Investing for TAX SAVING!
The major reason why a large number of young people invest is to save tax! In fact, thank God for tax. If tax did not exist, the youth would never even think about investing!
Incase you do not know how this whole “tax saving” and investing thing works, let us explain that first.
You see the Govt. wants us to invest in certain things. Some of the things that the Govt. wants us to invest in are for our own good. The other things are for the good of the nation. So to encourage people to invest their money in the “these things” the Govt. says that, “If you invest your money in these things, you do not have to pay ‘income tax’ for earning that money!”
Incase you are confused, I will just give you are very basic and crude explanation on how income tax is calculated and paid. You see, “income tax” is all about your “income” i.e. the money you earn! You have to basically pay a portion of what you earn to the Govt.
Suppose you do a job and you earn Rs.20,000 every month you will have to pay a part or a “percentage” of that money to the Govt. What is the percentage that you have to pay? That depends on the “tax bracket” you fall in.
What is a tax bracket? You see, the Govt. feels that rich people can afford to give more money towards the development of the country and poor people cannot give much. Also the really poor people cannot give anything at all since they are struggling financially. So the Govt. has decided whether you are “very poor” or “poor” or “rich” or “very rich” depending on how much income you make. If you fall in the “very rich” category than you have to pay a big percentage of your money towards the county. If you fall in the “very poor” category you do not have to pay anything to the country.
This is basically what tax brackets are. The Govt. has decided what percentage of your income you must pay as “income tax” depending on how much you make or which “tax bracket” you fall in.
Now there is a legal way of paying less tax than what you are supposed to pay. And this way is though “investments”. If you invest part of your income into Govt. bonds, infrastructure bonds, life insurance etc. then your income will reduce and you will have to pay less to the Govt though income tax!
However, this is not true for any type of investment. It is true only for certain types of investments as stated by the Govt. Also, if you invest your money in these tax saving things, it does not just “go away”! You actually create an asset. An asset that produces money for your self. So, instead of loosing the earning power of the money by giving it to the Govt. though income tax, you could use the money to create an asset and also save tax in the process.
Again, incase you lost the original point in all the explanation, invest your money to save tax!
What we have told you above, are just the very basics of saving tax. There is a lot more to learn!
The last few budgets have thrown open a variety of investment options to invest to save tax. The most important question is which area of investment to choose. Three most important investments which as far as possible should be taken advantage of by all individual tax payers in particular are:
(a) Investment in a residential house property;
(b) Investment up to a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C / 80CCC;
(c) Investment up to Rs.10,000/- in a Mediclaim medical insurance policy, popularly known as Mediclaim Policy.
If you want to achieve the highest score of tax planning with reference to your investments, then one must make it a point to buy one residential house property for self-occupation especially when you do not own a residential property in your name. As per the provisions contained in section 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is permissible for every individual in respect of interest on loan for residential self-occupied house property. This interest on loan is allowed as a deduction irrespective of the person from whom you take the loan. Hence, even if you take a loan not from a banker but from a relative or your spouse and make the payment of the interest still then the deduction in respect of interest on loan would be allowed. The maximum amount of deduction as per section 24 in respect of interest on loan for residential house property is Rs 1,50,000 per year.
If you don't have a housing loan, it really makes sense right now to start hunting for housing loan and try to get the occupation of the property before the close of 31st March so as to enjoy the full deduction on account of interest on the housing loan. Please do remember that in case the house is not ready the benefit of deduction will not be available in this year. Your investment in residential house property for self-occupation can also get you another tax deduction in terms of section 80C whereby deduction from your income up to Rs 1 lakh is permissible even in respect of repayment of the housing loan to bank, financial institution, employer etc. Those interested should refer to the exact provisions of section 80C.
Now, it is time to judge your preference for making investment in various vistas available as per section 80C of the Income Tax Act, 1961. However, please do remember that one or more items taken together the total investment amount should be a maximum of Rs 1 lakh to entitle you to a deduction u/s 80C. One can also opt for contribution to the Pension Plan whereby deduction u/s 80CCC is permissible upto Rs 1 lakh. However, the combined deduction of section 80C and section 80CCC for Pension Plan is Rs 1 lakh only. Hence, it implies that there is no separate specific deduction for pension plan contribution
Now coming to the most important area of tax deduction by making investment in tune with the provisions contained in section 80C of the Income Tax Act, 1961, we find that the comparatively popular areas in which investment can be made by the tax payers are payment of life insurance premium, contribution to public provident fund, investment in NSC, investment in NSS (National Saving Scheme), payment of the children tuition fee, investment in ELSS(Equity Linked Saving Scheme) and repayment of the housing loan. Thus, all together one can pick and choose from all these investment options as also the pension plan and thereby target the total investment to the figure of Rs 1 lakh, which happens to be the maximum amount which one can contribute by way of investment for tax benefit.
Another happy news of making investment for the purposes of section 80C is investment in bank fixed deposit of any scheduled bank having a maturity period of minimum five years. Thus, your investment in bank fixed deposit during the current year for five years or more will entitle you to tax deduction in terms of section 80C of the Income Tax Act, 1961.
