Making the Most of Section 80C Deductions: 10 Smart Tips

SECTION 80C of Income Tax Act, 1961, allows deduction from gross total income for various investments and expenditures. To avail maximum tax deduction under section (u/s) 80C of the I.T.Act, you must plan the savings and investments well.

Here is a list of ten smart tips for tax planning to maximize the tax break under section 80C:

1. Consider tax saving investments as part of overall investment plan As per conventional wisdom, most of us look at investments as mere tools to save tax under section 80C rather than as a means to achieve our long term goals. It is not a correct approach.

You need to change your perspective and consider tax plan as an integral part of your financial plan.

2. Never postpone your tax planning till the end of the financial year Make it a practice to do your tax planning at least thrice a year rather than making it an end of the financial year exercise (which is the general convention).

Prepare a tax savings plan at the very beginning of the financial year by making a rough estimate of your income and savings and revise it in the middle of the year and finally at the end of year. With a little practice, everybody can learn to do his or her tax calculations.

Besides, don’t leave your tax saving investments under Section 80C till the very end of financial year. Plan them in advance and spread the payments throughout the year to avoid any year-end cash flow problem.

Also ensure that you get TDS deducted from your salary -- based on your estimated income -- uniformly through out the year rather than during the last 3 months.

All the above steps will help you in planning your taxes and investments well in advance and smoothing out your cash flow so that you are not caught off guard at the end of the year.

3. Don’t exceed the limit of Rs 1 lakh under Section 80CMost of us never keep in mind the ceiling of 1 lakh while making investments for the purpose of claiming tax deduction under section 80C of the I.T. Act. But any amount invested over and above the maximum limit under section 80C unnecessarily gets blocked without providing any tax benefits. That money could have been channeled into more productive investments.

Therefore, don’t overdo your tax saving investments under section 80C. Always keep in mind the maximum limit under section 80C while making investments for the purpose for claiming tax benefit.

Besides, don’t forget that limit of Rs 1 lakh includes both sections 80C and 80CCC.4. Before making any further investments under Section 80C, know your existing commitments Certain expenses and investments that are eligible for the section 80C tax benefit are unavoidable.

Therefore, from the maximum limit of Rs 1 lakh under section (u/s) 80C , first deduct your existing tax saving expenditure and investments such as PF contribution, life Insurance premium (existing policies), principal repayment of home loan (if any), tuition fees, accrued interest on NSCs and any other tax saving obligations.

Furthermore, you also need to take into account any other non-80C tax breaks or deductions from GTI (gross total income) such as education loan under section 80E and rent paid u/s 80GG. For a complete list, please read “Looking Beyond Section 80C”. The non-section 80C deductions wouldn’t reduce your section 80C limit but would go towards reducing your taxable income.

After deducting the above, probably there won’t be any elbow room left, but if there is still some scope, make further investments under section 80C.

5. Choose investments wisely Just because making investments in eligible instruments save taxes under section 80C of the I.T. Act should not be a good enough reason to choose an investment.

There are many tax saving options available under section 80C such as PPF, NSC, 5 year Bank FDs, senior citizen saving scheme (SCSS), Mutual funds pension plans, Ulips, ELSS and 5-year post office time deposit scheme. A brief overview of all the tax saving instruments and investment avenues is given in the post "Section 80C Tax Saving Options & Investment Avenues".

While deciding on a tax saving and investment scheme, one has to keep in mind various considerations such as the time-horizon, the lock in period, risk and return factor, taxability of returns and cash flow needs.

And don’t neglect to consider your risk profile. For example, if you are a risk taker you can consider ELSS but if you are risk averse you should consider assured return schemes.

Furthermore, you should also be aware of section 80C limitations, which are mentioned in the post, "The Other Side of Section 80C - Conditions & Restrictions".

6. Compare investments on post-tax yield and not pre-tax yieldMost investors look at pre-tax returns but taxes can be a significant drag on returns. The impact of taxation is such that even a pre-tax return of 12% is no match for post-tax return of 8% (considering maximum marginal tax rate of 33.99%).

Therefore, don’t get carried away with gross/pre-tax returns. Take the tax angle into account and make your investment decisions based on post-tax returns. For instance, suppose that an investment u/s 80C provides you with a gross return of 10 per cent annually but if the same is taxable, the effective post tax return becomes 6.60 per cent based on maximum marginal tax rate of 33.99%.

7. Invest in ELSS The best option available under section 80C is ELSS (these are similar to diversified equity funds but with additional benefit of tax break under section 80C) provided you are not risk averse, as already discussed.

Furthermore, among all the tax saving options under section 80C of the Income Tax Act,1961, ELSS has the minimum lock in period – just 3 years. For details, please see ELSS - The Best Tax Saving Option Under Section 80C .

8. Always invest in a PPF, even if you don’t want PPF is a great investment option u/s 80C but you might not be interested as it doesn’t score too well on liquidity.Nevertheless, remember to open a PPF account and invest at least the minimum amount of Rs 500 even if it is not on your investment radar. This will help you to take advantage of this account after 10-12 years because by that time the original lock in period of 15 years will get reduced to just 3-5 years.A few salient features of Public Provident Fund (PPF) have been mentioned in the post, NSC or PPF - How to Decide? and certain tips to followed while investing in PPF are discussed in the post How to Invest in PPF.

9. Never invest in an insurance plan Sadly, most of us look at insurance as a tax planning tool rather than a risk management tool.It is better to pay tax rather than investing in insurance to avail deduction under section 80C of Income Tax Act. The tax you save by investing in insurance (and getting deduction under 80C) gets more than offset by the long term costs you incur by investing in insurance plans. Thus, remember never to mix your tax planning and insurance planning. Separate your insurance needs from your tax savings and investment needs.Buy life insurance, but never invest in it. Ensure that you don’t buy any more life insurance for the purpose of tax saving under section 80C because it’s the worst form of investment or tax saving you will ever make.If you want to buy insurance, go for pure term plans and forget ULIPS, money back, endowment or whole life plans.

10. Never invest in a pension plan Don’t ever invest in a pension plan. Why? Because pension plans of insurance companies involve high costs, unfavourable tax treatment (although you receive tax benefit under section 80CCC) and lack of exit options. It is better to create one’s own retirement/pension plan rather than buying it from an insurance company.

Conclusion In a nutshell, goal of tax planning is to reduce your tax liability. The smarter approach is to become proactive and integrate your tax and investment planning (but keep your insurance planning separate). Besides, while making the most of section 80C, don’t forget to look at the other side of the coin. Finally, don’t forget that tax planning and saving is a year-round rather than a year-end activity.

Section 80C - Tax Savings Options & Investment Avenues

Section 80C of Income Tax Act, 1961, sets out a number of options or tax-saving instruments that are eligible for tax deduction. Broadly, we can divide tax-saving avenues into two categories: first is expenditure related deductions such as tuition fees and home loan principal repayment; and second is investment instruments or options such as EPF (Employee’s provident fund), VPF (Voluntary provident fund), PPF (Public Provident Fund), NSC (National Savings Certificates), ULIPs (Unit-linked insurance plans), ELSS (Equity linked savings scheme), SCSS (Senior Citizens Savings Scheme), 5-Yr POTD (Post office time deposits), 5-Yr tax-saving fixed deposits (FDs) of banks, Mutual funds pension plans , NABARAD (National Bank for Agriculture and Rural Development) Rural Bonds and life insurance premium.

Here’s the brief over view of various tax-saving avenues or options under section (u/s) 80C of the IT Act, 1961:

Expenditure avenues u/s 80C I’ve already pointed out in my earlier post on section 80C tax-planning and tax saving strategies, “Making the most of Section 80C – 10 Smart Tips”, that before making any investment to get tax break under section 80C, you should first avail the concession / deduction available to you for certain expenditures incurred by you. The various expenses which are eligible for section 80C tax break are:

1. Tuition Fees: Expenses – only tuition fees – incurred on children’s full time education in India are eligible for deduction under section 80C. No other charges or expenses are allowed.

2. Repayment of principal sum of home Loans: The EMI (Equated Monthly Installment) that you pay against your home loan comprises of two components - principal and interest. While principal part is deductible under section 80C, there is a separate deduction for interest portion under section (u/s) 24(b) of Income tax Act. For further details, please read, "Housing Loan Tax Deduction: Comparison between Section 80C and Section 24(b)".

3. Expenses incurred on purchase of house property: Stamp duty, registration fees, and other expenses incurred for the purpose of purchase of house property are also entitled for section 80C deduction.

