1. What is a tax deduction?

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A tax deduction is simply an item that helps you reduce your taxable income by the amount of the deduction. So by utilizing
that particular deduction, you can reduce the amount of income tax by reducing the amount of your taxable income.

For example: If you have a taxable income of Rs. 2,50,000 for the financial year, and you invest Rs. 70,000 in PPF and Rs.
30,000 in Equity Linked Savings Schemes, then your taxable income is: Gross Taxable Income: Rs. 2,50,000

Deductions:
                    PPF: Rs. 70,000
                    ELSS: Rs. 30,000
Total Deductions:         Rs. 1,00,000
Net Taxable Income:    Rs. 1,50,000

2. How can I save tax using different tax deductions?

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There are different tax deductions available to an individual under different Sections of the IT Act. Section 80C for example
has a deduction limit of Rs. 1 lakh per annum.
You can save tax by making use of the various deductions available to you under different sections of the IT Act i.e.
investing in these instruments.

3. What are the investment avenues available under Section 80C?

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The specified investment schemes under section 80C are:

a. Life Insurance Premiums

b. Contributions to Employees Provident Fund (EPF)
c. Public Provident Fund (PPF)
d. National Savings Certificates (NSC)
e. Unit Linked Insurance Plan (ULIP)

f. Repayment of Housing Loan (Principal)

g. Equity Linked Savings Scheme (ELSS) of Mutual Funds

h. Fixed Deposit (FD) with Banks having a lock-in period of five years

i. Pension Funds

4. Does Section 80C include Section 80CCC and 80CCD?

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 Yes. The total deduction available under Section 80C is Rs. 1 lakh, inclusive of Section 80CCC and Section 80CCD. These
two sub sections are to do with pension. Under Section 80CCC, you can invest up to Rs. 1 lakh in a Pension fund of LIC of
India or any other insurance company. Under Section 80CCD you can invest in the National Pension Scheme of the Central
Government up to 10% of your salary. Any contribution to this scheme of more than 10% of your salary will not be eligible
for tax deduction.

5. What is the limit for Section 80CCF: Long Term Infrastructure Bonds?
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An additional deduction of Rs. 20,000 has been introduced by way of investment into long term infrastructure bonds.
Here, any investment made into the specified long term infrastructure bonds between April 1st, 2010 and March 31st, 2011
will be eligible for a tax deduction up to Rs. 20,000.
This is in addition to the Rs. 1 lakh deduction available under Section 80C.

6. How does Life Insurance Premium payment contribute to Section 80C investment?
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An amount up to Rs 1 lakh that you pay towards life insurance premium for yourself, your spouse or your children can be
included in Section 80C deduction and reduced from your taxable income.
If you are paying premium for more than one insurance policy, all the premiums can be included, subject to the limit of Rs. 1
lakh.

a. Can I include life insurance premiums paid for my parents?

No. Life insurance premium paid for your parents or your in-laws is not eligible for deduction.

b. Does this apply to all life insurance products such as endowment, money back, term plans, ULIPs etc?

Yes. Any premium paid for any life insurance in any life insurance product is eligible for tax deduction under Section
80C.

Also note that any sum, including the bonus, received on maturity of a life insurance policy is tax free. Death benefits
received are also exempt from tax.

Most importantly, remember to invest in a life insurance policy only if you need it, and not for the tax benefit. If you
opt for it keeping in mind the tax benefit, you may end up being under-insured or possibly over-insured.

7. How do I save tax by contributing to my employee’s provident fund?

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The EPF is a scheme intended to help employees from both private and non-pensionable public sectors save a fraction of
their salary every month in a savings scheme, to be used in an event that the employee is temporarily or no longer fit to work
or upon retirement.

An employee can withdraw full amount at the credit in the fund on retirement from service after attaining the age of 55 year.

EPF is automatically deducted from salary. Both employee and employer contribute to it. Employee’s contribution is counted
towards Section 80C investments.

