Friday, 10 February 2012

How to avail income tax exemption under 80C wisely

As an income tax payer you are aware that you can avail personal income tax exemption up to Rs. 100000 of your income under section 80 C of income tax act. If you plan wisely you can reach this income tax exemption limits easily. Under Section 80C you can save a tax of Rs. 10300 in 10% tax slab, Rs. 20600 in 20% tax slab and Rs. 30900 in 30% tax slab including Education Cess of 3%.  According to the priority of payment, exemption in income tax under section 80C can classified in to three categories. (1) Unavoidable payments, (2) short term tax saving investments and (3) long term tax saving investments.

Unavoidable Payments: First priority of payments for personal income tax exemption under section 80 C must be your unavoidable payments. These are investment in

Employees Provident Fund,

Tuition fee of your children,

Repayment of housing loan (principal amount) and

Life insurance premium.

These payments are compulsory payments and normally, you cannot escape from them. But you can use these payments to cover your income tax exemption limits of Rs. 100000 under section 80C

Short term tax saving investments: Some short term investments also help you to get exemption in income tax under section 80C. If the abovementioned unavoidable payments do not cover your income tax exemption limits you can go for short term tax saving investments for your personal income tax exemption. These short term investments are

ELSS (Equity Linked Saving Schemes or Tax saving mutual funds) and some

ULIPs (Unit Linked Insurance Plans).

These investment plans allow exemption in income tax and at the same time it allows a lock in period of 3 years. You can withdraw money after three years as per your needs and financial goals. But these investments have market risks and you should check whether these investment plans are as per your risk bearing capacity.

List of Tax Saving Mutual Funds (ELSS)

Long term tax saving investments: These investments also allow you exemption in income tax under section 80C. If the abovementioned personal income tax exemption instruments do not cover the income tax exemption limits of Rs. 100000 under section 80C or you are not ready to bear the market risk of short term tax saving investments, you can choose long term tax saving investments which has a secure and safe nature. Those are

NSC (National Saving Certificates) with 5 years lock in period,

Tax Saving Fixed Deposits – Lock in period 5 years,

Senior Citizen Saving Scheme (SCSS) – 5 years,

PPF or Public Provident Fund (15 years – but can make conditional withdrawals after 6 years),

Infra Structure Bonds (5 years lock in period, but gives an additional exemption of Rs. 20000 also under section 80CCF) and

NABARD bonds (5 years).

You can go for any of these tax saving plans for getting exemption in income tax as per your priority, risk bearing capacity and financial goals. Out of the above long term tax saving schemes, PPF is ideal as a personal income tax exemption instrument. Whatever may be your tax saving plans, you should cover your income tax exemption limits under section 80 C every year so that you can save tax and also create an investment habit.

More benefits for NSC, PPF & Small Saving investments

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