Investment options / avenues u/s 80CVarious investment options can be broadly divided into three categories: first is equity instruments, second is debt instruments and third one is life insurance and pension plans.

Equity Instruments:

1. Equity linked savings scheme (ELSS): Considered as the best section 80C option, it’s a mutual fund scheme investing entirely in equities and therefore has the potential to deliver the best returns. For more details please read, “ELSS – The Best Section 80C option”.

Debt Instruments:

2. Public Provident Fund (PPF): Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Current rate of interest is 8% tax-free and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500 and maximum is Rs 70,000. A point worth noting is that interest rate is assured but not fixed. For details, please read “PPF vs. NSC- Which is Better?”. If you're interested in investing in PPF, first get yourself acquainted with certain practical tips and tricks to be followed while investing in PPF.

3. Employee’s Provident Fund (PF): PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF). Current rate of interest is 8.5% per annum (p.a.) and is tax-free.

4. National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%. If you invest Rs 1,000, it becomes Rs 1601 after six years. The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

5. Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list, Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. Current rate of interest is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest. Interest income is chargeable to tax.

6.5-Yr post office time deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) – which currently offers 7.5 per cent rate of interest –qualifies for tax saving under section 80C. Effective rate works out to be 7.71% per annum (p.a.) as the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable.

7. 5-Yr bank fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction.

At present, rate of interest offered on these FD’s is at par with plain vanilla FDs. For instance, current – as on 2nd February 2009 – applicable rate of interest on ICICI Bank ‘Tax-Saver Fixed Deposit’ is 8.25% per annum (p.a.) for general

category and 8.75% for senior citizens which are similar to what the bank is offering on its other fixed deposits of similar maturity. Likewise, SBI (w.e.f. 01.01.2009) is currently offering rate of interest of 8.5% for general public and 9.0% for senior citizens on SBI tax-saving FD’s called “SBI tax saving scheme 2006 (SBITSS)” which are also same as being offered on other FDs with similar tenure.However, remember that unlike plain vanilla FDs, premature exit is not possible. Besides, interest income is taxable.

8. NABARD rural bonds: There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.

At present, ‘NABARD rural bonds’ are not open for subscription. Last year NABARD opened the subscription for these bonds – 5-Yr tenure carrying coupon rate / interest rate of 8.25% – during end of January 2008 but received a lukewarm response.

Life Insurance & Pension Plans:

9. Life Insurance: Any amount paid towards life insurance premium for yourself or your family (spouse and children) is eligible for section 80C tax break.This is the most popular investment avenue among all the tax-saving instruments but for all the wrong reasons. If you would like to know why, please read “How to do Section 80C tax planning”.

10. Unit linked insurance plans (ULIPs): Although, Ulips gets covered under life insurance, but still require a specific mention due to their immense popularity. Undoubtedly, better than traditional insurance plans; nevertheless, you should avoid them. Why? Read: “10 Top Most Factors about Ulips”.

However, if you still want to invest in them to avail section 80C deduction please read, “5 Secrets about ULIPs” and “Best Ulips based on IRR”.

11. Mutual fund pension plans: Another variable return instrument available under section 80C is pension plans of mutual funds. There are only two such plans available in the market –Templeton India Pension Plan (TIPP) and UTI Retirement Benefit Pension Plan (UTI-RBP). These are open-ended debt-oriented mutual fund schemes with a maximum exposure of 40% to equities. In the long run, you can expect these pension funds to deliver better returns than the assured return schemes like PPF and NSC.

However, invest in them only if can spare funds for the long term because premature exit is very costly. Also, please don’t confuse them with pension plans of insurance companies.

12. Pension plans of insurance companies: Contribution towards pension plans offered by insurance companies qualifies for tax benefit under section 80CCC instead of section 80C. However, the aggregate deduction allowed under section 80C and section 80CCC can’t exceed Rs one lakh.

There are basically two kinds of pension plans offered by the insurance companies: traditional pension plans which invest mostly in fixed income products and unit-linked pension plans (ULPPs) which are more flexible. If you want to invest, make sure that you buy pure pension plan without a life cover. Also note that while pension (or annuity) is taxable, commutation of pension is tax-free. For details, please read, “5 Common Sources of Tax-Confusion”.

The Other Side of Section 80C - Conditions & Restrictions

In my previous post “Section 80C Tax Saving Options & Investment Avenues” a brief overview of various expenses and investment instruments eligible for section 80C deductions is given.

However, many specific conditions & restrictions are applicable to those expenditure and investment options mentioned in section 80C. This post specifies those conditions & restrictions in detail:

Restriction & Conditions under section 80C

1. Tuition fees: Tuition fees paid for the full time education of your two children is allowed as deduction under section 80C. However, it is subject to following restrictions:

1. Allowed only for full time education, i.e., part time course and private coaching classes not allowed

2. Allowed only up to two children

3. Development fees, building fund, donations or any payment of similar nature not allowed.

4. Self or Spouse education not allowed.

5. Overseas education not allowed.

However, playschool, pre-nursery and nursery tuition fees are allowed. For a more detailed discussion, you can read http://simpletaxindia.blogspot.com/2008/02/tuition-fees-paid-for-children-us-80c.html.

2. Home loans: The principal component of the housing loan EMI, which is eligible for deduction under section 80C, is subject to following conditions:

1. If the loan is borrowed for the purpose of reconstruction/renewal/repair, then deduction under section 80C is not allowed.

2. The deduction for repayment of principal of a loan is not allowed in case of commercial property.

3. The property should not be sold before a period of 5 years. If you sell the house within a period of five years from the year in which you have started claiming home loan IT benefits, the entire deduction claimed under section 80C – for repayment of principal sum of the home loan – in earlier years will be deemed to be your income in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

4. If the house is in the name of your family member (spouse or your parents) and you make the repayment of loan yourself, the deduction u/s 80C won’t be allowed.

5. Unlike section 24(b), where you are allowed interest deduction irrespective of the source of borrowing (the borrowing may be even from your family and friends), the repayment of principal sum under section 80C is allowed only if the borrowing is from specified institutions mentioned therein.

3. House registration expenses: The following expenses relating to house property are not allowed under section 80C:

1.Stamp duty and registration charges paid for purchase of plot of land is not allowed under section 80C.

2. Property tax or municipal tax deduction is also not available under section 80C. It is available separately under section 23 while calculating net annual value of house property.

3. The admission fees, cost of share or initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming a member is also not allowed.

4. Life insurance: There are certain restrictions regarding the premium, lock-in period and the eligible persons:

1. If the amount of premium paid in any financial year exceeds 20% of the sum assured then deduction will be allowed only up to 20% of the sum assured.

2. While ULIPs can’t be sold or terminated before 5 years, other life insurance policies can’t be surrendered before the premium for 2 years have been paid.

3. Life insurance premium paid to insure the life of your parents (Father and Mother) is not eligible for the section 80C deduction.

5. Public provident fund (PPF): While PPF is considered as one of the best option among all the assured return schemes under section 80C, it is also subject to certain limitations:

1. Maximum contribution allowed Rs 70,000 per annum (p.a.) in all the accounts clubbed together. For example suppose you open two PPF accounts: one in your name and other in the name of your minor son. Here contribution to both the accounts will be clubbed for the purpose of limit of Rs 70,000. And if you still make a contribution in excess of Rs 70,000, section 80C deduction will not be allowed, nor will you get any interest on the excess contribution.

2. A joint account is not permissible.

3. To keep the PPF account active, a minimum annual investment of Rs 500 is required in all subsequent years.

4. It is not possible to close & withdraw the entire amount before the maturity period of 15 years except in the case of death. However, partial withdrawals can be made from 7th year onwards.

6. Pension plans of insurance companies: The investment in pension plans of insurance companies is subject to following limitations:

1. If any investments have been made in pension plans of Insurance companies’ u/s 80CCC, then the qualifying amount u/s 80C stands reduced to that extent. In other words, combined overall limit u/s

80C and 80CCC is Rs 1 lakh.

2. On maturity, you can withdraw (or, commute) only one-third (33%) of the corpus which is tax-exempt; balance 2/3rd has to used to purchase an annuity (monthly pension) from any insurance company.

3. Pension is taxable.

7. 5-Yr Bank Fixed Deposits (FDs): While offering you same interest rates which are offered on plain vanilla FDs, tax-saving fixed deposits suffer from poor liquidity:

1. Tax Saving Bank FDs can’t be pledged for loan purpose.

2. Unlike other plain vanilla bank FDs, which you can encash before maturity by paying a penalty – usually one per cent – tax saving FDs doesn’t allow premature encashment.

