In the previous article some of the Tax Saving Schemes under Section 80C were discussed. This concluding part in the series will look at the rest of them.
Repayment of Housing Loan
The EMI that you pay every month to repay your home loan consists of two components — one is the principal and the other is the interest. The principal component of the EMI qualifies for deduction under Sec 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 tax 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.
Equity Linked Savings Scheme (ELSS) of Mutual Funds
The advantage with ELSS is that the lock-in period is only for three years while for NSC it is six years and for PPF it is 15 years.
The last five years’ return from ELSS has been in the range of 23 to 25 per cent compounded annually compared to eight per cent in NSC and PPF. The limitations in ELSS are that premature withdrawal is not allowed and the risk factor is high when compared with the NSC and PPF.
Infrastructure Bonds
Deduction will be available for all taxpayers who invest up to Rs 20,000/- in long-term infrastructure bo-nds as announced in the Bu-dget 2010-11. This amount is over and above the Rs 1 lakh 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 six to eight per cent 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 three to five 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. 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 1 lakh. This also means that your investment in pension funds up to Rs 1 lakh 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, IRDA has come out with a clear rule that maturity amount should not be withdrawn as cash this is coming to effect from 1st July 2010. As of now the maturity can be withdrawn as cash but the amount will be added to income and will be taxed accordingly.
Five Year Tax Saving Bank Deposit
A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above. Investor gets a lump sum (principal + interest) at the maturity of the deposit.
The 5 Year Tax Saving Bank Deposit gives tax benefit under Section 80C. The typical interest rate is eight per cent with an additional 0.25 to 0.5 per cent for senior citizens.
The interest rate varies between banks and with time. So one needs to check between several banks to get a better offer. But once the deposit is made the rate remains constant for the five years. This is a limitation for the tax saver.
The new direct tax code will shift India to the Exempt-Exempt-tax regime from the Exempt-Exempt-Exempt regime. This being the last year before the implementation of the EET system, tax savers have to be careful in the choice for their tax saving investments.
The writer is CEO of bankbazaar.com. He can be contacted at adhil.shetty@
bankbazaar.com