Employees also have the option to contribute additional amounts through voluntary contributions (VPF).
 SUMMARY OF EMPLOYEES PROVIDENT FUND

Return (p.a.) 8.5%

Risk NIL
Lock In Working Life
Income from Investment Interest earned is Tax Free
Maturity Proceeds Exempt under Section 10(11).
NRI/PIO eligible Yes

8. How do I save tax by contributing to the Public Provident Fund (PPF)?

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PPF is eligible for tax deduction up to Rs. 70,000. So any amount up to Rs. 70,000 invested towards your PPF account will
be eligible for tax deduction. The minimum investment in PPF is Rs 500 per year and the maximum investment is Rs 70,000
per year.

The unique feature of PPF is that in case of insolvency it will not be attached to the assets of the insolvent. So this is an
attractive tax saving tool for business people in fluctuating and highly leveraged businesses. Withdrawals from your PPF
account are allowed during certain years for specific purposes.

SUMMARY OF PPF DETAILS

Return (p.a.) 8.0%

Risk NIL
Lock In 15 years
Income from Investment Interest earned is Tax Free
Maturity Proceeds Exempt from tax.
NRI/PIO eligible No

9. How do I save tax by investing in the National Savings Certificate (NSC)?

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NSC is a good medium term investment option. An advantage of the NSC is that it can be pledged as security against a loan
to banks/ government institutions.

The minimum investment starts from Rs 100 and there is no maximum limit for the investment in a year.

Return (p.a.) 8.0% compounded half-yearly, i.e., the effective annual rate of interest is 8.16%.
Risk NIL
Lock In 6 years
a. Interest accrued every year is liable to tax (i.e., to be included in your taxable
income).
Income from Investment b. However, interest is also deemed to be reinvested and thus eligible for section 80C
deduction.

Maturity Proceeds It includes interest which is already taxed

NRI/PIO eligible No

 How do I save tax by taking a Unit Linked Insurance Plan (ULIP)?

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Unit-Linked Insurance Plan (ULIP) is life insurance solution that provides for the benefits of risk protection and
flexibility in investment. Part of the premium you pay goes towards the sum assured (amount you get in a life
insurance policy) and the balance will be invested in whichever investments you choose as per what is available
under the scheme - equity, debt or a mixture of both.

SUMMARY OF ULIP DETAILS

Return (p.a.) Market linked

Risk Market and Fund manager risk
Lock In 5 years
Income from
N.A.
Investment
a. Exempt under Section 10(10)D for any sum received from insurance policy as maturity
proceeds. Death benefits are exempt from tax.
Maturity b. However for ULIPs the maturity benefit is tax free only if the premium paid per year is less
Proceeds the 20% of the life insurance cover. In other words the life cover has to be at least 5 times the premium.

NRI/PIO eligible Yes

 How can I use my home loan to save tax?

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The EMI (equated monthly installment) that you pay to repay your home loan consists of two components - one is
the principal and the other is the interest. The principal component of the EMI qualifies for deduction under section
80C.

Even the interest component can save you significant income tax - but that would be under Section 24 of the Income
Tax Act. Currently, anybody with a housing loan gets a deduction up to Rs 150,000, paid as interest for the loan,
from his total income, for a self occupied property.

For more information on how a home loan can help you save tax – please see our Section on Income from House
Property (Question 10).

 How do I save tax by investing in Equity Linked Savings Schemes (ELSS)?

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Investment in ELSS is considered to be one of the best option to save tax because of many reasons like low
expenses, short lock-in period, high liquidity and high growth in long-term. Year 2008 and 2009 had been extremely
volatile. Still, many mutual funds have delivered positive return in past 3 years.

The limitations in ELSS are that premature withdrawal is not allowed. There is a 3 year lock in period. Also ELSS
returns are not guaranteed as they are market linked investments.

SUMMARY OF ELSS DETAILS

 Market linked
Return (p.a.)
(The last 5 years' return from ELSS has been approximately 20% compounded annually)*
Risk Market and Fund manager risk
Lock In 3 years
Income from Investment Basically, dividend which is Tax Free
Maturity Proceeds Long term capital gain on sale of equity oriented mutual fund is tax free.
NRI/PIO eligible Yes

* Source: PersonalFN Research

 How do I save tax by investing in the 5 Year Bank FD?