3. Fixed deposits of non-scheduled banks are not covered.

8. Mutual Fund Pension Plan: Though lock-in period for tax purposes is only 3 years, premature exit before the vesting age of 58 years is subject to high exit loads. For instance, Templeton India Pension Plan (TIPP) charges 3% exit load for early redemptions.

9. Employee's Provident Fund (EPF): Basically, there are two kinds of EPF - first is Statutory Provident Fund (SPF) applicable to government and semi-government (including universities and other specified institutions) employees. And second is Recognised Provident Fund (RPF)under Employee's Provident Funds and Miscellaneous Provisions Act, 1952, applicable for private sector employees. While SPF is fully exempt from tax under section 10(11); RPF is subject to a lock-in period of 5 years. For more details, please read "10 Common Income Tax Misconceptions".

10. General or Common Restrictions: There are certain general limitations also:

1. The total limit under section 80C – combined with ‘pension plans of insurance companies under section 80CCC – is Rs 1 lakh. However, let me clarify that unlike section 88, there are no sub-limits under section 80C. The following sectoral caps which existed under section 88 have been omitted from section 80C:a. Rs 12,000 per child for tuition feesb. Rs 20,000 in respect of repayment of housing loanc. Rs 10,000 in respect of equity linked saving schemes (ELSS)

2. Deductions permissible under section 80C to 80U are not allowed from short term capital gains chargeable under section (u/s) 111A and long term capital gains chargeable under section 112. It is because that these capital gains are already taxed at concessional rates. So, if your total taxable income includes any capital gains taxable under either section 111A or section 112, please exclude them from total income for the purpose of availing deduction u/s 80C.

3. Deductions under section 80C to 80U is also not available in case of winnings from lotteries, card games, races, gambling etc.

So, keep the above limitations in mind while doing your tax-planning to avail tax deduction under section 80C of IT Act.

10 Common Income Tax Fallacies

Ignorance of the law is no excuse.

Since law presumes that we are familiar with the law’s commands, we cannot plead ignorance. It is our responsibility to know and understand the law.

So let’s make a beginning to at least understand the broad provisions of income tax law which can help you in proper compliance as well as making the most of deductions and exemptions provided in the statue. We make a start with shattering some common misconceptions about income tax.

Here is the list of top ten income tax myths:

Filing I.T.R

1. Income tax return has to be filed before the due date It is common perception that if you don’t file your income tax return by due date, interest and/or penalty will be imposed. The fact is that there is no interest or penalty if I.T return is not filled before due date provided tax is already paid and you file it before the end of the relevant assessment year (i.e., up to 31st March).

So, it is always advisable to file it either at the very beginning of the financial year or after the due date is over, so that you won’t have to rush at the last moment and wait in long queue.

However, in case tax is not paid before due date, simple interest @ 1% per month or part of the month is charged under section 234A from the due date up to the date of furnishing the return of income.

Besides, also remember that in case you have either business loss or capital loss to be carried forward, you need to file the return by due date; otherwise you lose the benefit of carry forward. For further details, please see 12 Practical Tips for Filing Income Tax Returns

2. TDS has already been deducted by the employer, so there is no need to file the returnEven if the entire tax has been deducted at source by the employer and there is no more tax liability, you still need to file your tax return.

House Loan benefits

3. Home loan for second house property is not eligible for income tax benefitsIt is another popular misconception. First of all, let’s understand that there are two different I.T. deductions available in case of home loans. The EMI you pay is divided into two parts – principal & interest component. The repayment of principal is claimed as a deduction under section 80C and the deduction for interest component is allowed under section 24(b) of income tax Act under the head ‘Income from House Property’.

Both the above deductions have nothing to do with the number of houses you already have. In fact, you can have as many number of houses (and also as many loans against them) as you wish.

The only point worth remembering is that you are allowed only one house for self occupation and all other houses are deemed to be let out (even if they are lying vacant) and their notional rental income is subject to tax. For further details, please see Amazing Facts about Income Tax: Taxation of Notional Income.

4. Maximum interest exemption available on housing loan is Rs 1.50 lakhIn case of self occupied house property, the maximum limit of interest deduction under section 24(b) is no doubt Rs 1.50 lakh. However, in case of let out/deemed to be let out house property, there is no limit; entire amount of interest paid, even if exceeding Rs 1.50 lakh is exempt.

Furthermore, in case of self occupied house property also, the interest deduction can exceed the maximum limit of Rs 1.5 lakh, if the property is owned jointly. In such case, each of the co-owner is entitled for separate deduction. For further details, please read 8 Tax Considerations to Remember Before Buying a Home.

Exemptions/Deductions

5. Interest on savings account and bank fixed deposits is exemptNo, it is taxable. Earlier it was allowed as deduction under section 80L, but since the section was abolished around two years ago, the entire interest is taxable. Therefore, though the amount may be miniscule, you need to disclose it and pay tax on it.

Legally speaking, most of people are tax evaders because it is a common practice among people not to include the interest in their taxable income which tantamount to concealment of income.

My advice to you is to start considering it as part of your taxable income, however small it may be. It won’t cost you much time or money.

6. Amount withdrawn from PF because of job change is exempt

from taxIn case you are a member of recognized provident fund and change your job before completing a period of 5 years, and withdraw the PF amount, then all your previous years income gets recomputed as if the fund was unrecognized from the very beginning (i.e., the tax benefits you received on your own contribution u/s 80C/88 in earlier years will get forfeited) and further the employer contribution and interest received will be added to your current income subject to relief under section 89.

7. Interest on National Savings Certificate (NSC) is exemptInterest on NSC is chargeable to tax on the basis of annual accrual specified in NSC rules. You have to consider it as part of your total income. However, it is eligible for deduction u/s 80C as it is deemed to have been reinvested on behalf of the holder. Net effect is that it does not increase your tax liability but goes towards reducing the Rs. one lakh investment limit available under section 80C.

So, start including it in your taxable income; it won’t increase your tax liability - just a slight reduction in 80C limit.

8. LTCG on shares is always exemptOnly long term capital gains arising from listed shares sold through a stock exchange are exempt. In other words, off-market transactions are not eligible for this exemption.

9. ULIPs can be surrendered after 3 or 4 yearsOf course, you can surrender them but there are tax consequences. It has been specifically mentioned in section 80C that in case of termination of ULIPs before 5 years, all the deductions claimed earlier will be treated as income of the year in which surrender or termination takes place. Therefore aggregate deduction claimed earlier u/s 80C on payment of ULIP premium will be treated as “income from other sources” and you will be liable to pay tax on it. For further details, please read Unravelling the Ulips: 5 Secrets You Should Know About

10. If employer does not pay HRA or if you are a self-employed person, deduction for rent paid is not allowedIn such cases, you can claim deduction under section 80GG which is similar to section 10(13A) under which HRA exemption is claimed. But unlike HRA exemption, deduction of rent paid under section 80GG is subject to certain conditions and the maximum deduction cannot exceed Rs 24,000.

ELSS - The Best Section 80C Tax Saving Option

Fisher |

SECTION 80C offers a wide range of tax savings options which includes PF, PPF, NSC, ULIPs, ELSS and SCSS. For a brief over view of various instruments available under section 80C, please read "Section 80C - Tax Saving Options & Investment Avenues".

Equity linked saving scheme (an open-ended mutual fund) popularly known as ELSS is one of most important tax saving avenue made available to tax payers to enjoy the tax deduction under section (u/s) 80C of Income Tax Act, 1961.

Here are 3 reasons why ELSS is considered as the best tax-saving investment option under section 80C:

1. Shortest Lock-in-periodBetter LiquidityELSS has lowest lock-in (just 3 years) as compared to all other options under section80C. For instance PPF has lock-in of 15 years, NSC has lock-in of 6 years and Bank FDs have lock-in of 5 years.

StabilityThe initial lock-in period of 3 years make ELSS quasi close-ended. Put another way, it is an open-ended for subscription purposes but for redemption purpose it becomes open-ended only after 3 years of investment.

The lock-in-period of 3 years acts as a deterrent against short term money flowing into the scheme which is a blessing in disguise. The lock-in lends stability to the fund as the fund manager has enough time and freedom to invest and stick to the investment strategy without bothering about redemptions. The fund manager can take a long term view on investments and also avoid frequent portfolio churning. The stability and long term focus helps in generating better returns.

