Tax havens

Sections in the Income Tax Act that give good benefits.

With the financial year coming to an end, taxpayers would be scrambling to invest to get maximum benefits. However, before rushing to do so, they should be aware of all the sections that allow advantages. Here's some help.

Section 80C
The most important section that saves you a lakh every year. Ideally, the right time to invest in instruments under this section is the first week of April and, not February 2009 or March 2009. There are several reasons for this. The most vital being, the interest that will be earned on returns on the investment for the entire year and yet, tax saving will occur on the entire amount.

For example, if a taxpayer had invested Rs 70,000 in his public provident fund (PPF) before April 5, he would earn 8 per cent tax-free interest of Rs 5,600 for the entire 2009. If the same money is invested in the last week of March, there would be no income for the financial year 2008-09.

The second important aspect of tax related investments is the choice of the investment instrument. For tax payers in the highest tax bracket of 30 per cent (income over Rs 5 lakh), PPF offering 8 per cent "tax free" return is far superior to National Savings Certificates (NSC) VIII series offering 8 per cent "taxable" interest or five-year bank deposit offering 8per cent to 9 per cent taxable interest.

Yet another attractive instrument under Section 80C is Equity Linked Savings Scheme (ELSS) over Infrastructure related bonds or IPOs. ELSS offers tax-free returns compared to taxable returns of Infrastructure bonds. Hence, the yield higher comparable post-tax returns.

Choosing a growth option instead of dividend can help get tax-free returns after three years under Section 10(38) of the Income tax Act. In another words, ELSS offers triple benefit. First, the tax deduction at the time of investment (this could be as high as Rs 34,000 on an investment of Rs 1 lakh for a taxpayer). Two, the income during the tenure being exempt under section 10(35). Finally, the entire amount on withdrawal after three years, including the surplus over the initial investment of Rs 1 lakh, is completely tax-exempt.

Section 80D
There is yet another tax benefit, which could be explored by a taxpayer in the higher brackets. This section permits deduction up to Rs 15,000 per year for medical insurance premium on a policy covering the tax payer, the spouse, the dependent parents and children. For senior citizens, the deduction can go up to Rs 20,000 per year.

Insurance companies have come up with several innovative policies under section 80D that could be considered.

Section 80E
Taxpayers, who are going for higher education, can avail of a deduction under Section 80E for interest payment on an education loan. There is no ceiling on the quantum of deduction, since the deduction is linked to the interest payable on such loans. This deduction is linked to the year the repayment of loan starts and is available for eight succeeding assessment years.

80GG
Finally, a deduction under section 80GG, in respect of rent paid for residential house. This is one deduction, which many tax payers are not aware of. The deduction is available to any individual, who has income from salary or from any other source and the quantum of deduction is excess of actual rent paid over 10 per cent of total income or 25 per cent of total income or Rs 2,000 per month over the actual rent paid, whichever is lower.

Keeping a record of all financial transactions is a big help. By paying it in time and above all, submitting the returns of income helps make things hassle-free.

The writers are chartered accountants