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Well friends the goal of tax planning is to arrange your financial affairs so as to
minimize your taxes.
It's best to start your tax planning in the beginning of the year to help you
systematically grow your savings coupled with the added benefit of tax saving
realised at the end of the financial year.
The most popular tax saving schemes fall under Section 80C of the Income
Tax Act. Under this section, this year too a deduction of up to Rs 100,000 is
allowed from taxable income in respect of investments made in some specified
schemes.
Meanwhile, let's focus on this year and see how you can make the best of
Section 80C
Eligible schemes under section 80C for 2010-2011
The Specified Investment Schemes u/s 80C and u/s 80CCC are:
1. Life Insurance Premiums
8. Tuition Fees including admission fees or college fees paid for full-time
education of any two children of the tax payer.
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Tax Planning
11. Fixed Deposit with Banks having a lock-in period of five years.
This article will discuss the details of all the above plans.
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Tax Planning
EPF is automatically deducted from your salary. Both you and your employer
contribute to it. While employer's contribution is exempt from tax, your
contribution (i.e., employee's contribution) is counted towards section 80C
investments.
You also have the option to contribute additional amounts through voluntary
contributions (VPF).
Current rate of interest is 8.5% per annum (p.a.) and is tax-free. Also, apart
from saving tax now, it builds a long term, tax-free retirement corpus for you.
The EPF is fully exempted at all stages -- investment, growth and withdrawal,
but from April 2011 it might be taxed at the time of withdrawal.
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Tax Planning
The interest accrued every year is liable to tax (i.e., to be included in your
taxable income) but the interest is also deemed to be reinvested and thus
eligible for section 80C deduction.
An advantage of the NSC is that it can be pledged as security against a loan to
banks/ government institutions. The minimum investment starts from Rs 100
and there is no maximum limit for the investment.
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Tax Planning
80C. Even the interest component can save you significant income tax -- but
that would be under Section 24 of the Income Tax Act.
Currently, anybody with a housing loan gets a deduction up to Rs 150,000, paid
as interest for the loan, from his total income.
The Direct Taxes Code proposal relating to housing loans, if implemented, will
deal a severe blow to home loan customers. This is because after April 1, 2011,
the tax benefit that a customer receives due to the deduction in his income for
the interest paid on his housing loan will be abolished.
Infrastructure bonds
Deduction will be available for all taxpayers who invest up to Rs 20,000 in
long-term infrastructure bonds as announced in the Budget 2010-11. This
amount is over and above the Rs 100,000 limit under section 80C.
The returns that these bonds will give are not clear at present, as they have not
been in the market for the past five years.
However, returns in the range of 6 to 8% can be expected. You can expect
these bonds to be in the market during the tax saving season -- December 2010
to March 2011. Typically these bonds will have a lock-in period of 3 to 5 years
Pension plans
Today pension plans are available with all life insurance companies. They
typically come without any life cover (zero death benefit).
Pension funds are exempted under Section 80CCC, this section stipulates that
an investment in pension funds is eligible for deduction from the income.
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Tax Planning
Section 80CCC investment limit is clubbed with the limit of Section 80C which
means that the total deduction available for 80CCC and 80C is Rs 100,000. T
his also means that your investment in pension funds up to Rs 100,000 can be
claimed as deduction u/s 80CCC.
Of the maturity amount only one-third can be commuted in cash as tax free
maturity. The rest of the amount (or the full amount as the case may be) has to
be used to by a pension plan (annuity).
Recently, the Insurance Regulatory and Development Authority (IRDA) has
come out with a clear rule that maturity amount should not be withdrawn as
cash this is coming to effect from July 1, 2010.
Currently, the maturity amount can be withdrawn as cash but the amount will
be added to income and will be taxed accordingly.