Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

PLANNING RECIPES FOR TAX SAVING

Head of the household must do some smart thinking for maximizing the family’s tax benefits u/s.80C!

A significant relaxation announced at the time of the passing of the Finance Bill, 2005, related to the abolition of the proposed condition for deduction of upto Rs.1,00,000 under Section 80C requiring that “the eligible investments must be made out of a taxpayer’s income chargeable to tax.”  With this restriction removed, it became possible for taxpayers to invest in various tax saving schemes or incur eligible expenditure, even by securing loans or gifts or withdrawing out of their exempt incomes or accumulations.  This point can be better appreciated by the illustration hereunder:

Illustration:  Mr. Smart’s gross taxable income is Rs.9,00,000, on which the income-tax payable for FY 2011-12 would work out to Rs.1,25,660.  He is under strain to invest Rs.1,00,000 and avail deduction under Section 80C, since he needs the entire income of Rs.7,74,340 (after tax provision of Rs.1,25,660) for meeting his family obligations.

Mr. Smart is in a position to withdraw Rs.70,000 from his PPF A/c and avail Rs.30,000 as a short term loan from his friend.  He should plan to raise this resource of Rs.1,00,000 and out of the same invest Rs.70,000 back in his PPF A/c and also invest Rs.30,000 in any other eligible investment under Section 80C.  He would thus be entitled to avail the benefit of deduction of Rs.1,00,000 under Section 80C, which would mean that his taxable income would now work out to Rs.8,00,000, the income-tax payable thereon amounting to Rs.94,760.  Out of the tax saved Rs.30,900 (1,25,660 – 94,760), he can smartly repay his friend’s loan of Rs.30,000 and draw satisfaction of having made the new 80C investment of Rs.30,000.

Section 80C offers deduction to either an individual or HUF. However, there are diverse recipes under Section 80C prescribed for the two entities. An HUF does not enjoy the entire range of choices under Section 80C as available to an individual. Moreover, some investment or spending avenues, such as contribution to statutory or recognized provident fund or housing loan repayment are exclusively available only to the concerned salary earner or house owner as the case may be.

However, there are several other deductions, which offer fairly flexible opportunities for tax planning and it is in respect of some of these, that a head of the household must do some smart thinking.

SWITCHING OF LIP

Payment of Life Insurance Premium (LIP) is eligible for deduction, where an individual pays LIP in respect of a policy taken either for himself, his spouse and/or children (minor or major). In case of an HUF, payment of LIP for insurance taken on the life of any member of the HUF is also entitled to deduction under Section 80C. Keeping this in view, switching of premium payments, from time to time, as required to enjoy the comfort level of the limits under Section 80C can be usefully planned.

To illustrate, if the limit of Rs.1,00,000 under Section 80C gets saturated in the case of an individual,  LIP on his policy can be paid either by his spouse, his parent or even the HUF of which he is a member and the benefit of tax saving can be enjoyed in that case.

HUF CAN CONTRIBUTE TO PPF

A new account under the Public Provident Fund (PPF) Scheme is not permitted to be opened by an HUF in its name after 13th May, 2005. However, it needs to be noted that Section 80C allows deduction in respect of contribution to PPF by an individual in his own account or in the account of his spouse or children or in the case of an HUF in the PPF account of any of the member of the HUF. In view of the above, an HUF can, without opening a PPF account in its own name, still contribute Rs.70,000 to the PPF account of any of its member (including a minor). This planning would be of special significance, where the individual’s 80C limit has already been exhausted with other savings and contributions and he does not wish to miss the opportunity of saving in PPF, while at the same time availing of the advantage of deduction under Section 80C in the case of the HUF.

TUITION FEES FOR CHILDREN

In case of payment for tuition fees for the full time education of any two children upto Rs.1,00,000, this deduction under Section 80C can be availed in case of either or both of the parents.  Keeping this in mind, it should be decided which of the two parents should pay the tuition fees during the year to avail the maximum benefit of this deduction.

So, draw out the Section 80C allocations chart for your family at the beginning of each fiscal year, before it is too late.

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