Tag Archives: Tax exemption

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.

Joint Home Loans and Tax Benefits

If you have a dream of purchasing a home, but are worried about the Home Loan Amount, bank is going to sanction against your current income, relax… take a deep breathe and calm down. Usually, Banks do not allow a person to borrow to an extent where their monthly EMI(Equated Monthly Installments) payment exceeds more than 40-50% of their monthly income. If you are in a similar situation and your current income is not high enough to ensure the Required Home Loan Amount, there is a smart option that you can exercise. You can (and in fact should) go for a Joint Home Loan with your parents or spouse as co-borrower(s) of the property. With co-borrowers/co-applicants around, for Loan-Amount-Calculations,  Bank will take into account the income of all the applicants involved. Some banks even allow siblings as co-borrowers, so you may have to check with your bank, if you can have your brother as co-borrower.

But before you jump to a decision of taking Join Home Loan, it is certainly advisable to be aware of the Pros and Cons of taking a Joint Home Loan.

Pros:

  • If you need a higher loan amount but your salary is not enough to get required loan amount, Joint Home Loans is the way for you.
  • All co-applicants are eligible for getting tax rebates under Section 80 C for principal repayment(Subjected to a Maximum Amount of Rs 1 Lakh) and under Section 24 for Interest Repayment(Subjected to a Maximum Amount of Rs 1.5 Lakhs). So if a couple is taking a Joint Home Loan, in theory  they could collectively claim Tax Exemptions under Section 80 C for Principal Payment of Rs 2 Lakhs and under Section 24 for Interest Payment of Rs 3 lakhs. Though the Actual Tax Exemption depends solely on the Monthly EMI being paid.
  • Both the owners would have to show the Rental Income in Proportion of their ownership. So if your brother has a 40% stake in the house and you have 60%, for tax purposes, 40% of rental income from the house will be added to your brothers’ annual income for that financial year, while you will be responsible for rest 60% amount.

Cons:

  • In case of any dispute arising between the borrowers/owners, it could create problems, so you want to play safe, especially with your wife 😉 you should not go for it.

Apart from these, there are some important points which you need to keep in mind, before taking Joint Home Loans:

  • You should be a co-owner to enjoy tax benefits of a Joint Home Loan
  • A maximum of 6 co-applicants are allowed to be part of a Joint Home Loan.
  • You should be a co-applicant of the home loan to get tax benefits out of it.
  • Tax Benefit to individual borrowers  is available in proportion of the EMI paid by them. Say for example, you are paying 70% of the EMI and your wife is paying rest 30% , you will be able to claim tax-exemption only on your 70% payment. Similarly, your wife can also enjoy tax-benefits on her 30% payment.

So enjoy your dream house with your spouse as a Joint-Owner as well as Joint-Borrower 🙂

Good Things Bad Things Ugly Things Pros And Cons Summary Highlights About DTC(Direct Tax Code)

Starting with Financial Year 2011-2012, Indian Government is planning to abolish the existing Income-Tax Act 1961 and replace it with DTC (Direct Tax Code) . There are going to be wholesale changes in the way, taxes are being calculated and paid by organizations and individuals, including the existing Income Tax Slabs. In an Earlier Blog Post, we have already discussed these proposals for New Income-Tax-Slabs being introduced by DTC (DTC Tax Code). Let us turn to some of other highlights, especially the good things, bad things and ugly things and Pros and Cons of DTC (Direct Tax Code)

Good Things (Pros)

  1. Earlier, as per Income Tax Act 1961, most of the investments came under EEE(Exempt-Exempt-Exempt) Category. What that meant was the tax exemption is enjoyed at all the Three Stages – Investment, Accumulation and Withdrawal. All this is going to change, once DTC regime comes in place. As per DTC proposals, most of these investments (except few mentioned in the second paragraph) will now be considered under EET(Exempt-Exempt-Tax) Category. What is means is you will have to pay taxes on any money being withdrawn from these funds.
    Earlier it was supposed to cover most of the investment avenues like Life Insurance, Mutual Funds, Equity Linked Saving Schemes etc. But Thank God, our parliament members showed some sympathy and revised the rules on 15th June, 2010 to exclude some investments from EET category. Now Provident Funds (GPF, EPF and PPF), NPS (New Pension Scheme administered by PFRDA), Retirement Benefits (Gratuity, Leave Encashment etc), Pure Life Insurance  Products & Annuity Schemes will all continue to follow the EEE Regime.
  2. On top of existing Rs 1 lakh tax benefit, an extra Rs 50,000 has been added for Pure Life Insurance (Sum insured is atleast 20 times the premium paid), health insurance, mediclaims policies and tuition fees of children.
  3. Maximum limit for medical reimbursements has been increased to Rs 50,000 per year from current Rs 15,000 limit.
  4. Tax Exemption for interest-payment on housing loan for self-occupied property will remain the same i.e,  Rs 1.5 lakhs per year.
  5. For income/losses from housing property, deductions for Maintenance and Property Tax would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from tax.
  6. Tax exemption on Education Loan Payments to continue.
  7. Surcharge and Education cess are abolished.
  8. Corporate tax to be reduced from present 34% to 30 % including education cess and surcharge

Bad Things (Cons)

  1. No tax benefit on Principal Repayment on House Loan and Stamp Duty and Registration Charges on purchase of house property either.
  2. No tax benefit for LTA (Leave Travel Allowance)
  3. No tax benefits for investments made as part of Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term Deposits, NSC (National Savings Certificates), Long Term Infrastructures Bonds.
  4. All dividends will attract 5% tax.
  5. As per the existing laws, an NRI(Non Resident Indians) is liable to pay taxes on his or her global income, if he or she stays in India for a period more than 182 days in a financial year. But DTC is going to shorten this duration to just 60 days.

We can only hope that all the good things are implemented as part of DTC and bad ones, if not dropped altogether, will at least be made reasonable. So let’s keep our fingers crossed and wait for its final implementation 🙂

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