an employee can contribute more than the stipulated amount. You can open a PPF (Public Provident Fund) account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain selected post offices. The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.

ROI (Returns On Investment):
Government body decides how much return is on offer for both these funds. For financial year 2010-2011 EPF interest rate has been announced at 9.5% annum, whereas for PPF it has been kept little less at 8 %.

How long is my money blocked?

     

  • PF (Provident Fund): The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs. In case of the death of the employee, the accumulated balance is paid to the legal heir.
  • PPF (Public Provident Fund): The accumulated sum is repayable after 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account. It can be extended for a period of five years after that.

What is the Tax Impact ??
The amount you invest in both PF and PPF is eligible for deduction under the Rs 1,00,000 limit of Section 80C. In PF If you withdraw it before completion of five years, it is taxed whereas in PPF you pay absolutely no tax on maturity.

What if you need the money?
EPF as well as PPF  both have Premature Withdrawal and Loan Facilities available. In EPF, Premature Withdrawal is allowed only for your Daughter’s Wedding (not son or not even yours) or only if you are Buying a Home. For PPF, we can take a loan on the PPF from the third year of opening your account onwards up to the sixth year, whereas we can make complete withdrawals after it completes six years of maturity.

The reason we discussed this at length was to know the answer to a straight forward question : that is which one is better PF or PPF ?? In my opinion, PF is definitely better than PPF because in the case of PF, the employer also contributes to the fund. On the other hand there is no such contribution happening in case of PPF. The rate of interest on PF is also higher (currently 9.50%) than interest on PPF (8%). But the flip-side is, you have a longer lick-in period for your funds. So there are Pros, there are Cons. You choose, what is the best for you, after all its your own hard-earned money, isn’t it 😉

Tax Benefit On Home Loans And Economics Of Purchasing Second House

All of us have a dream of owning  a house, no matter how small or big it may be. But one should not think of purchasing a house being just an emotional decision, in reality, it is one of the safest bet for your investments and a very good avenue for reducing income tax liability. Under the Income Tax Act, 1961 All Resident Indians are eligible for certain tax benefits on some portion of principal and interest components of their Home Loans.

There are two ways, in which you will be benefited, when you purchase a house and take a home loan. First one being Tax Exemptions and second one being the Usually High-Returns on your Investment made against your house, simply because of ever-rising property prices. With the recession all but over, housing sector is going to witness yet another boom. So if you have not bought a house yet, this could very well be your shot at redemption 🙂

Tax Benefits on First Home Loan:

If you purchase your first house, by-default it is taken as self-occupied. You will enjoy tax-exemptions via following two ways

  • Up to Rs 1 Lakh for Principal Repayment that can be claimed under section 80 C
  • Up to Rs. 1.5 Lakh on Interest Repayment, that will be deducted from your taxable income under Section 24.

Interest repayment comes under the heading of ‘Income From House Property‘ and is taken as a loss or negative amount.

Tax Benefit On Second Home Loan:

If your disposable income is high enough to afford a second home, then you can enjoy even more tax-benefits than the one you did on your first home !! Even though, you may already have a home loan running, banks are generally more than willing to finance your second house as well, provided your income is high enough to convince them about your loan-repayment-capability. Most of the people either let out their second home for rental income or make it the place for other family members.

Second house is not taken as a self-occupied house and you have to pay taxes for rental income from it. This income is calculated after deducting up to 30% on maintenance expenses and property taxes. You will again enjoy tax-exemptions via following two ways

  • Up to 1 Lakh for Principal Repayment under section 80 C
  • Unlimited Exemption on Interest Repayment, albeit with a difference. Loss from house property is calculated as Annual Interest Repayments minus the Adjusted Rental Income and this differential amount is  eligible for tax-benefits.

As you can see, there are more tax-incentives in store, when you go about buying the second house. But you should have enough money in order to afford a second home. Apart from owning a second house and earning a rental income, you also get more and more tax-exemptions. Now this is what we call Sone Pe Suhaga 🙂 Isn’t it ??

So…..when are you planning to buy a house ?? your first one, may be your second one 😉

Save Taxes and Get Decent Returns by Investing in Infrastructure Bonds

Did you know that by investing in Infrastructure Bonds, you could save taxes up to 6000 Rs and get an annual return of nearly 8% on your investments !! Last year, Government had announced a new income tax section 80CCF, which allows tax exemptions on investments made in infrastructure bonds. This is over and above the Rs 1,00,000 limit allowed via Sections 80C ,80CC and 80CCD. The limit on such investments has been kept to Rs 20,000.

So, if you are an individual having an income in the 30% tax bracket(taxable income more than 8 Lakhs), you can save Rs 6,000 of tax. For people belonging to 10% tax bracket(income between Rs 1.6 to 5 lakh), this figure would be 2060 Rs, while for those falling in 20% tax bracket(income between Rs 5 to 8 lakh), tax savings will be Rs 4000.But its not without clauses, though. A 5-year lock-in period for your investment is compulsory to avail tax benefits. But the good thing is, you will be getting about 8% returns, compounded annually, on your investments. If you want to, you can also choose to lock your investments for a period of 10 years and you will be getting an additional close to 2%  annual returns, effectively a ~10% return, on your money.

But again, all this makes sense, only when you have exhausted your 1,00,000 investment limit underneath 80C* sections. But given that 80c* includes Provident Funds, Housing Loan Principle Pre-Payments and various other  common categories, its not unusual for most of us(especially in higher income brackets) to hit the Rs 1,00,000 limit. So if you are looking for long term investments promising decent returns and offering tax-benefits at the same time, Infrastructure Bonds could be the right investment avenue for you.

Invest it, forget about it, claim tax exemptions of up to 6000 Rs, sleep for 5(or 10) years and get about 8%(or 10%, if invested for 10 years) returns, compounded annually, on its maturity. Now is not that cool ??

At present, IFCI Tax Saving Long Term Infrastructure Bonds are available for purchase till 12th Jan 2011. More details can be found at their website http://www.ifciltd.com/IFCIBonds/InfrastructureBonds/CurrentIssue/tabid/218/Default.aspx

How To Save Your Money Wisely For Future : Money Saving Tips

Irrespective of whether you presently have money or not, I am sure you always dream of having a bunch of them at some point in your life. Somebody famously said “Money saved is money earned”, so the most important thing is one should always save money at regular time interval. No matter, how much you earn, you could be earning lakhs of them or may be thousands or even hundreds, what matters at the end of the day is how much you are able to save out of your earnings.

Now that you have saved some money, the next step is where should you invest the money? Do you think making good investments need a great mind ? Not really,the important thing is to control the greediness and fear, while taking decisions.  If you show a little bit of interest, it should not take you more than couple of days or even hours to understand the fundamentals behind sound investing. Don’t ever think that investment needs a bulk of money. Lot of us have this misconception and think of investing only when they have loads of cash. You don’t need to wait till then, you can start right away by saving small amount every month. In a few years time, you will realize the importance of these small savings. This money will help you during problematic times, when you will really need it.

Now just by saving, you will not become a millionaire. If you become one, you will be the first one ever, as no one else has done so before 🙂 So you need to invest your money judiciously at right places. I will be covering the various investment avenues  in my next blog post. Watch out this blog for more updates !!