2. Best way to get equity exposureELSS is the best way to participate in equities. It is ideal investment option for small investors as it is a simple way of investing in stock markets coupled with tax savings. If you want a taste of equities to boost your overall portfolio returns, there is nothing like ELSS which combines section 80C tax benefit with the returns of the equity funds.

It is quite well known principle in investment that equities tend to perform better than other asset classes over the long term. ELSS is the best option if you have a long term horizon (i.e., willing to invest for the long term) and are comfortable with taking moderate risks (i.e., have the capacity to ride the ups and downs of the capital markets).

Equity linked savings schemes are no different from the diversified equity schemes. What makes these schemes special is that, generally, they tend to out perform other equity based mutual funds. ELSS are in fact better than plain vanilla equity funds because even if the ELSS are able to generate returns at par with other equity funds, they certainly give better returns taking into consideration section 80C tax benefit.

Although conventional wisdom says one should avoid timing the markets, but it pays to enter when the markets are at a low level. The recent correction in the stock market should be used as an opportunity to enter the markets because India’s long term growth potential is no doubt intact.

It may take a few months to a few years but sooner or later Indian equity markets are going to bounce back.

3. Potential for high returns ELSS offers the best returns among all investment avenues under section80C. Almost all other options under section 80C are fixed return instruments and hence there is a ceiling on the returns that can be earned. In most of the cases e.g., NSC, SCSS, 5 YR POTD (Post Office Time Deposits) etc, even the assured interest income at maturity is subject to tax which further brings down the post tax yield.

Over the years, the average returns from tax saving funds far outweigh the returns from all other investment avenues under section 80C. For instance, the five year returns (annualised) of ELSS category are still above 10 per cent even after considering the market meltdown of 2008.

Being equity oriented schemes, ELSS have the potential to provide superior returns (although unlike assured return schemes, returns are not guaranteed) than most of the other options available under section 80C. Besides, those returns are also tax free.

So, don’t waste any more time and wait till the end of the year. First, learn how to prepare a tax savings plan (click here) and in case there is any scope left for further investments, make ELSS your first choice. DO IT NOW. The recent market meltdown offers an opportunity to invest in ELSS at lower levels. With equity markets are trading at such low levels, let me assure you that you won’t get a better chance to SAVE TAX as well as EARN BETTER RETURNS.

If you're finally convinced and would like to invest in an ELSS fund, please read How to Invest in Best ELSS Mutual Funds.

PPF vs NSC - How to Decide?

Fisher |

Among all the tax-saving instruments under section (u/s) 80C, ELSS occupies the numero uno position (for details, please read “ELSS: The Best Section 80C Option”) but the ELSS schemes are inherently risky. So, if you’re not comfortable investing in ELSS, you can consider PPF (Public Provident Fund) or NSC (National Saving Certificate). Among the assured return schemes, both PPF and NSC occupy the top slot.

But, the next question is: How to decide which – PPF or NSC – is better among the two? Or, which is the best tax-saving instrument under section 80C among the assured return schemes? Therefore, this article attempts to resolve the classic dilemma: NSCs vs. PPF. Let’s compare them on various parameters:

PPF vs. NSC – A Comparison

1. Returns While PPF offers 8% per annum (p.a.), NSC offers 8% per annum compounded half yearly i.e., the effective yield is 8.16% per annum. Not a big difference.

2. Tax on returns PPF returns are tax-exempt but NSC returns are taxable. Interest accrued on NSC is to be included in your total income every year.

However, you’re also entitled to get the deduction under section 80C for the interest accrued on NSCs, because this notional interest is deemed to be reinvested. So, the net effect is that your section 80C limit gets reduced to that extent because otherwise you would have made investment in other tax-saving instruments to the extent of accrued interest on the NSC. If your section 80C limit already stands exhausted, then your post-tax returns from NSC would become 6.48% if you fall in 20.6 per cent tax bracket and 5.64% if your marginal tax rate is 30.9 percent.

3. Whether returns are guaranteed/ fixed Once you invest in a NSC the interest rate gets locked-in i.e., can’t be changed subsequently, where as in case of PPF the returns are assured but not fixed. In other words, depending upon the interest rate scenario, government can move it either downward or upward, as the economic situation demands.

However, as the interest to your PPF account gets credited every year, the change in interest rate is always prospective and not retrospective.

Let’s see the past changes in the PPF interest rates:

From 1986-87 to 1999-00 -> 12.00%2000-01 -> 11.00%2001-02 -> 9.50%2002-03 -> 9.00%Since 2003-04 -> 8.00%

Now, let’s see the past changes in NSC interest rates:

Mar’01 to Feb’02 -> 9.5%Mar’02 to Feb’03 -> 9.0%Mar’03 onwards -> 8.0%

From the above mentioned changes in PPF and NSC interest rates, we notice that PPF and NSC interest rates are changed simultaneously, so that both are at par (with a slight difference due to half yearly compounding in case of NSCs).

However, what makes the yield differ is the fact that in case of NSC’s revised rates applies only for new purchases, while for PPF new interest rates apply to all accounts, both new and existing. For instance, let’s say you invested Rs 1000 each in both PPF and NSC in March 2001. Now,

while for NSC you would have received interest @ 9.5% per annum (compounded half-yearly) for all the 6 years of it’s duration, your PPF account would be credited with interest @ 9.5% for only the year 2001-02 and for subsequent years reduced interest rate would apply (i.e., 9% for 02-03 and 8% since 03-04 onwards).

4. Liquidity While the duration of NSC is 6 year, PPF carries a lock-in period of 15 years. Besides, PPF premature account closure is not permissible except in case of death. Although partial withdrawals are allowed from the PPF account from seventh year onwards, the actual amount depends on the balance in the account in earlier years. Thus, NSCs offer better liquidity than PPF.

5. One time or regular investment While NSC requires one time investment, PPF requires regular investment. NSC is the form of a certificate but PPF is in the form of an account and to keep it active, you’ve to make regular investment – a minimum amount of Rs 500 has to be deposited every year to keep the account active.

So, except the parameter of ‘taxability of returns’, on all other counts the NSCs score over PPF. However, this singular factor is big enough to tilt the balance in favour of PPF. Let’s see:

1. If the tax-saving limit of Rs 1 lakh under section 80C remains under-utilized year after year, then NSC, no-doubt, is the best option for you because in that case net tax effect (of NSCs accrued interest) is zero. In other words, in such a case, NSCs returns also become tax-free.

2. If your existing tax saving investments exceeds the limit of Rs 1 lakh (or expected to cross the Rs one lakh mark, in the near future) as specified under section 80C, then it would have direct impact on your post-tax returns from NSCs ; for example, it becomes 5.64% if you fall in the 30.9% tax bracket. In such a case it is better to opt for PPF. However, even in such a case you should opt for NSC if your investment horizon is medium term (i.e., you’re going to require the money, say, after 6 or 7 years for your spending needs).

No doubt, the liquidity factor and uncertainty associated with the PPF interest rate are two major drawbacks.

However, if you just change your perception and give it another look, lack of liquidity should not be a hindrance. Perhaps, it’s a blessing in disguise. Why? Because even if you get back your money, say, after 3 years or 6 years, won’t you invest it some where else or spend it on some worthless things.

So, if you invest your funds for different time duration according to your financial plan/ needs and invest only so much in PPF which you can spare for long term, 15 years lock-in period should not be a constraint. In other words, for the purpose of saving money for long term goals, like education and marriage of children or to save for retirement – which you must – PPF is the best debt instrument after EPF (Employees Provident Fund).

Besides, in emergency cases, if you require the funds before the maturity, the

option of making partial withdrawals, or borrowing against your PPF account, is always available.

As regards the uncertainty associated with the PPF interest rate, we can observe that since 2003, there has not been any change in the PPF interest rates. Even if there is a change in near future, in my view, it can’t go beyond +/- 1%.

I hope the above discussion is helpful to you in resolving the dilemma between PPF and NSC. However, if you’ve any further suggestion or questions, please feel free to leave a comment.

Finally, if you've decided to invest in PPF, please read "How to Invest in PPF-10 Practical Tips".

How to Invest in PPF - 10 Practical Tips

Fisher |

Public Provident Fund (PPF) is the most popular option (among assured return schemes) under section 80C. I presume that by now you’re well aware of PPF ranking vis-à-vis NSC and would like to open a PPF account.

So, in this post topic of discussion is how to invest in PPF. There are certain tips and tricks you should know before you open a PPF account so that you can realise its full potential.

