“Paying tax often pinches an investor’s pocket but no tax planning creates a further hole in the pocket!”

Search hits for tax oriented article around the financial year end normally resemble the Sensex graph from 8000 to 21000 levels; the reverse is true at other times of the year. It’s time investors understand that being aware of and planning taxes is the smarter and surer way to save money.

In this article we try to focus on the various tax benefits available under Sec 80C, 80CCF, 80D, 80G and 80E.

Sec 80C: Deduction in respect of Life insurance premium, contribution to PPF, principal repayment on home loan, etc.

You are entitled to a tax benefit provided you make investments in certain instruments which are eligible for deduction under Sec 80C of the Income Tax Act, 1961, with the maximum total exemption being Rs. 1, 00,000. That is, if your income is 5,00,000 you can claim tax exemption up to 1,00,000 which leaves you with a taxable income of 4,00,000.

Following are a few options that permit this exemption:

Sec 80CCF: Deduction in respect of subscription to long term infrastructure bonds

Sec 80D: Medical Insurance Premium

Premium paid for medical insurance up to Rs. 15000 is eligible for deduction under Sec 80D; incase of senior citizens the limit is extended to Rs. 20,000.
The following table summarizes the provision:

Sec 80E: Deduction in respect of interest on loan for higher education

Sec 80G: Donations to certain funds/ charitable institutions

Donations, charity need not necessarily be one-way traffic but could result in a win-win situation for both parties. To simplify it further, donations made to certain funds or charitable institutions are eligible for deduction under Sec 80G of the Income Tax Act, 1961. So while the receiving party benefits with the donation, you receive tax benefits arising from the deduction.
Institutions eligible for deduction under this section are categorized in three segments based on the amount of deduction allowed. The three segments have:

1. 100% deduction allowed without any limit

2. 50% deduction allowed without any limit

3. a.) 100% deduction allowed of restricted amount

b.) 50% deduction allowed of restricted amount

Where restricted amount is 10% of the adjusted total income

llustration: Mr. A an individual has total income for a year amounting to Rs. 4, 00,000. He makes a donation of Rs. 1, 50,000 to an approved charitable institution. Depending on the institution he invests in, we have 4 different scenarios that explain the benefits arising in each case.

Note: Education cess has not been calculated

To know more about the list of institutions, Click here

In a Nut shell

Let’s understand these deductions and its impact on your tax liability by way of the following illustration:
Mr. X and Mr. Y have total income for a year amounting to Rs. 5, 00,000 each.

The illustration above clearly states the benefits enjoyed by an investor taking advantage of the various deductions available in a planned manner.

Conclusion:

To reiterate, an investor needs to consider his overall investment objective rather than frantically making investments with the sole purpose of saving tax. The idea is not just to throw light upon these deductions but also to explain the underlying concept of tax planning. Hope this provides you a leg-up in your tax saving investments.

Tax slabs for your reference: