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EPF 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. Also, apart from saving tax now, it builds a long term, tax-free retirement corpus for you.

The EPF is fully exempted at all stages-  investment, growth and withdrawal, but from April 2011 it might be taxed at the time of withdrawal.

It’s best to start your tax planning in the beginning of the year to help you systematically grow your savings coupled with the added benefit of tax saving realized at the end of the financial year.

The most popular tax saving schemes fall under Section 80 C. Under this section, this year too a deduction of up to Rs.1L is allowed from Taxable Income in respect of investments made in some specified schemes. This may change to Rs.3L from next year once the new direct tax code kicks in from April 1, 2011. Meanwhile, let’s focus on this year and see how you can make the best of Section 80C.

Eligible Schemes Under Section 80C for 2010-2011

The Specified Investment Schemes u/s 80C and u/s 80CCC are:

  1. Life Insurance Premiums
  2. Contributions to Employees Provident Fund
  3. Public Provident Fund
  4. NSC (National Savings Certificates)
  5. Unit Linked Insurance Plan (ULIP)
  6. Repayment of Housing Loan (Principal)
  7. Equity Linked Savings Scheme (ELSS) of Mutual Funds
  8. Tuition Fees including admission fees or college fees paid for full-time education of any two children of the tax payer.
  9. Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC, etc.
  10. Pension scheme of LIC of India or any other insurance company.
  11. Fixed Deposit with Banks having a lock-in period of 5 Years

This article, in 2 parts, will discuss the details of all the above plans.

Life Insurance Premiums

An amount up to Rs.1 L, that you pay towards your life insurance premium for yourself, your spouse or your children can be included in Section 80C deduction. An amount up to Rs.1 L, that you pay towards your life insurance premium for yourself, your spouse or your children can be included in Section 80C deduction. Life insurance premium paid for your parents or your in-laws is not eligible for deduction. If you are paying premium for more than one insurance policy, all the premiums can be included. It is not necessary to have the insurance policy only from Life Insurance Corporation (LIC) even insurance bought from private companies can be considered. All plans like endowment, money-back plans and term plans are eligible for the deduction.

You can also seek exemption from gross income under Section 10 (10) D for any sum received from insurance policy as maturity proceeds. Death benefits are exempt from tax.

Employee Provident Fund (EPF)

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 saving scheme, to be used in an event that the employee is temporarily or no longer fit to work or at retirement.

A member of the provident fund can withdraw full amount at the credit in the fund on retirement from service after attaining the age of 55 year. Full amount in provident fund can also be withdrawn by the member under the following circumstance:

  • A member is retired on account of permanent and total disablement due to bodily or mental infirmity.
  • On migration from India for permanent settlement abroad or for taking employment abroad.
  • In the case of mass or individual retrenchment.

EPF 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. Also, apart from saving tax now, it builds a long term, tax-free retirement corpus for you.

The EPF is fully exempted at all stages-  investment, growth and withdrawal, but from April 2011 it might be taxed at the time of withdrawal.

Public Provident Fund

Public Provident Fund is a tax saving investment, the interest earned is also tax free. It is a scheme run by the Government of India, and it is also totally safe. The interest paid is 8% compounded annually and the minimum investment is Rs. 500 and the maximum investment is Rs. 70000/-. It is a long-term investment option (minimum 15 years with option to extend it for any number of 5 year periods) as the interest is fully exempted from tax. The PPF is fully exempted at all stages- investment, growth and withdrawal, but from April 2011 it might be taxed at the time of withdrawal.

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.

National Saving Certificate

It is a good medium term investment option. National Savings Certificate (NSC) is a 6-Year 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. An advantage of the NSC is that it can be pledged as security against a loan to banks/ Govt. Institutions. The minimum investment starts from Rs. 100/- and there is no maximum limit for the investment.

Unit Linked Insurance Plan

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 desire – equity, debt or a mixture of both.

The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The fund value at any time varies according to the value of the underlying assets at the time. This is similar to mutual funds.

ULIP provides solutions for insurance planning, financial needs, and many types of financial planning including children’s marriage planning.

The tax benefit for life insurance plans also extend to the time of maturity and in case of death claim under Section 10(10)D. However for ULIPs the maturity benefit is tax free only if the premium paid per year is less the 20% of the life insurance cover. In other words the life cover has to be at least 5 times the premium. As per the New Direct Tax Code (which will come into force from April 1st 2011) this benefit will be available only if the life cover is 20 times the premium.

 
 

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