Here are the 10 practical tips on how to invest in PPF:

PPF Account Opening

1. First, you should open a PPF account even if it’s not on your investment radar. Why? Please read “10 tips for section 80c tax planning”.

Furthermore, leave aside section 80C tax-break/tax-planning, otherwise also PPF is among the best debt option available to you – particularly self-employed persons who don’t contribute to EPF – for retirement planning because it offers tax-free returns (current interest rate is 8% which translates into pre-tax yield of 12.12% for someone in the 33.99% tax bracket), exemption from wealth tax and the protection from attachment by any order or decree of court.

2. Public Provident Fund (PPF) account rules allow you to open an account in the name of your spouse or children. Children can be major or minor, son or

daughter, bachelor or married, dependent or otherwise. The only restriction is that total aggregate contribution in all the PPF accounts should not exceed Rs 70,000 in a financial year (i.e. 1st April to 31st March).

Correction (6/10/2009): As per PPF rules, the aggregate limit of Rs 70,000 is only for the account of an individual and minor combined together. Contribution to other PPF accounts (spouse and major children) is excluded from this limit. The mistake is regretted. It came to light when a reader pointed it out. See comment section.

If you decide to open a PPF account in the name of your spouse or minor child, what are the tax implications? The contribution will be deemed as gift and clubbing provisions under section 64 should apply. But as the interest on PPF is exempt, there’s no income to be clubbed; therefore, nothing to worry about. On maturity of PPF account, if you reinvest the amount somewhere else, the clubbing provisions becomes applicable in both the cases: spouse and minor child. However, if by the time of maturity of PPF, child has become major, the clubbing provision under section 64 (1A) becomes inoperative (i.e., there won’t be any clubbing of income).

So, if you want to make investment in the name of your minor child, PPF is a preferred instrument to avoid the clubbing provisions of IT Act.

3. While opening a PPF account, please don’t forget to appoint a nominee. In fact this is a very important part of making any investment or buying life insurance. You’re also allowed to change the nomination at any time thereafter.

Making Contributions to PPF Account

4. One of the attractive features of Public Provident Fund (PPF) is the flexibility offered to you for making contributions. Unlike NSC, you need not invest a lump sum amount at one go. PPF gives you full discretion to invest in installments within the range of minimum amount of Rs 500 and maximum amount of Rs 70,000. Besides, unlike recurring deposits or mutual fund SIPs each PPF installment need not be the same. You can vary the amount of PPF deposit as per your convenience. Also, you can deposit more than one installment in a month. The only limitation is that the total number of installments in a year should not exceed twelve.

Thus, rather than waiting for the end of the year to deposit the one lump sum amount, keep on investing small sums on regular basis in your PPF account.

5. Make sure that you invest by the 5th of every month. Why? Because, in case of PPF accounts, interest is calculated on the lowest balance between the close of the fifth day and end of the month (though credited to your PPF account on annual basis).

6. Keep on investing in your PPF account. Never think of making

premature withdrawals. Nevertheless, if ever you face a financial crunch, you can avail the facility of loan (from 3rd year to 6th year) and partial withdrawal (from 7th year onwards). However, both the facilities are subject to certain ceiling limits.

Furthermore, there’s another possibility that you’re not able to make tax-saving investments for availing the deduction under section 80C due to some temporary cash flow problem (although your financial position is ok). In such a case also you just need to rotate the funds by making a partial withdrawal from your PPF account and redepositing the amount in your PPF account.

7. Ensure that you continue to make a minimum deposit of Rs. 500 every year to keep the PPF account active. Otherwise, it becomes ‘inactive’ account and you become ineligible for loan as well as partial withdrawal. However, you can regularize or revive the discontinued PPF account after paying the prescribed default fee along with subscription arrears (i.e. a minimum of Rs 500 for each such year).

8. Though the term of PPF account is 15 years, the contribution made in 16th year (even on the last day) also qualifies for section 80C tax benefit. How? Because the PPF account can be closed only after the 15 years from the end of the financial year in which it is opened. Put another way, PPF account runs for full 15 financial years subsequent to opening and matures on 1st April of the 17th year. In other words, if you make a contribution to your PPF account on 31st March of the 16th year, and withdraw it on the next day (i.e., 1st April of the 17th year), you’ll be allowed a deduction under section 80C.

PPF Account Maturity

9. On maturity, you can still continue with your Public Provident Fund (PPF) account, if you so desire. PPF gives you option to extend the account beyond maturity, each time for another block of 5 years. Put another way, you have three options available to you:

a) Close the PPF account and withdraw the entire amount.

b) Continue the PPF account without making any further contribution and earn the same rate of interest as before the maturity. If you choose this option, you can withdraw the entire PPF amount either in a lump sum or in installments. However, you’re not allowed more than one withdrawal in a financial year.

c) Continue the PPF account with fresh subscription. Please remember that for exercising this option, you’ve to submit form H within a period of one year of maturity. Besides, also note that if you choose this option, (i.e., extending the PPF account while continuing with fresh deposits), then you’ve access to only 60% of the account balance (at the beginning of the extended period) during the next five years (i.e., 40% gets permanently blocked for another 5 years and you can’t withdraw it even in an emergency).

In other words, though you’ll continue to be eligible for section 80C deduction on fresh contributions, it will adversely affect the liquidity.

How to decide whether to close the PPF account or continue with it? The decision depends upon the facts and circumstances prevailing at the time of maturity such as your need for funds (immediate or in the near future), interest rate and availability of other investment opportunities.

10. When closing the PPF account and withdrawing the amount, make sure you do it at the beginning of a month because you are not allowed any interest for the month of withdrawal.

If you think that I’ve missed something or you’ve any other question relating to PPF, please feel free to add in the comment box.

PPF Interest Calculator

Fisher |

Photo by D-Kav

I’ve designed a PPF Interest Calculator in excel sheet (which shows PPF returns and maturity value after different time periods) to help you plan your PPF investments. Similar to the ‘Income Tax Calculator’ designed earlier, which is, as of now, the only online tax Calculator to provide you with the accurate tax liability figure (by including all the possible permutations and combination of different kinds of taxable income, special tax rates applicable on certain income and the various conditions and restrictions imposed on section 80 deductions), this PPF Returns Calculator is also only one of its kind. You would find many online PPF Returns Calculators available on the net but none of them is as good as this one. Try comparing it with other PPF Interest Calculators.

Actually, the PPF (Public Provident Fund) interest calculation is a bit complicated due to various factors such as interest calculated on monthly basis but compounded on annual basis, no interest paid for a particular month if the amount is deposited after 5th of the month, interest always credited to the PPF

account at the end of the financial year (i.e., 31st March), varying minimum duration of the PPF (ranging from 15 years 1 day to 16 years) depending upon the first month of the deposit.

Before using the PPF Returns Calculator to know the maturity value and the interest earnings and to plan your future investments in the PPF account, first you need to understand how the PPF account actually works. Please see ‘10 Tips about PPF Investing’.

To simplify the PPF returns Calculation, I had to make certain assumptions which are as follows:

PPF Interest Calculator: Assumptions1. Deposit by 5th of the month: It is assumed that every deposit made by you in your PPF account is on or before 5th of a month.

2. Recurring Deposits: The second assumption is that you’re making a recurring deposit in your PPF account either annually or monthly. Recurring annual deposit means that the same amount is deposited in the PPF account every year (and in the same month). Similarly, recurring monthly deposit means that every month you’re depositing same amount in your PPF account.

3. Applicable for PPF accounts opened on or after April 2003: PPF Calculator is based on interest rate of 8% per annum (p.a.). In other words, use the Calculator to calculate interest earned on your PPF account if the account is opened on or after 1st April 2003. If you started investing in PPF even before the month of April 2003, then this PPF Calculator is not applicable.

Instructions for using the PPF Calculator:1. The value of N (number of years) can be 16, 21, 26, 31 or 36 only. It means that investment in PPF account is for a minimum lock-in period of 16 year. If you extend it for another 5 years then either you keep on investing same amount of deposit for the next 5 years (put n=21) or the extension is without any further deposits (then put n=16). However, the Calculator will show you the PPF returns and the maturity value at the end of 21 years in both the cases (i.e., n=16 as well as n=21) in addition to returns and the maturity value at the end of 16 years.

The same process is followed for every 5 year extension of PPF account.

So understand that n is the number of years for which you make investments in the PPF account. For example, if you make regular investment for 26 years (monthly/annually) put n=26 and you’ll know the interest earnings and the maturity value at the end of 16, 21, 26, 31 and 36 years.