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A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a
minimum period of 15 days to five years and above. Investor gets a lump sum (principal + interest) at the maturity
of the deposit.

The 5-year tax-saving bank deposit gives tax benefit under Section 80C as the amount you invest in the 5 year FD is
deducted from your taxable income.
However interest received on the FD is taxable.

SUMMARY OF 5 YR BANK FD DETAILS

Typical interest rate is 8.00 to 8.50% with an additional 0.25 to 0.5% for senior citizens. The interest rate
Return (p.a.)
varies between banks and with time.
Risk NIL
Lock In 5 years
Income from
Interest received is taxable
Investment
Maturity Proceeds Includes interest which is already taxed
NRI/PIO eligible Yes

 How do I save tax using the New Pension Scheme?

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This is a new, market-linked vehicle for those who do not have an EPF facility to target long-term retirement
planning. It is open to any Indian citizen between the age of 18 and 55. Minimum investment is fixed at Rs. 6,000
p.a.
The NPS offers two accounts: tier I and tier II. Currently only tier I account is available. This is a non-withdrawable
account and investments in this keep accumulating till you turn 60.

SUMMARY OF NEW PENSION SCHEME DETAILS

Return (p.a.) Market Linked

Risk Market and Fund Manager Risk
Lock In Till age of 60
Income from
N.A.
Investment
a. Tax will be levied if you withdraw the money on maturity
b. You can save paying tax by transferring the entire corpus to an annuity service provider
Maturity Proceeds and receiving a pension

NRI/PIO eligible No

 How do I save tax by investing in the Senior Citizens Savings Scheme (SCSS)?
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It allows a retired person having a lump sum to invest it at a reasonably good interest rate. If you are 60 years old (or
took voluntary retirement at 55), you are eligible for the scheme.

Minimum Investment under the scheme is Rs. 1,000 and maximum Rs. 15 lakhs.
The amount invested into SCSS is eligible for tax deduction under Section 80C thus reducing your taxable income
in the year of investment.

This is a popular investment with senior citizens as it offers liquidity as well as periodic income – interest is paid out
quarterly.

SUMMARY OF SCSS DETAILS

Return (p.a.) 9%
Risk NIL
Lock In 5 years (May be extended for another 3 years at the option of depositor)
Income from Investment Fully taxable
Maturity Proceeds Maturity proceeds includes interest which is already taxed every year
NRI/PIO eligible No

 How do I save tax by investing in the 5 Year Post Office Time Deposit (POTD)?
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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) qualifies for tax saving under section 80C.
The current rate of interest on the 5 year POTD is 7.50% p.a., compounded quarterly. The minimum investment
amount is Rs. 200, there is no maximum investment amount. Interest on these deposits is calculated quarterly and
paid out annually.

Return (p.a.) Effective 7.71% as interest is compounded quarterly

Risk NIL
Lock In 5 years
Income from Investment Fully taxable
Maturity Proceeds Maturity proceeds includes interest which is already taxed every year
NRI/PIO eligible No
  How do I save tax by taking a Pension Plan?
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Today pension plans are available with all life insurance companies. They typically come without any life cover
(zero death benefit).

Pension funds are exempted under Section 80CCC, this section stipulates that an investment in pension funds is
eligible for deduction from the income.

Section 80CCC investment limit is clubbed with the limit of Section 80C which means that the total deduction
available for 80CCC and 80C is Rs 100,000. This also means that your investment in pension funds up to Rs
100,000 can be claimed as deduction under section 80CCC.

