Get to know the details about Tax Savings under section 80C
People often try to save tax by using section 80C. Section 80C provides various ways to save taxes. But before you try to save tax by section 80C, you must know 80C deeply. It is important to know the section in detail so that you can make the best use of the options available for the exemption you would get under Income Tax Act. Before knowing the section in detail you must know about Taxes. A tax is a financial charge that a taxpayer has to pay to the state or an equivalent body to fund various public expenditures that are to me handled by the state or the equivalent body for the betterment of the people of the country as a whole. According to the law, it is a crime to evade or resist paying taxes.
Purpose of collecting taxes:
The main purpose of collecting taxes by the government is to raise funds in order to meet the public expenditures. Tax is revenue earned by the government. Funds being raised by the government is utilised towards expenditures on economic infrastructure which includes construction of roads, providing sanitation facilities, expenditures on public transport, expenditure on public safety, providing education to increase literacy rate, and much more.
There are a variety of taxes that are imposed by the government. Different slabs are made through which the distribution of taxes is done amongst the masses and the burden of paying tax is divided accordingly. Besides imposing these taxes the government is also required to distribute this burden of tax and it is also responsible for collection & utilisation of taxes.
“Income Tax Slabs for the FY year 2015-2016”
INCOME RANGING BETWEEN
GENERAL
(non senior citizen category)
WOMEN
(below 60 years of age)
SENIOR CITIZENS
(Men and Women above the age of 60)
VERY SENIOR CITIZENS
(Men and Women above the age of 80 years)
For income Upto Rs 2,50,000
No Tax
No Tax
No Tax
No Tax
For income ranging between Rs 2,50,001-Rs 3,00,000
10%
10%
No Tax
No Tax
Rs 3,00,001- Rs 5,00,000
10%
10%
10%
No tax
Rs 5,00,000- Rs 10,00,000
20%
20%
20%
20%
Above Rs 10,00,000
(Surcharge@12% above Rs 1 crores)
30%
30%
30%
30%
Note: A tax rebate of Rs 2,000 from the amount that has been calculated for tax can be availed by people having annual income upto Rs 5 lakh. Certainly, if the person crosses the slab of Rs 5 lakh, he/she will not be able to avail this benefit.
The education cess continues @ 3%.
Mistakes committed by common people
People tend to make the same mistakes every year by evading taxes as they do not know about the various schemes that can help them save the tax they have to pay. It’s sad for everyone to pay taxes as they work so hard to earn that money, but they just need to know that certain deductions just don’t really add up. People have certain assumptions of their own like, college students don’t have to pay tax, well that is surely a myth because college students do have to pay taxes, they are liable to pay taxes just like everyone else no matter even if their parents claim them dependent. There are a certain criteria like if a college student is earning $5500 they could still end up owing taxes. Another assumption that people make is that when they are of 55 years or above, then they can sell their house tax free. Well that is surely not going to happen. At any age, if you have that house as principle house for 2 years out of total 5 years only then you can exclude the amount while calculating tax. For businesses there used to be a time when the owners of businesses could get a tax deduction on their sales tax that they paid for personal use. But now-a-days owners adjust the cost of production in the prices of the product and similarly the sales tax that is paid on the product can be deducted too. Therefore, different states provide different tax deductions that can be taken off.
It would be strange for people to know that Income tax deductions are available since there are Income taxes in the country. We used to have a federal tax form through which one could get tax deductions. Earlier, federal tax payers use to write off expenses being made for the business, they were allowed to write off local taxes, they were also allowed to write off terrible losses for they did not have insurance for, they could write off unrecoverable debts and depreciation on assets. The income deductions are the same today but in different forms or shapes. The deductions that the government allows for personal payment of interest is only on home mortgage. This deduction is the most profitable deductions that a person makes from the taxes they pay for. Another profitable deduction is related to depreciation. This deduction is actually the loss in the value of assets due to wear & tear or becoming obsolete. So every year a certain amount is deducted from asset depending upon the method used. The deductions are just the same as they were a thousand years ago it’s just that the rules have been changed and made much strict.
Ways by which you can maximize your Tax deductions:
As the time comes closer to pay taxes, people start struggling to find different ways to save taxes. So now let us discuss a few ways by which you can increase your tax deductions:
Education: There are a number of benefits that you can avail to help you manage the cost of higher education by on the other side reducing the amount of tax that you have to pay on the income being earned by you. There are various educational credits available through which one can maximize the deductions. For dependents tuition is not included in deductibles, but expenses like after-school care expenses along with a few other types of expenses are included in deductibles. All you have to do is consult your tax preparer take advice from him and give him all the necessary details that he requires.
Scheduled Deductions: There is a list of scheduled deductions that you must ask your tax preparer to advice you for. These scheduled deductions include; Medical expenses, charitable contributions being made by you, Mortgage interests being paid by you, Real estate property taxes applicable on residences which are not being used for business or rental purpose, Sales tax that you are paying on retail purchases, By filling a form you can avail the benefits for the expenses you incurred during your job as an employee, fee paid by you for preparation of tax and interests relating to money borrowed for a property which is held for investment. So with no doubts, it is clear that these scheduled deductions are worth it.
