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| Home > Individuals > Tax Planner |
| Tax Faqs | Tax Planner |
Tax Saving Strategy
B.Anand,Financial Consultant
There are various provisions in the Income Tax Act to save tax payable. We have shown below that the scheme one should opt for would depend on the person's income and the tax bracket he is in. In other words investing in New Jeevan Suraksha 1 of LIC, ICICI Pru Life from ICICI Prudential Life Insurance Company, HDFC Pension Plan from HDFC Standard Life Insurance Company or other approved pension scheme of other life insurers , may result in greater savings for one person while investing in Public Provident Fund (PPF) may result in greater tax saving for another person. The tax saving strategy has been discussed below after giving a brief description of the various options.
Under the Indian income tax regulations, a policyholder can avail of tax exemption on insurance schemes. The following are the important tax provisions applicable to LIC policyholders;
Section 88:
Under Section 88 of IT Act, an individual can claim rebate of 20% on LIC premium paid on his/her life, his/her children including adult children. The rebate is deductible from the tax payable by the individual/HUF.
Other Plans which participate in rebate under Section 88 are:
Contribution made by an individual for participating in the Unit linked insurance plan of UTI.
Contribution made by an individual for participating in the Unit linked insurance plan of LIC of India (Dhanaraksha).
The total amount of investment in the form of LIC premium and other specified investment like PPF, NSC, etc. is restricted to Rs. 60000/- per annum. This means that a person can save an amount of Rs. 12000 (20% of Rs. 60,000) on tax payable , by investing in Insurance plans.
Section 80CCC:
An individual can invest in the New Jeevan Suraksha 1 Plan of LIC of India, to avail a deduction of Rs. 10000/- from his gross total income in order the arrive at the net income. This is of great advantage to those people who are on the verge of falling into a higher tax slab. Since the deduction is made on gross total income, a person can invest in New Jeevan Suraksha 1 Plan and reduce his net taxable income .
Section 80D:
Under this section, the insurance premium paid on a
Mediclaim Policy taken on the health of the tax payer and/or the spouse,
dependant parents or dependant children of the tax payer is deductible upto a
maximum limit of Rs.10,000/- from the net income .
The aforesaid limit has been increased to Rs. 15,000 with effect from assessment year 2000-2001 where the assessee or his wife or her husband ,or dependent parents or any member of the family is a senior citizen(i.e,one who is resident in India and who is at least of 65 years of age at any time during the previous year) and the medical insurance premium is paid to effect or keep in force an insurance in relation to him or her. In order to get a deduction in excess of Rs. 10,000 ,one has to pay mediclaim insurance premium to effect or keep in force insurance in relation to a senior citizen as noted above.
Section 80DD:
Under section 80DDA a deduction of Rs 40000/- is allowed from gross total income when a contribution is made or deposit is made with LIC under its Jeevan Aadhar or Jeevan Vishwas plans, for the maintenance of a handicapped dependent.
In addition to the above plans, any sum received under LIC policy including bonus etc. is non-taxable.
Strategy to save Tax:
From tax saving point of view, the suitability of a scheme depends on which income tax slab one is in.
| Tax Slabs | Rate of Tax in the slab | After adding surcharge |
| Upto 50,000 | 0 | 0 |
| 50,000 to 60,000 | 10% | 10% |
| 60,000 to 150,000 | 20% | 22.4% |
| 1,50,000 and above | 30% | 35.1% |
For a person in the highest slab of 35.1%, it is advantageous to first invest Rs. 10,000 in New Jeevan Suraksha 1 Plan and another Rs.10,000 in Mediclaim policy.
For a person in 22.4% slab, the tax saving is same whether he invests in the above two schemes or in any other LIC scheme or in PPF.
For a person in 10% slab, the tax saving is only 10% if a person invests in New Jeevan Suraksha 1 Plan or Mediclaim. This is because the income is deducted for tax calculation purpose. But if the person invests in other LIC schemes, the tax rebate of 20% is given. By including the surcharge, the real savings on tax would be 22.4% of the amount invested. For tax saving purpose, LIC schemes (other than New Jeevan Suraksha 1 Plan or Mediclaim of GIC) are suitable.
New Jeevan Suraksha 1 Plan or Mediclaim is also suitable for persons who fall in higher tax slabs by marginal amounts. By investing in these schemes it may be possible to bring the net income to a lower slab. This will result in the surcharge rate going down on the tax payable.
Infrastructure bonds:
If one has exhausted all options to save tax through LIC schemes, he also has the option to invest in Infrastructure Bonds and save upto Rs. 4,000 by investing Rs. 20,000.
Income from these investments:
The income from almost all the investments made is taxable in the future years in which it arises. For example the interest paid on NSC is taxable even though the investment made in NSC results in tax saving. Similarly interest on all bank deposits and bonds are taxable. So, the real interest works out to be low after paying tax on the interest. But the income arising out of LIC schemes like maturity benefits, bonus are not taxable(However annuities received under New Jeevan Suraksha 1 Plan is taxable). Other investment is PPF, which gives similar advantage. The interest on PPF is not taxable.
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