Of the maturity amount only one-third can be commuted in cash as tax free maturity. The rest of the amount (or the
full amount as the case may be) has to be used to by a pension plan (annuity). Pension receipts from the same will be
treated as income in the hands of the assessee and taxed accordingly. Recently, the Insurance Regulatory and
Development Authority (IRDA) has come out with a clear rule that maturity amount should not be withdrawn as
cash this is coming to effect from July 1, 2010. Currently, the maturity amount can be withdrawn as cash but the
amount will be added to income and will be taxed accordingly.

Now that you know about the various investment instruments available, before you invest – ask yourself the
following questions:

a. How much risk are you willing to take on the investment?

b. For how long will you not need to use these funds? i.e. what lock in period is suitable for you?

c. Do you want your returns to be tax free?

d. Do you want the maturity values of your investments to be non taxable?

e. Do you need liquidity?

S. No. Factor Criteria

a. Fixed rate of return with more safety - NSC, PPF, Bank FD

OR
1. Risk and Returns
b. Market return with more risk - ELSS or ULIP.

c. Range: Up to 15 years lock-in;

d. ELSS has the least lock-in period of 3 years, whereas PPF has the highest of 15
2. Lock-in period years;
e. Others fall in between

3. How return are The most crucial part is to look at how the returns are taxed.
 taxed f. Only PPF and ELSS offer tax free returns; whereas
g. Interest on NSC, Post Office term deposits and bank FDs is taxable

h. Usually products offer tax deduction on investment

Tax Treatment on i. Few offer tax exemption on returns at the time of maturity
4 (a) j. The taxability on maturity reduces the effective return that an investment offers.
Maturity

k. Exempt-Exempt-Exempt (EEE) tax status - tax benefits at the investment stage, the
accrual (accumulation) stage and maturity stage - PPF, ELSS and Life Insurance

l. Exempt-Exempt-Tax (EET) tax status - tax benefits at the investment stage and the
EEE or EET accrual (accumulation) stage and are taxed at the maturity stage - Bank FDs.
4 (b)
category

m. In the new Direct Tax Code, lot of investment products will shift from EEE to EET
wherein these products will be taxed at the maturity stage

n. If a product has maximum investment limit in a year, a tax payer will not be able to
claim entire tax benefits for any amount invested above the maximum limit;
Maximum o. PPF has maximum investment in a year of Rs. 70,000
5.
Investment Limit p. In case of ELSS and ULIPs there is no maximum investment limit.

q. Most tax saving investment products come with a lock-in period;

r. PPF allows partial withdrawal during the 15 years tenure of the investment.
s. Tax savings bank FD cannot be broken before maturity and also banks normally
don’t give loans against these FDs.
6. Liquidity t. Traditional Life insurance policies and ULIPs allow partial withdrawals but only
after completion of 3 years. Also, as an investor you can take loans against life insurance policies.
u. An investor can also take loan against NSC Certificates.

v. Returns from financial products should beat inflation;

w. Low fixed returns products are to be avoided by investors during periods of high
inflation as they yield negative returns.
7. Inflation protection x. In the long run equities have consistently given higher inflation adjusted returns
than returns given fixed return securities.

As per the government law, it is mandatory for every citizen to pay the income tax. Tax assessment takes place
every year in the month of March. Government has given so many benefits to the taxpayers. Tax payment is
applicable for a person who is generating profit by any mode either by the business or from the job. In any of
the public or private limited company, there are shareholders then the tax will not be exempted on the individual
basis. The calculation is based on the annual profit generated by the organization.

In India, there are various tax slabs for the male and female and as per the annual salary, the tax deduction takes
place. If a male individual earns (in Rs) 160,001 to 500,000, the tax would be 10% if it exceeds from 500,000 to
800,000 the tax would be 20% if it exceeds from 800,000 the tax would be 30%. Tax slabs for the female
individual is different from the male individual, the tax limit for the female start from 190,001. For 190,001 the
tax is 10%, from 500,000 to 800,000 tax is 20% whereas for above 800,000 tax would be 30%.

To get the tax benefit,  it is important to show the investment proof. Tax waiver is applicable if the investment
has done in the following:

Mutual funds – There are several government and private mutual funds available in the market such as State
Bank of India mutual funds, Franklin Templeton, Kotak Mahindra and ICICI. Investor has to take care that tax
waiver is available only on those mutual funds that have a locking period; a fund without a locking period is not
eligible for the income tax benefit.