The major reason why a large number of young people invest is to save tax! In fact, thank God for tax. If tax did not exist, the youth would never even think about investing!
Incase you do not know how this whole “tax saving” and investing thing works, let us explain that first.
You see the Govt. wants us to invest in certain things. Some of the things that the Govt. wants us to invest in are for our own good. The other things are for the good of the nation. So to encourage people to invest their money in the “these things” the Govt. says that, “If you invest your money in these things, you do not have to pay ‘income tax’ for earning that money!”
Incase you are confused, I will just give you are very basic and crude explanation on how income tax is calculated and paid. You see, “income tax” is all about your “income” i.e. the money you earn! You have to basically pay a portion of what you earn to the Govt.
Suppose you do a job and you earn Rs.20,000 every month you will have to pay a part or a “percentage” of that money to the Govt. What is the percentage that you have to pay? That depends on the “tax bracket” you fall in.
What is a tax bracket? You see, the Govt. feels that rich people can afford to give more money towards the development of the country and poor people cannot give much. Also the really poor people cannot give anything at all since they are struggling financially. So the Govt. has decided whether you are “very poor” or “poor” or “rich” or “very rich” depending on how much income you make. If you fall in the “very rich” category than you have to pay a big percentage of your money towards the county. If you fall in the “very poor” category you do not have to pay anything to the country.
This is basically what tax brackets are. The Govt. has decided what percentage of your income you must pay as “income tax” depending on how much you make or which “tax bracket” you fall in.
Now there is a legal way of paying less tax than what you are supposed to pay. And this way is though “investments”. If you invest part of your income into Govt. bonds, infrastructure bonds, life insurance etc. then your income will reduce and you will have to pay less to the Govt though income tax!
However, this is not true for any type of investment. It is true only for certain types of investments as stated by the Govt. Also, if you invest your money in these tax saving things, it does not just “go away”! You actually create an asset. An asset that produces money for your self. So, instead of loosing the earning power of the money by giving it to the Govt. though income tax, you could use the money to create an asset and also save tax in the process.
Again, incase you lost the original point in all the explanation, invest your money to save tax!
What we have told you above, are just the very basics of saving tax. There is a lot more to learn!
The last few budgets have thrown open a variety of investment options to invest to save tax. The most important question is which area of investment to choose. Three most important investments which as far as possible should be taken advantage of by all individual tax payers in particular are:
(a) Investment in a residential house property;
(b) Investment up to a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C / 80CCC;
(c) Investment up to Rs.10,000/- in a Mediclaim medical insurance policy, popularly known as Mediclaim Policy.
If you want to achieve the highest score of tax planning with reference to your investments, then one must make it a point to buy one residential house property for self-occupation especially when you do not own a residential property in your name. As per the provisions contained in section 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is permissible for every individual in respect of interest on loan for residential self-occupied house property. This interest on loan is allowed as a deduction irrespective of the person from whom you take the loan. Hence, even if you take a loan not from a banker but from a relative or your spouse and make the payment of the interest still then the deduction in respect of interest on loan would be allowed. The maximum amount of deduction as per section 24 in respect of interest on loan for residential house property is Rs 1,50,000 per year.
If you don't have a housing loan, it really makes sense right now to start hunting for housing loan and try to get the occupation of the property before the close of 31st March so as to enjoy the full deduction on account of interest on the housing loan. Please do remember that in case the house is not ready the benefit of deduction will not be available in this year. Your investment in residential house property for self-occupation can also get you another tax deduction in terms of section 80C whereby deduction from your income up to Rs 1 lakh is permissible even in respect of repayment of the housing loan to bank, financial institution, employer etc. Those interested should refer to the exact provisions of section 80C.
Now, it is time to judge your preference for making investment in various vistas available as per section 80C of the Income Tax Act, 1961. However, please do remember that one or more items taken together the total investment amount should be a maximum of Rs 1 lakh to entitle you to a deduction u/s 80C. One can also opt for contribution to the Pension Plan whereby deduction u/s 80CCC is permissible upto Rs 1 lakh. However, the combined deduction of section 80C and section 80CCC for Pension Plan is Rs 1 lakh only. Hence, it implies that there is no separate specific deduction for pension plan contribution
Now coming to the most important area of tax deduction by making investment in tune with the provisions contained in section 80C of the Income Tax Act, 1961, we find that the comparatively popular areas in which investment can be made by the tax payers are payment of life insurance premium, contribution to public provident fund, investment in NSC, investment in NSS (National Saving Scheme), payment of the children tuition fee, investment in ELSS(Equity Linked Saving Scheme) and repayment of the housing loan. Thus, all together one can pick and choose from all these investment options as also the pension plan and thereby target the total investment to the figure of Rs 1 lakh, which happens to be the maximum amount which one can contribute by way of investment for tax benefit.
Another happy news of making investment for the purposes of section 80C is investment in bank fixed deposit of any scheduled bank having a maturity period of minimum five years. Thus, your investment in bank fixed deposit during the current year for five years or more will entitle you to tax deduction in terms of section 80C of the Income Tax Act, 1961.
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