2. In the 'month of deposit' ("M")column put 1 for January, 2 for the month of February and so on. The maximum value can be 12 which represents the month of December. Also understand that in case of ‘Monthly PPF Calculator’, month of deposit means only the initial or first month of deposit.

3. The value of “A”, the amount of recurring deposit can’t exceed Rs 5,833 in case of monthly deposit and Rs 70,000 in case of annual deposits.

4. There are two separate PPF Interest Calculators combined into one excel sheet. First one is applicable for monthly recurring deposits in PPF account and second one is applicable for annual recurring deposits. Use the one applicable to you. You can also use both the Calculators to compare monthly deposits with annual deposits.

After making so many assumptions, doesn’t the PPF returns calculator lose its relevance? Not at all! As already stated, the basic idea behind the Calculator is to help you get a broader view of PPF returns and to make the PPF investment planning easier for you.

Anyway, the actual PPF interest calculations can be seen from your PPF account statement or the passbook.

So, here’s a PPF Calculator that actually works!

If you come across any bug in the PPF Interest Calculator or need some clarification regarding the PPF Calculator, just write it down in the comment box.

Anyhow, your feedback and suggestions is really important for me to understand what’s working and what’s not.

TUITION FEES PAID FOR CHILDREN U/S 80CToday we will discuss important points regarding deduction available for payment of tuition fees .we try to cover each and every aspect on the issue ,if any left ,or you have different opinion than of us ,please record in comments.

Relevant part of the section 80c is reproduced here under.

"(xvii) as tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether at the time of admission or thereafter,

(a) to any university, college, school or other educational institution situated within India;

(b) for the purpose of full-time education of any of the persons specified in sub-section (4) "

"(4) The persons referred to in sub-section (2) shall be the following, namely: (a) ......................b) .......................c) for the purposes of clause (xvii) of that sub-section, in the case of an individual, any two children of such individual."

on the basic of above following points are to be noted .

1. Deduction for tuition Fees is available up to Rs.100000 /-2. The limit of one lac as above is total limit u/s 80C for all type of

savings ,plus section 80CCC(pension policy) plus u/s 80CCD(Contributory Pension Plan).Means the aggregate amount of deduction under above referred sections can not exceed Rs. 1,00,000.

3. The deduction is available to Individual Assessee and not for HUF.4. The Deduction is available for any two children.5. This the only clause u/s 80 C where assessee can not claim tax benefit for expenditure done

on himself.Means if assessee has paid tuition fess for his studies ,he will not be eligible.6. Deduction is not available for tuition fees paid for studies of spouse.7. The deduction is available for Full Time courses only,so no deduction for part time or

distance learning courses.(This is my opinion but point is not very clear)8. The fees should be paid to university, college, school or other educational institution,so no

rebate for private tuitions.9. Tuition fees paid for coaching courses for admission in professional courses or any other

type of courses are not covered as that fees is not paid for FULL time eduction.10. The center mention above in point 8 must be situated in India,so location should be in India

though it can be affiliated to any foreign institutes.11. In This section tuition fees has a wide meaning than normal parlance ,means here tuition fees

means total fees paid minus any payment towards any development fees or donation or payment of similar nature.so admission fees is also allowed.

12. In My Opinion Transport charges ,hostel charges,Mess charges ,library fees ,scooter/cycle/car stand charges is not allowed.

13. Building fund or any donation etc not allowed.

questions which are commonly asked regarding tuition fees eligibility u/s 80C given hereunder.

Que:Can Mother claim the benefit of tuition fees paid for his son/daughter.Ans:Assessee means both mother and father both can take the benefit u/s 80 C for amount paid by

them respectively.

Ques:If a couple have four children,can they both claim fees for two children each?Ans:Yes ,husband and wife both have a separate limit of two children each ,so they can claim deduction for 2 children each.

Ques:If a Couple has one child and paid a fees of 200000 rs can they both claim tuition fess 100000 each ?Ans. :yes ,they both can claim deduction for 100000 each subject to they have actually paid same amount .If husband has paid 1.50lac and wife has paid 50000 then husband can claim 100000 and wife can claim 50000.

Ques:Ram has paid tuition fees for his child 2000/- in February 2008 relates to period march to june 2008 ,how much amount he can claim deduction in assessment year 2008-09?Ans: He can claim full 2000 rs in assessment year 2008-09 , as this deduction is available on the basis of payment and it may or may not be related to the period in which it has been paid.

Ques: Is Late fees paid with tuition fees is eligible for deduction ?Ans:No,late fees is not eligible for deduction.

Ques:is tuition fees admissible for pre nursery class also?Ans: pre-nursery ,play school and nursery class fees is also covered under section 80C (circular 9/2008 & 8/2007)Ques:Ram has paid rs 36000 (rs 8000 admission fees, rs 5000 development fees rs 5000 caution money, rs 12000 annual charges and rs 6000 @rs 2000 per month for april-june 2008 fees) in dec 2008. how much he can claim reimbursement as well rebates/deductions in 2008-09 and 2009-10.Ans:As explained above in the article, tuition fees meaning is wide in income tax as generally perceived ,so in my opinion admission fees rs 8000 ,12000 annual charges and 6000 fees is covered for claim u/s 80C .Development fees is not allowed and caution money,as it is refundable amount ,hence not allowed.You can claim the tuition fees on payment basis whether relates to this financial year ,old or coming financial year.

ques:Are there any particular educational courses for which income tax exemption is given?Ans:No specific course defined in the Income tax act ,but course should be in India and a full time course

Ques:My Son has been going to Play School Since 01/04/2008. Can I claim the fee paid during the year under Children's Education(80-C). The receipt given by the school shows quarterly fee, & not tuition fee.Ans:You can claim tuition fees paid for playway school.but the break up of the fees should be obtained from the school .Take a certificate from scholl authorities regarding full year fees on letter head with their seal. Example is given below

T o whom it may comcern

" It is certified that ...............son of sh Raj kumar Ojha is a bonafide student of class ..(pre nursury).in our school and we have received ..................Rs(in words..........................) as full year tuition fess."

How to Claim HRA Tax Exemption - Tips & FAQs

First, let me clarify that for claiming HRA (house rent allowance) the correct word is EXEMPTION and not DEDUCTION. What’s the difference between exemption and deduction? Well, exempt portion of HRA is not considered as part of the taxable income whereas in case of deduction first the amount is included in your gross total income (GTI) and afterwards the deduction is allowed.

For example, while the persons drawing salary receives HRA , which gets TAX EXEMPTION under section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules ; the self-employed persons are entitled for TAX DEDUCTION under section 80GG of Income Tax Act, 1961.

Here we discuss some tips and frequently asked questions (FAQs) relating to HRA tax calculations and claiming exemption:

Calculating HRA Exemption

1. How to calculate HRA? Or, how much HRA is exempt from tax?Please READ “How to Calculate HRA Income Tax Exemption”.

2. Whether HRA calculation to be done on monthly basis or annual basis?There are four variables in HRA tax calculations: namely, salary (i.e., basic pay plus DA), HRA received, rent paid and the city of residence (whether metro or non-metro). In case all of the four remain the same through out the year, the HRA tax exemption calculation is to be done on ‘annual’ basis. On the other hand, if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis.

3. What if the place/city of residence and place/city of working is different?Good question. In such a case for the purpose of HRA calculation, place of residence will be considered and not place of working. Suppose that you’re working in a factory or a company located in Sonepat (near New Delhi) while residing in New Delhi. So, for the purpose of HRA, your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%.

Claiming HRA Exemption

4. How to Claim the maximum possible tax exemption on HRA?Yes, indeed it is possible to claim the HRA tax exemption to the maximum extent possible as provided in the income tax law. For details, please read “How to Claim Maximum HRA Tax Exemption”.

5. How can a self-employed person claim tax benefit for the rent paid?As the self-employed person doesn’t receive any salary, so there is no HRA and consequently question of HRA exemption – under section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules –doesn’t arise.

However, to take care of such a situation, there is a separate provision in the Income Tax Act, whereby a person not in receipt of HRA but incurring rent expenses for his residence can claim a deduction under section 80GG which is quite similar to section to 10(13A) but some additional conditions have been imposed.

6. Is it possible to claim HRA as well as home loan tax benefits?Yes, certainly. There is no relationship between claiming HRA exemption and claiming interest deduction for housing loan. For details, please go to “4 Ways to Claim HRA exemption and House Loan Interest Deduction”.