Home Loan – If an individual has purchased any property on loan, a tax waiver is applicable on it.

House Rent – House rent is another mode to save the income tax. While filing for income tax, tax receipt should
be attached.

Insurance Policy- Government has given tax benefit on different type of insurance policies such as life
insurance policy and health Care. This should be noted that no tax benefit is given for the General insurance like
motor insurance etc.

While filing for the income tax it is useful to attach the receipt of the documents as per the above list.

For Male Citizen :

Then: The pre-budget period witnessed that the basic exemption limit was Rs. 1, 60, 000, where the total
income of the assessee was in between Rs. 1.6 lakhs to Rs. 5 lakhs; tax levied on total income was 10%, in case
the total income fell in between Rs. 5 lakhs to Rs. 8 lakhs; tax levied was 20% and whereas the total income
was above Rs. 8 lakhs, the applicable rate of taxation was 30%.

Now: After the Union Budget 2011-12, there has been some amendments with respect to the figures. The limit
has been raised by Rs. 20, 000. The basic exemption limit is Rs. 1, 80, 000, where the total income of the
assessee is in between Rs. 1.8 lakhs to Rs. 5 lakhs; tax levied on total income will be 10%, in case the total
income falls in between Rs. 5 lakhs to Rs. 8 lakhs; tax levied will be 20% and whereas the total income is above
Rs. 8 lakhs, the applicable rate of taxation will be 30%.

For Female Citizen :

Then: The pre-budget period witnessed the basic exemption limit for women to be at Rs. 1, 90, 000, where the
total income of the assessee was in between Rs. 1.9 lakhs to Rs. 5 lakhs; tax levied on total income was 10%, in
case the total income fell in between Rs. 5 lakhs to Rs. 8 lakhs; tax levied was 20% and whereas the total
income was above Rs. 8 lakhs, the applicable rate of taxation was 30%.

Now: The post budget of such exemption limit remains unchanged and the same shall be applicable as per the
Union Budget 2011-12. The reason behind such ignorance is the new direct tax code which is likely to prevail
from 1st April, 2012, which aims at abolishing the gender distinction system in terms of payment of tax.
For Senior Citizen :

Then:  The pre-budget period witnessed the basic exemption limit for senior citizens to be at Rs. 2, 40, 000,
where the total income of the assessee was in between Rs. 2.4 lakhs to Rs. 5 lakhs; tax levied on total income
was 10%, in case the total income fell in between Rs. 5 lakhs to Rs. 8 lakhs; tax levied was 20% and whereas
the total income was above Rs. 8 lakhs, the applicable rate of taxation was 30%.

Now: After the Union Budget 2011-12, there has been some amendments with respect to the figures. The limit
has been raised by Rs. 10, 000. The basic exemption limit is Rs. 2, 50, 000, where the total income of the
assessee is in between Rs. 2.4 lakhs to Rs. 5 lakhs; tax levied on total income will be 10%, in case the total
income falls in between Rs. 5 lakhs to Rs. 8 lakhs; tax levied will be 20% and whereas the total income is above
Rs. 8 lakhs, the applicable rate of taxation will be 30%.

For Very Senior Citizen :

A new concept of very senior citizens has been introduced where people who have attained the age of 80 or
more will fall. For this category, the assessee will get an exemption upto Rs. 5, 00, 000, earlier as these people
fell under the senior citizen category, there limit was also restricted to Rs. 2, 40, 000. The rest of the part shall
be similar to the present position of senior citizens, that is, from Rs. 5, 00, 000 to Rs. 8, 00, 000, 20% of the
income shall be taxable and incase the income exceeds Rs. 8, 00, 000, 30% of the total income shall be taxable.

It shall be noted that in every case, the application of education cess and secondary and higher education cess
shall prevail at the same rate of 2% and 1% respectively.