ABOUT TAXATION

For people, Section 80C has become synonym to Tax Saving.  Everyone jumps on one of the products which are available there for Investment.  In India Tax Saving & Investment go hand in hand – some time its too shocking when we hear people saying that their investment is only what they are doing for tax savings.  Investors who think that investing is only for tax saving will be enough for them to achieve all their goals or a single goal like retirement – they are terribly wrong.  And sooner they realize it is better as time cannot be substituted, in most of the financial products.

Always remember your tax saving should be result of your investment planning & not vice versa.

 This means first we make our goals, make a plan for it, then choose an investment strategy and after that we see that can any tax saving instrument can become part of overall strategy or not.

What is Section 80C?

Section 80C provides you deduction upto Rs 1 lakh from once income. It is applicable for any individual or HUF and also for any income level. As this is a deduction this actually reduces your gross income for tax purpose. So if you have earned Rs 5 lakh in this year & you used 1 lakh limit of section 80 C – you have to calculate tax only on Rs 4 lakh.

Let’s understand it with example:

Mohan & his friend Sohan who joined IT company this year at same level & are going to earn Rs 10 Lakh. Mohan was enjoying his life at fullest & never thought that he has to invest any amount to save tax. So he actually planned to pay tax or we can say he was not having any choice but to pay tax. Sohan was a good saver & had some idea about tax saving – he kept aside some portion of his salary to invest in some tax saving instrument. Last week one of the insurance agents meets Sohan & told him about how he can save tax under section 80C by investing in their newly launched endowment policy. So Sohan invested Rs 1 Lakh in their policy & saved tax.

Let’s see how their finance looks:

You must be thinking that how smart is Sohan he saved a tax of Rs 30900. But I think he was equally dumb because he forgot the basic principal “your tax saving should be result of your investment planning & not vice versa”.

Two Mistakes that Sohan did:

1. Invested in Low yielding expensive insurance policy.
2. Not considered his EPF contribution. This is deducted from your monthly salary @ 12% of your basic. Your employer also contributes the same amount. Your contribution qualifies the Sec 80C investment.
   

Various options available under section 80C & which one is suitable for you.

Let’s assume that one person who is 30 years now & want to invest in tax saving instruments till his retirement. How much corpus will be build if you invest Rs 30000 every year in Endowment Plan(6%), PPF(8% – before change) & ELSS(12%) for 25 years.

Hidden Gem of Section 80C:

Term Insurance is the cheapest policy available and hence hardly talked about by agents and even insurance companies never promote such cheap and low cost product. Term policy is insurance at its purest and simplest form. You pay premiums because there is a guarantee that if something happens to you, your family will be paid out the pre-decided amount, hence you have the peace of mind that even if you are not there, those loved ones you leave behind will not have to bear a financial loss. Term Insurance is protection against risk of life. You must buy it & also avail section 80C benefit on it.