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How to save tax over and above the Rs 1 lakh limit

Last updated on: August 04, 2009 

How to save tax over and above the Rs 1 lakh limit

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'We have learned to say that the good must be extended to all of society before it can be held secure by any one person or any one class. But we have not yet learned to add to that statement, that unless all [people] and all classes contribute to a good, we cannot even be sure that it is worth having.' -- Jane Adams

The income tax department of India strives to ensure the spirit of the above lines in the way it deals with collecting our income tax. It gives us credit for doing good deeds for the nation's sake in the form of tax deductions.

These deductions are like a gift for doing a particular deed and what's best is that it's in the form of hard money which you save as tax that you don't need to pay.

The income tax department has clubbed all the different deductions under a section called Section 80: it runs from 80 to 80A right up to 80 VV. It will be of great value, if we can understand the sections and how they relate to saving us from taxing ourselves.

And some of these tax deductions are over and above the Rs 100,000 benefit the taxman gives you! Read on. . .


Photographs: Illustration, Uttam Ghosh
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How to save tax over and above the Rs 1 lakh limit

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The Rs 1-lakh gift

A maximum of Rs 1 lakh (Rs 100,000) can be deducted from your taxable income if you invest the equivalent amount in any of the following instruments/activities. The amounts thus invested should have been done during the period April 1 to March 31 of a financial year.

# Insurance premium: Includes premium paid for self, wife and children. The check here is that the insurance cover should be five times your premium or the benefit is given only to a premium amount of up to 20 per cent of the life cover, and also that the premium is in no way being returned by the insurance company.


Photographs: Illustration, Uttam Ghosh.
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How to save tax over and above the Rs 1 lakh limit

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# Money paid towards a deferred annuity plan: Includes amount paid for self, wife and children. A deferred annuity plan is one in which you pay money in a lumpsum or installments to receive a periodic series of payments at a later stage in life.

A pension plan of insurance companies would be one such plan. This will be taxable in case there is a lumpsum payment instead of receiving it in periodic payments. The second hitch here is that annuities fall under EET (exempt, exempt, tax) meaning you pay tax at the time of withdrawal.

# Contributions to Provident Funds/approved superannuation funds/pension funds: The government is responsible for the welfare of its subjects, especially after retirement. But, for a country like India, it is not feasible for the government to support us financially when we are old. Hence, it encourages us to invest for our retirement/old age by giving benefits on investing on these instruments.


Photographs: Illustration, Uttam Ghosh.
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How to save tax over and above the Rs 1 lakh limit

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# Any purchase of government securities or deposit schemes

# In Unit-Linked Insurance Plans/In Equity-Linked Mutual Funds: The government gives us the benefit of tax deduction for investing in the equity markets as this is an indirect way in which it can boost the economy and economic growth and also brings about inclusiveness in the equity markets which have for long been seen as the playground of only a select few. You have to stay invested for a minimum of three years.

# Deposits of National Housing Bank /public sector company in housing finance involved in providing long-term finance for construction of residential properties in India. This is basically to enable the government achieve its aim of providing shelter for all.

You invest in these companies (your good deed), these companies in turn take the burden of the government in terms of housing, and the government gives you the benefit of tax reduction.


Image: The Bombay Stock Exchange in Mumbai.
Photographs: Reuters
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How to save tax over and above the Rs 1 lakh limit

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# Tuition fees paid to school, college or university or educational institution in India: This is applicable only for the purpose of full time education. The government also limits the fees to only two children. We get benefit on tuition fees as we are sharing the government's responsibility of educating its young subjects.

If we did not do so the government would be forced to build more schools and spend resources on it. By giving benefits it is improving private sector participation. The limit of two children is to promote its agenda of small families.

# Build or purchase a house: If you have taken a loan for building or purchasing a house and are repaying the amount in installments, then up to Rs 1 lakh of the principal repaid in the financial year is deductible. This does not apply to stamp duty, registration fees or other expenses or for the sake of renovation or alteration of the house.

# Term deposit: In any scheduled bank and for a period of not less than five years. The idea behind giving benefits on these deposits is to improve the financial stability. If the bank knows that you are not going to need the amount for the next five years then the amounts can be used for development purposes and improving the liquidity of the economy.


