With the tax saving season about to close by March 31, it’s time to have a close look at the maximum amount of tax savings that one may do under Section 80C of the Income Tax Act. If you are falling short, there’s still time for it. While the maximum limit to save or invest in any of the specified and eligible tax saving investment and expenses under Sec 80C is Rs 1.5 lakh in each financial year, the amount of actual saving in terms of taxes will differ according to the taxpayer’s income slab.
Find the tax rate applicable to you
Two unique features of the tax system in India are One, the income slabs (both for men and women taxpayers ) differ according to age and secondly, the tax is not applicable on flat basis but is to be calculated on progressive method.
For those below age 60, the income up to Rs 2.5 lakh is exempted from income tax. Thereafter, income between Rs 2,50,001 and Rs 5,00,00 is taxed at 5 per cent. On income between Rs 5,00,001 and Rs 10 lakh, the tax rate is 20 per cent, while income above Rs 10,00,001 is taxed at 30 per cent.
For those above age 60 but below age 80, the income up to Rs 3 lakh is exempted from income tax. Thereafter, income between Rs 3,00,001 and Rs 5,00,00 is taxed at 5 per cent. On income between Rs 5,00,001 and Rs 10 lakh, the tax rate is 20 per cent, while income above Rs 10,00,001 is taxed at 30 per cent.
For those above age 80, the income up to Rs 5 lakh is exempted from income tax. Thereafter, income between Rs 5,00,001 to Rs 10 lakh taxed at 20 per cent while income above Rs 10,00,001 is taxed at 30 per cent.
So, depending on the age, the exemption limit differs based on which the three tax rates apply on the income 5 per cent, 20 per cent and 30 per cent. However, a 4 per cent ‘Health & Education Cess’ is applicable on the income tax and applicable surcharge. Therefore, the effective tax rates become 5.2 per cent, 20.8 per cent and 31.2 per cent for the respective income slabs.
How Section 80C investment helps in cutting tax liability
The amount invested under section 80C qualifies for a deduction i.e. the gross total income of the taxpayer gets reduced by an equal amount and thus reduced tax liability and results in tax saving. Illustratively, if your gross total income is Rs 9 lakh and you invest Rs 1,20,000 in section 80 C tax investments, the income gets reduced to Rs 7.8 lakh. In doing so, the tax saved will be equal to Rs 24,960.
Maximum tax savings for different tax slabs
The total tax saving may be calculated using the formula:
Tax saving = Your tax rate x Amount invested u/s 80C
Total tax savings including cess = (Tax saving x 4 per cent ) + Tax saving
or, one may use the following formula:
Total tax saving = Effective tax rate x Amount invested u/s 80C
Therefore, when a taxpayer invests say, Rs 1.5 lakh in any tax saving investment, the amount of tax saved will depend on his or her income slab and hence the tax rate. Here, we see the tax saved for taxpayers in different tax rates:
Total tax saved by investing Rs 1.5 lakh for those paying 5.2 per cent tax = 5.2 % x Rs 150000 = Rs 7800
Total tax saved by investing Rs 1.5 lakh for those paying 20.8 per cent tax = 20.8 % x Rs 150000 = Rs 31200
Total tax saved by investing Rs 1.5 lakh for those paying 31.2 per cent tax = 31.2 % x Rs 150000 = Rs 46,800
The maximum tax saving under section 80C for the taxpayers paying 5 per cent, 20 per cent and 30 per cent tax will be Rs 7,800, Rs 31,200 and Rs 46,800 respectively.
One may choose any of these tax saving investments which are eligible tax savers under section 80C – Life insurance plans including endowments and Ulips, equity-linked savings schemes or ELSS of mutual funds, post office tax saving investments such as Public Provident Fund or PPF, National Savings Certificate or NSC, five-year post office time deposits, Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Account, five-year notified tax-saving bank deposits, Employees Provident Fund (EPF) etc.
One can invest the entire Rs 1.5 lakh in any one investment but is it always better to diversify across them. Finally, link the investment in the tax saving investment to your long term goal and do not merely invest to save tax.