7. What if the employer refuses to allow the HRA tax benefit?Nothing to worry about. Just claim it while filing your return of income and get the refund of excess TDS deducted from your salary. But, first try to convince your employer and clarify his doubts, if any, regarding your eligibility for claiming it. If your case is indeed genuine, I don’t think your employer should have any problem in allowing HRA tax exemption.

8. Is it possible to claim HRA if residing in a relative’s (Parents/Spouse) house?Please read "4 Ways to Claim HRA exemption".

9. Can both the working spouses claim HRA tax benefit separately?Yes, Why not? If both of them are paying rent and landlord issues either two separate rent receipts or only one receipt specifying the amount or proportion paid by each, then both husband and wife are entitled for HRA exemption according to the amount of rent paid.

Submission of Evidence

10. What evidence needs to be submitted for claiming HRA?The only evidence required for claiming HRA tax exemption is proof of rent payment (i.e., the rent receipt issued by the landlord). A lot many people think that you also require rent agreement for claiming HRA tax exemption but there is no such requirement in tax laws.

Furthermore, even the requirement of production of rent receipts have been dispensed with for the salaried employees drawing HRA (house rent allowance) up to Rs 3,000 per month. Please note that this relaxation is only for the purpose of TDS on salary and in the regular assessment, tax assessing officer has the power to ask for the relevant evidence, if deemed necessary.

Besides, please carefully note the above limit of Rs 3,000 is for the amount of HRA received per month and not for the amount of rent paid. For example, if you’re drawing a monthly HRA of Rs 4,000 p.m. but paying a rent of Rs 2,500 per month, you’ll have to submit the rent receipt for claiming HRA.

11. Can we submit rent agreement instead of rent receipt for claiming HRA?Yes, if you wish you can submit the rent agreement but it can be in addition to and not instead of the rent receipt.

It’s quite possible that you’ve entered into a rent agreement but not paid the rent. The evidence of actual payment of rent is only the rent receipt and not the rent agreement. Thus, at present the only documentary evidence required for claiming HRA is rent receipt.

12. Whether PAN no. of landlord needs to be mentioned on rent receipt?No, there is no such requirement under the tax law.

13. Whether all the 12 months rent receipts need to be submitted?Absolutely not! The basic purpose is to satisfy the DDO that you’re actually paying the rent. It will suffice if you submit rent receipts for 2 months – one for the start of the financial year (i.e., April) and other one for the end of the financial year (i.e., March), or at the most 3 months (third one for the middle of the year).

14. Is there any particular format for rent receipt?No particular format for rent receipt has been specified under the income tax law. However, a typical rent receipt can be as follows:

Received a sum of Rs ------vide cheque (no.-------dt------) or cash, being the rent for the month/period of ----- from Mr./Mrs.----- in respect of House no----(Mention complete address).

Date:-------Place:------

Signature ofLandlord(Name of Landlord)

It can also be in a different wording, but please ensure it mentions the following relevant information:

a) Amount of rent paidb) Period/monthc) Mode of payment (Cheque/Cash)d) Your namee) Landlord’s namef) Landlord’s signatureg) Residential addressh) Date & Placei) A revenue stamp of Rs 1 for payment (both cash/cheque) exceeding Rs 5,000.

I hope that above tax planning tips and Faqs are able to answer your queries regarding calculating and claiming HRA income tax exemption. However, if you

still have any doubts, or if there are any unanswered questions, please feel free to ask here in the comment box. I’ll try my best to clarify them.

4 Ways to Get HRA Exemption Along With Home Loan Tax Benefits

Fisher |

AT the outset, let me clarify that there is no direct relationship whatsoever between claiming HRA tax exemption and claiming tax breaks on home loans (interest deduction under section 24(b) and principal repayment under section 80C). There are separate provisions in the income tax Act, 1961, for each of the two and one does not influence the other. Depending upon the particular facts and circumstances, you may or may not be able to claim both the benefits.

For claiming HRA tax exemption under section (u/s) 10(13A) of Income Tax Act, 1961, read with rule 2A of Income Tax Rules, the only condition is that you should be living in a rented accommodation for which you should be paying rent. Now, if you stay in your own house, you can’t pay rent to yourself and therefore the whole of the HRA received by you becomes taxable.

However, there still remains a possibility that even if you own a house, you stay in a rented accommodation/any other accommodation. It can be due to following reasons:

1. You've rented your own house while you stay in a rented accommodationIn such a case you'll be entitled for HRA tax exemption. However, rental income from your own house will be taxed in your hands while allowing interest deduction under section 24(b) and deduction for principal repayment under section 80C.

2. Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons You may stay at a place – it may be a different city or a different location within the same city - different from the place where your own house is situated.

Here there are two possibilities:

a. Rented accommodation i.e., you're paying rent In this case, you can claim HRA tax exemption while your house will also be treated as self occupied house property for purpose of income tax and you'll get all the housing loan tax benefits i.e., both interest deduction u/s 24(b) and principal repayment under section 80C.

b. Non-rented accommodation i.e., you're not paying rent As the rent is not being paid, the question of HRA tax exemption does not arise. However, your house

will be treated as self-occupied and you'll get the housing loan tax concessions (i.e., interest deduction under section 24 and deduction for principal repayment under section 80C).

3. Your house remains unoccupied while you stay in any other accommodation due to any other reason whatsoever (other than professional/employment/business reasons)

Here again, there are two possibilities:

a. Rented accommodation i.e., you're paying rent In such a case, although you'll be entitled for HRA deduction, your own house loses the status of self-occupied property and will be treated as deemed to be let out, and thus its notional rental income will be taxable in your hands.

b. Non-rented accommodation i.e., you're not paying rent For instance, for your personal convenience you live with your parents in their house while your house remains unoccupied. Here, if you don’t pay any rent, you're not entitled for HRA deduction.

Further, your own house won’t be treated as self-occupied for tax purposes.In other words, your own house will be treated as deemed to be let out and its notional rental income will be taxable in your hands.

However, irrespective of tax status of house i.e., whether self-occupied/deemed to be let-out/let-out, you'll continue to get the interest deduction on home loan under section 24(b) and deduction for principal repayment under section 80C.

4. The new house is not in your name. It belongs to any of your relative (spouse/parent’s) and you actually pay rent to the owner of the house.In such a case also you'll be entitled for HRA tax exemption but the owner of the house who may be your spouse or parent(s) is assessable for the rental income derived from the house. Also, remember that it should a genuine transaction and not a colourable device to evade tax.

However, there is a difference of opinion among tax experts regarding payment of rent to spouse. According to one opinion, there is nothing wrong in paying rent to a spouse so long as it is not a sham transaction. The other view is that there can’t be any commercial transaction between husband and wife.

I tend to agree with the second view and therefore recommend that it is prudent not to indulge in such a dubious transaction which can be questioned by tax authorities and entangle you in legal disputes. Otherwise also, it is always better to err on the side of caution.

Conclusion In a nutshell, if you've a house, either stay in it or rent it out. Don't leave it vacant. In case you have to leave it vacant, it should be only for employment/business/professional reasons. Even in such a case you should be

either living in a different city or at different place within the same city, and not in the immediate vicinity of your house (i.e., the location where you stay should be at a considerable distance from your own house). Otherwise, notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C.

Furthermore, as regards the HRA, you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment, irrespective of whether you are having your own house(s) or not.

How to Calculate HRA Income Tax Exemption

Fisher |

Almost every salaried class person receives HRA (house rent allowance) as part of the salary package irrespective of whether he is paying rent or not. Besides, after basic pay, HRA constitutes the second most significant component of your CTC (cost-to-company).

From tax planning point of view, I have already mentioned in detail how to claim HRA tax exemption and also further clarified all your doubts regarding claiming both -- HRA tax exemption and home loan interest deduction -- simultaneously. For details, please see 4 Ways of Claiming HRA Tax Exemption Along With Home Loan Interest Deduction.

However, some of you might also be interested in knowing how much of the HRA is actually tax exempt or deducted while computing taxable income, or how to calculate the tax exempt portion of the HRA. In fact, it is better to be aware of some tax basics instead of completely relying on your employer so that you can do some of the basic tax calculations and planning yourself.

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, least of following three is exempt from tax:

1. Actual HRA received2. Rent paid in excess of 10% of salary (Basic + DA)3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)

Salary for the above purpose means BASIC + DA. However, private sector organizations, usually, doesn’t provide DA to employees.