Other Scheduled Deductions: There are various other scheduled deductions which can help you increase your tax deductions. These deductions are as follows: Advertising expenses can be written off, property taxes being paid, expenditure on utilities can be written off, Mortgage interests if being paid can be written off, Commissions, fee being paid for legal work and other professional work, expenses for cleaning and maintenance can be written off, management fee if any is included in the scheduled deductions, any kind of repairs being made, payments being made to suppliers and other interests are also included in the scheduled deductions.
Further we will discuss about the Deductions under Section 80C.
Deductions under Section 80C
Section 80C replaced Section 88 and since then it is being followed effectively. Section 80C replaced this section in the year 2005-06. Section 80C gives a deduction of upto Rs 1, 50,000 which is allowed from the amount that is taxable in respect of the investment made in specific schemes listed below. In simple terms you can reduce up to Rs 1, 50,000 from the total amount that is taxable through section 80C. The schemes do not vary from the ones which were listed under section 88 the only difference is that there are no sectoral caps and individuals have an opportunity to save in the various schemes. Now let us make it more clearly understandable as to what investments are available under section 80C in order to save you tax. The table below will make it much easier for you to analyse all the benefits and options available: w.e.f FY 2016-17
SAVING SCHEMES
SECTION
80C
RETURN TILL MAR 31, 2016
RETURN FROM APR 1, 2016
TAX BENEFITS
LOCK IN PERIOD AND OTHER REMARKS
National Savings Certificates-(NSC Scheme)
80C
8.50% for VIII Series 5 year NSC’s;
8.80% for 10 years NSC’s
8.10% for VIII Series 5 year NSC’s (eliminated for 10 years)
Taxable
5 years.
Equity Linked Saving Schemes(ELSS)
80C
Different in every year (Market Linked)
Different in every year (Market Linked)
Tax free dividend
3 years
Life Insurance Policies
80C
Different in every year
Different in every year
Differs as per scheme
Differs as per scheme
Unit Linked Insurance Plans (ULIP)
80C
Different in every year
Different in every year
Differs as per scheme
Differs as per scheme
Contribution towards EPF/ GPF and voluntary PF
80C
8.75% on EPF
8.8% on EPF
Interest earned is tax free
Till retirement (loans are permitted after 5 years only)
Other Insurance Policies
80C
6%-7%
6%-7%
Earnings are tax free in most of the cases
No withdrawal will be allowed until maturity
ULIPS(market linked)
80C
Depends on the market condition
Depends on the market condition
Earnings are tax free
Partial withdrawal facility available
Public Provident Funds (PPF)
80C
8.70%
8.10%
Earned interest is tax free
15 years and extendable withdrawals allowed after 7 years. The yield on PPF will vary and will be fixed at 25 basis point above the 10 year govt. bonds
NPS (market linked)
80C
Depends on the market condition
Depends on the market condition
Interest is tax free
Withdrawal not allowed before maturity date.
Tuition fees including school fees and college fees paid for full time education of any two children of the payer.
80C
NA
NA
NA
NA
Principal repayment of Housing Loan
80C
NA
NA
NA
NA
Bank Tax Saving Fixed Deposit (5 year scheme)
80C
Varies from bank to bank (7.50%-8.75%)
Varies from bank to bank (7%-8%)
Taxable
5 years
Senior Citizen Saving Scheme
80C
9.30%
8.60%
Taxable
As per the guidelines issued in Dec 2011, 100 basis points will be spread above the 5 year bonds yields for this scheme.
Post Office Time Deposit Scheme
80C
8.50% for a term deposit of 5 years
7.90% for a time deposit of 5 years
Taxable
-
Note: It is important to bring into notice that now some of the above listed schemes (like PPF and 5 year Senior Citizen Schemes etc.) are linked to the benchmark of 10-5 year govt. Bond yields. And thus it is seen that the return on these investments will change according to the change in yields from government bonds. This means you will not have fixed returns on the investments that you make. Also, there are some other small saving schemes through which you can get same returns.
As we can clearly see that there are various ways with the help of which we can save tax, then why to commit a crime by evading taxes? Section 80C offers a wide investment schemes in which you can save taxes upto Rs 1, 50,000 from the amount that has to be paid as tax. For further assistance you can always contact a Charted Accountant and get to know as to which would be the best tax saver scheme in which you can invest. We hope the above listed investment schemes will be profitable for you. The more income you earn, the more tax is to be paid by you. Go for investment schemes that are perfect for you & file your returns as it is beneficial for every individual.
(Author is a Chartered Accountant with more than 3 years of experience and has been teaching ACCA from past one year. Apart from this, she is also a professional writer and writing articles in different niche’s for her clients since last 1 year. She have good command of English which helps her to write unique and engaging articles)
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