Image: Tuition fees are tax deductible.
Photographs: Reuters
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How to save tax over and above the Rs 1 lakh limit

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Beyond the Rs 1 lakh:

Apart from the Rs 1 lakh deduction that we get to reduce from our taxable income as described above the taxman has also given other ways by which we can reduce the taxable income.

# Medical premium: An amount of up to Rs 15,000 in total for medical insurance premium towards self, wife, children and parents is allowed to be deducted from the taxable income. In cases where the parents are above 65 years of age the limit is raised to Rs 20,000.

# Dependent with disability: Any expenses incurred on the treatment or well being of a dependent up to a maximum limit of Rs 50,000 for persons with disability and Rs 75,000 for persons with severe disability is allowed. (Note: this has been raised to Rs 1 lakh in the current Budget and will be applicable for 2009-10).



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How to save tax over and above the Rs 1 lakh limit

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# Medical treatment: A sum of up to Rs 40,000 for any actual expenses incurred on the medical treatment of specific diseases (neurological diseases, malignant cancers, AIDS, renal failure and hematological disorders) can be deducted from the tax. This is applicable for expenses incurred on self, wife, children, parents, brothers and sisters of the individual.

If the dependents are above 65 years of age then actual expense incurred up to a limit of Rs 60,000 can be deducted from taxable income.

# Higher education loans: The interest paid on loans for studying in undergraduate or post-graduate of engineering, medicine and management and for PG courses in sciences can be deducted from total taxable income. (Note: This has been opened for all fields of study after 12th standard).


Image: Expenses on some ailments are tax-free up to a limit.
Photographs: Reuters
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How to save tax over and above the Rs 1 lakh limit

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# 100% deduction on donations: If you contribute money from your income to any of the causes listed below, then, the entire amount that you pay towards them will be deductible from your taxable income.

From a narrow viewpoint, this looks illogical as in what is the use if you invest Rs 100 in something and I get 100% exemption when already your Rs 100 has gone out of the pocket.

But, from a broader perspective this could be looked at two ways:

  • You have contributed to the social causes of the country in your own small way. Probably your Individual Social Responsibility (ISR!)
  • In case your taxable income is very near to the upper limit of a lower slab, your contribution to such causes could bring it down to a lower slab if you invest the difference amount. Although it must be accepted that it's very rare if the savings are going to be great.
  • Donations which are eligible for claiming 100% deduction:

    • National Defence Fund
    • Prime Minister's National Relief Fund
    • National Foundation for Communal Harmony
    • University of national eminence
    • Zilla Saksharta Samiti under a collector
    • National Blood Transfusion Council
    • Chief Minister's Relief Fund
    • National Cultural Fund


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    How to save tax over and above the Rs 1 lakh limit

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    # 50% deduction for donations: These are those causes where 50% of your donation can be straightaway deducted from your taxable income. The donations which are eligible for the 50% deduction benefit are as below:

    • Prime Minister's Drought Relief fund
    • National Children's fund
    • Jawaharlal Nehru Memorial Fund
    • Army, Navy or Air Force welfare fund
    • National Sports Fund

    # Other donations: Apart from the above donations there are other avenues too where you can avail of 100% deduction:

    • Donation to  Specific Scientific Research Associations
    • Any association involved in rural development
    • Any organisation involved in conservation of natural resources
    • As donation to a political party

    As seen in the previous few paragraphs the taxman gives us credit for social service activities and donations that we make in the previous year. This gives us benefit both in terms of the satisfaction of contributing to society and also in terms of reduction of taxable income.


    Photographs: Reuters
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    Bottom line

    The lessons that need to be learnt from the above discussion is that when we are in the mood to do any social service or contribute in the form of donations for a noble cause, it would be advisable to do the same in an avenue which will also give you the benefit of tax deduction.

    All organisations which collect such donations will have a registration with the government and will quote the relevant section under which you get the benefit. Take note of the section and keep a copy of the receipt safely when filing your tax returns. Social service is so much more satisfying with the Indian taxman supporting us!


    Photographs: Illustration, Uttam Ghosh.
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