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How to pay LESS tax

By Shobhana Subramanian
February 22, 2006 09:47 IST
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After having worked so hard the whole year round, you surely don't want the government to get more than its fair share of your earnings, right? So take some time off to figure out how you can keep most of what you've made.

As an individual taxpayer, Section 80C of the Income Act allows you a deduction of Rs 1 lakh (Rs 100,000) from your "income" figure, provided the money is put into specified investments or used for some specific purpose.

So, if you pay tax at the highest rate of 33.6 per cent, you could save as much as Rs 33,600 of your liability if you put in a sum of Rs 1 lakh.

You have flexibility too. You can put all your money into a single option; you could claim your entire tax break by paying the principal on your home loan, for example. As you can for your children's school fees, likely to be no less steep.

If you're a salaried employee, your contribution to the Provident Fund (PF) can be part of this amount. So, for instance, if you make a contribution of Rs 2,500 per month, the total annual deduction would be Rs 30,000.

Try any of these to reduce your tax burden

Section 80C




Employee contribution to PF


Till you retire

Life insurance premium

Not fixed

As preferred

Public Provident und (ceiling Rs 70,000)

8%, interest exempt

15 years plus five

Equity Linked Saving Scheme

No fixed return

Three-year lock-in

Principal on Housing Loan

Not applicable


Tuition fees for 2 children



Pension Fund of a mutual fund

No fixed return

Lock-in of three years

National Savings Certificate

8%, interest taxable

Six years

Annuity Plan for insurance

Not fixed

As preferred

Infrastructure bonds (ICICI, IDBI, etc)

Approx 5%, interest taxable

Approx. 3-5 years

Or you could buy a life insurance policy, the premium on which would qualify for deduction. A life insurance policy is a must, by the way, especially if you have a home loan to pay off.

Also, with the tax benefits of a home loan, there has never been a better time to buy a house. Section 80C allows you a deduction of the principal paid, up to Rs 1 lakh every year. (The interest component of Rs 1,50,000, of course, is eligible for a deduction from your income).

In addition, you could save money via a Public Provident Fund (PPF) account, which fetches you a neat 8 per cent per annum by way of interest, though the maximum amount that you can put into a PPF account annually is Rs 70,000.

The disadvantages of a PPF account are that the interest rate could be brought down and the government has been toying with the idea of taxing the interest earned on withdrawal (which would turn PPF into an unattractive investment, taken together with the somewhat stiff lock-in provisions).

But if you simply leave money lying in a bank fixed deposit, the interest you earn will be taxed. It makes sense, thus, to look for smarter alternatives. If you are not too risk averse, try out an Equity Linked Savings Scheme (ELSS).

Remember that you are getting more than a 33-per cent return upfront (if you pay your taxes at that rate), and equities do perform better than most asset classes in the long term.

The government also encourages you to contribute to a pension plan of an insurance company -- you are allowed a deduction of a maximum Rs 10,000 under section 80CCC.

However, if you are claiming a deduction under Section 80CCC, then the deduction under section 80C stands reduced to Rs 90,000.

In other words, the aggregate investments under Sections 80C and 80CCC cannot exceed Rs 1 lakh for a tax break. Do note that in a pension scheme, both the principal and the interest are taxed on maturity.

There's also a tax break on medical insurance under Section 80D. Here again, you can get a deduction of upto Rs 10,000 on the premium paid. After all this, if you still have money left, spend it!

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Shobhana Subramanian
Source: source