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

TAX SAVING MAGIC OF SECTION 80C!

Do Not Miss to Buy, Beg or even Borrow…
Be Smart to Invest & Avoid your Tax Sorrow!

Be happy and gay … saving tax the 80C way!’  This should be the ‘Magic Mantra’ of all taxpayers with taxable income above Rs.8,00,000, who attract the maximum tax bracket of 30.9%. If you think smart, you can save a good Rs.45,743 as income-tax, without even investing a penny from your pocket!

NO EXCUSES PLEASE!

“My liquidity constraints do not permt me to invest,” some may retort.  But let this not be your excuse.  Infact, you should be prepared to even beg or borrow to make up for your investment limit of Rs.1,00,000 and thus plan to lawfully avoid your tax sorrow.  Fortunately, Section 80C of the Income-tax Act does not require you to invest out of your ‘income chargeable to tax’.  You can thus venture to even go for an interest bearing personal loan to ensure that you do not miss out on the potential tax saving of Rs.30,900.   An interesting Case Study below will highlight the significance of this strategy.

 


Case Study: Amdavadi’s gross total income is Rs.10,00,000 on which the Income-tax, and Education Cess together work out to Rs.1,58,620.  He borrows Rs.1,00,000 from his retired father (whose income is not in any taxable bracket), promising him to pay interest at 8% per annum and invests this amount in the six years National Savings Certificates (NSCs).  P saves income tax of Rs.30,900 (1,58,620 – 1,27,720) right away in the year of investment, since his resultant tax liability on the taxable income of Rs.9,00,000 (after deduction of Rs.1,00,000 under Section 80C) stands reduced to Rs.1,27,720.

In the first completed year of investment, Amdavadi would earn accrued interest of Rs.8,160, which would be taxable, but against which he would also be entitled to deduct a similar amount of Rs.8,160, considering it as interest payable to his father on the 8% loan of Rs.1,00,000.  This would effectively determine his net taxable interest at Rs.Nil, thus neutralizing his tax liability on the NSC interest.

However, as per the CBDT Circular treating NSC accrued interest as deemed to have been reinvested for purposes of Section 80C, Amdavadi would be able to claim 80C deduction of Rs.8,160 and actually save Rs.2,521 (at 30.9%) by way of income-tax.  Such tax saving (as per chart) can be reaped during the five years of interest accrual, prior to the maturity of NSCs in the sixth completed year.


Amdavadi would receive Rs.1,60,120 as maturity amount of the NSCs at the end of six years.  He can repay this amount to his father who would have become eligible to receive similar amount, considering similar interest working at 8% on the loan of Rs.1,00,000.  As mentioned above, P’s father does not carry any tax worry for the interest earned by him.  But P has reaped tax saving of Rs.45,743 through 80C Deduction (as per chart).

 

Year           Interest Accrued      Deduction           Tax Saving
Interest on Loan u/s.80C By Amdavadi

Rs.                          Rs.                          Rs

.


Year of Investment               —                1,00,000                    30,900

Year 1                            8,160                   8,160                       2,521

Year 2                            8,830                   8,830                       2,728

Year 3                            9,550                   9,550                       2,951

Year 4                           10,330                10,330                        3,192

Year 5                           11,170                11,170                        3,451

Year 6                           12,080                     Nil                              Nil

———                 ———–                      ———

60,120               1,48,040                     45,743

Note:  In the sixth completed year, interest of Rs.12,080 not being eligible for deduction under Section 80C, tax saving is Rs. Nil.

 

Both father and son are happy indeed!  Amdavadi’s father receives back his loan with 8% interest thereon.  And our friend Amdavadi saves a good Rs.45,743 as income-tax, without even investing a penny from his pocket, thanks to the tax saving magic of Section 80C!



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