Let’s take an example. Suppose that you’re residing in Mumbai and paying a rent of Rs 20,000 p.m. and that your salary package comprises the following:

Basic — Rs. 50,000 p.m.DA — NilHRA — Rs. 20,000 p.m. (40% of basic)

Now, the exempted amount of HRA will be least of the following three figures:

1. HRA received i.e., Rs. 20,0002. Rent above 10% of basic i.e., Rs. 15,000 (Rs. 20,000 – Rs. 5,000)3. 50% of basic i.e., Rs. 25,000

The least of the three is Rs 15,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 15,000 p.m. (per month) out of total HRA received of Rs. 20,000 p.m. In other words, net taxable portion of the HRA works out to be Rs 60,000 i.e., Rs 2,40,000 (HRA received) minus Rs 1,80,000 (HRA tax exempt).

HRA Tax Calculator

Fisher |

I’ve already dealt with the subject of HRA tax exemption quite extensively in my earlier posts – How to Calculate HRA Tax Exemption, HRA FAQs & Tips, and Claiming HRA along with Home Loan Tax Benefits.

However, I’ve received a few requests to develop a HRA Tax Calculator in excel to make it easier for a layman to understand and calculate. So, here’s a HRA tax calculator.

You need to input the following information for calculating taxable and exempt portion of the HRA:

1. Basic Pay + DA (if any) p.m.2. HRA received p.m.3. Rent paid p.m.4. City of Residence (Enter "M" for Metro & "N" for Non-Metro)

However, it is very rare that all the four variables remain constant during the entire financial year. There can be increase in the basic pay and HRA received (due to annual increments or change of job); city of residence and rent paid might also change. As already pointed out in HRA FAQs, when there is change in any of the four factors, HRA tax exemption is to be computed on monthly basis.

Thus, I’ve prepared two HRA tax calculators. The first HRA calculator is meant for calculating HRA tax exemption when all the four parameters remain same through out the financial year. Second HRA calculator is to be used if there is a change in any of the four variables. In case you still need any clarification, please feel free to ask.

What’s Your Effective Tax Rate?

Fisher |

What’s your tax bracket? You must have heard this question quite often. But has anyone ever asked you about your effective tax burden? Did you ever thought about your effective rate of tax? Have you ever tried to calculate it?

We keep on carping about the high taxes by keeping in view only maximum marginal tax rates, without ever giving a thought to the exemptions and deductions we avail.

Taxes are determined based on your taxable income. Taxable income is broken down into different brackets or slabs, each to which a different tax rate applies. The highest tax slab rate relative to a taxable income is called marginal tax rate. Put simply, the highest rate of tax applicable on your marginal or additional income is called marginal rate of tax and is the rate you pay on your last rupee of income.

Marginal vs. Effective Tax RateMarginal tax rate is important because while making investment decisions, you need to consider your marginal tax rate. However, marginal tax rates do not fully describe the impact of taxation.

The effective tax rate refers to the actual rate of tax borne by you. It is the average rate of tax which you actually pay on your total earnings / income (i.e., both taxable plus non-taxable income). It is obtained by dividing the total amount of tax paid by you by your total earnings expressed as a percentage and indicates your effective tax burden which is always lower than your maximum marginal rate.

Two basic reasons for substantial difference between your marginal tax rate and your effective tax rate are:

1.Your entire income doesn’t get taxed. For example, you are entitled for various exemptions (e.g. HRA, long term capital gains on sale of equity shares, dividends etc) and deductions (such as section 80C and 80d) due to which your taxable income is much lower than your actual total earnings during a particular year.

2. Further, unlike corporate tax rates, your total taxable income doesn’t get taxed at a flat rate. There are different slab rates of tax applicable to individuals. Right now, the lowest tax slab rate is 10% and the highest is 30% (plus surcharge and education cess). Besides, there are certain other incomes which are taxed at concessional rate of tax. For example, short term capital gains under section 111A are taxed at a flat rate of 15% (plus surcharge, if applicable and education cess).

Furthermore, ‘Effective rate of tax’ is also different from ‘Average rate of tax’ which is average rate levied on your ‘Taxable Income’ and is calculated by dividing ‘total tax obligation’ with ‘Taxable income’. Your ‘effective rate of tax’, on the other hand, reveals the average rate of tax for all your income (taxable as well as non-taxable).

Let’s clarify the difference with the help of an example. Suppose that you’re having a total annual income of Rs 17 lakh out of which Rs 4 lakh is exempt (i.e., not taxable) from income tax. Further, let’s say that you are entitled to deductions amounting to Rs 1.6 lakh under various sections of income tax such as section 24(b) and section 80. Thus, your taxable income comes to Rs. 11.4 lakh (which includes short term capital gains of Rs 2,30,000 taxable u/s 111A @ 15%). Based on the tax rates applicable to ‘other individual’ (i.e., neither women nor senior-citizen) for the assessment year 2009-10 (PY 2008-09), the total tax liability works out to be Rs 2,40,760. So, we arrive at an effective tax rate of 14.16 per cent, which is less than half of marginal tax rate and almost two-third of average tax rate (marginal tax rate of 33.99% and average rate of tax of 21.12% ).

Now, finally calculate your effective tax rate. Isn’t it revealing? Feel free to share it with others by writing in the comment box.

Tax benefits on a land loanLast updated on: July 29, 2005 09:21 IST

While we have often spoken about home loans, a number of our readers had queries on land loans.

Harsh Roongta, CEO, Apnaloan.com, clarifies your doubts on the tax impact of such loans.

1. Can I take a loan to buy a plot of land?

Yes, you can.

Buying a home? Service tax will hit you

2. Will I get the applicable tax benefits?

No. You get no tax breaks if you take a loan to buy a plot of land.

But, if you take a loan for construction, that means a loan to build a house on that plot of land, then you can get a tax break.

In such a case, the tax benefits are available on both portions of the loan – the one to purchase the plot and the one taken to construct the house thereon. 

Let's say you took a Rs 5,00,000 loan to buy a plot of land and a year later you took a Rs 3,00,000 loan to construct. Now the total amount will be combined and you will get the tax benefit on the entire amount.

5 questions home loan seekers ask

3. What will be the tax benefits for such loans and when will they be available?

The tax deductions will be applicable only in the year in which the construction is completed.

Section 80C

The principal repayment you make on your home loan is eligible for income deduction under Section 80C. The principal is the actual amount you borrow from the home loan company and does not include the interest payments.

Incidentally, registration and transfer fees paid for the transfer of the plot title fall under this limit (as long as the transfer and registration amount is paid in the year in which the construction is completed).

Let's say that your taxable income is Rs 100,000 and you repaid the home loan principal of Rs 40,000. Your taxable income drops to Rs 60,000 (Rs 100,000 - Rs 40,000).

The overall limit under Section 80C is Rs 1,00,000. This will include certain investments -- provident fund, public provident fund, life insurance premium, equity linked savings schemes of mutual funds, infrastructure bonds, pension plans -- and home loan principal repayment.

There are no sub-limits within this section; you can utilise the entire Rs 1,00,000 exemption for home loan principal repayment deduction if you choose.

All about Section 80C

Section 24

Under Section 24, if your house is self-occupied, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. 

As a result, your taxable income decreases by that amount.

Let's work it out.

Salary income: Rs 3,50,000Interest payment on home loan: Rs 1,60,000Taxable income = Rs 3,50,000 (income) - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000 

This is subject to the fact that the construction of the house is completed within three years from the end of the financial year in which the first disbursement of the plot loan was taken.

This deduction is available in respect of interest payable for the year in which the construction is completed and one-fifth of the interest payable prior to that year.

Let's take an example:

Date on which the plot loan is bought: December 1999End of that financial year: March 31, 2000Year in which the construction loan is first taken: April 2002Construction completed on: April 2005

Here the tax benefits will first be available in respect of the financial year 2005-06.

If the time for construction exceeds that, then the maximum limit for deduction is Rs 30,000.

If the house is given out on rent, there is no maximum limit for this deduction and it also does not depend on the time taken for the construction to be completed.

Joint home loans and tax benefits

4. Will the loan for construction include the cost of all raw materials and labour?

That is right.

Can I take a home loan from my family?

5. After I commence construction, can I avail of the tax benefit on the loan for the plot of land too?

The first tax benefits are available only in the year of completion of construction.

In that year, the accumulated interest (including interest on land loan as well as the construction loan) till the end of the previous year shall be taken together and one-fifth of this cumulated interest plus the interest payable for the specific year will be eligible for deduction.

No tax benefits are available in respect of the principal paid back during the years in which the construction is not complete.