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ld wine in a new bottle!
If that's your understanding of the new Section 80C then you need an update on your Tax Quotient.
Section 80C has a lot more purpose and meaning from the long-term perspective of taxability of investments than the earlier Section 88 rebate.
Section 80C replaces the existing Section 88 with more or less the same investment mix available in Section 88 but with a major change in the method of providing a tax benefit.
To get an update on what Section 88 was all about, read Smart tax-saving solutions!
The investments
Let's start with the investments that fall under Section 80C.
Besides these investments, the payments towards the principal amount of your home loan are also eligible for an income deduction.
All the above must be made from the current year's earnings and not past earnings. So if you are paying tax for the financial year 2005'06, then your investments must be made from earnings during this period.
The limit
The limit under this section is Rs 100,000.
This is irrespective of how much you are earn and under which tax bracket you fall.
Also, there are no sub-limits under this overall Rs 100,000 amount.
So if you choose, you can invest the entire amount in ELSS or infrastructure bonds. The choice is entire up to you as to how you want to reach this limit.
Or, if you are repaying a home loan and the principal repayment amounts to Rs 100,000, then you can claim the entire amount as a deduction.
Earlier, the principal repayment of home loan was restricted to only Rs 20,000, irrespective of how much you actually paid. Not so any longer.
The calculation
Let's take an example to better explain the tax working:
Salary income: Rs 3,20,000
Home loan interest payment: Rs 1,20,000
Home loan principal repayment: Rs 80,000
NSC investment: Rs 30,000
|
Salary (a) |
320,000 |
|
Income from house property (b)* |
120,000 |
|
Gross total income (c) (c = a b) |
200,000 |
|
|
|
|
Home loan principal repayment |
80,000 |
|
NSC investment |
30,000 |
|
Section 80C investments |
1,10,000 |
|
|
|
|
Limit for Section 80C deduction (d) |
1,00,000 |
|
Taxable income (c d) |
100,000 |
|
Tax on taxable income |
Nil |
* The tax man views the home loan interest payment as negative income from house property.
Make it work for you
The taxman has given you total freedom in deciding where to invest your money. So you now have the flexibility to invest in investments that are most suited to your requirements.
Young investors should take a long-term view and seriously consider investing in ELSS. These are mutual fund schemes that invest in the stock market. So not only do they have the capacity of generating higher returns but they also provide you with a tax benefit.
Don't focus too much on infrastructure bonds and post office schemes because the interest there is on the downturn.
You can also set aside a portion in pension funds and the PPF for retirement purposes.
And, if you are thinking of taking a home loan, go for it.
Just ensure that you totally exhaust the Rs 1,00,000 limit and save on your tax.
The tax on withdrawal
When you look at the taxability of a certain investment, there are three aspects to consider:
1) Tax when you make the investment
2) Tax on the income you earn from such an investment
3) Tax on the maturity of the investment
For example, if you invest in a pension fund, the annuity (amount the insurance company pays you regularly as an income) may be taxable. But, your returns in a PPF are not.
This obviously creates a bias in the minds of the investors against the taxable investment option.
In order to remove this bias, the tax department has proposed to move towards EET (Exempt, Exempt, Taxed) basis of taxation through the three stages mentioned above.
According to this method of taxation, all investments would be taxable on receipt/ withdrawal/ maturity from such investment.
Hence, all investments are now in one basket - Section 80C - in order to facilitate this EET based taxation.
If the EET basis of taxation is made applicable, then the investment would become taxable at the time of receipt/withdrawal.
That means that your PPF too would be taxable. Most probably only amounts from this year onwards.
Not so soon....
However, the tax on withdrawal will only be levied if the parliament passes the Budget Bill.
Even if the parliament does so, the roadmap for EET-based taxation has not yet been decided and hence a committee would be set up to define the roadmap and only then would this basis of taxation would become applicable.
Probably we could look at a timeframe of at least a year.