A case study on why the Rs 1 lakh (Rs 100,000) tax-free investment limit for Section 80C of the Income Tax Act is ridiculously low and impractical.
There are a number of approved methods to reduce out tax outflow. The major among them, for salaried employees, is the provision under Section 80C of the Income tax Act.
Before getting into the case study we need to get a better understanding of Section 80C.
Benefits of 80C
Section 80C provides for reduction in taxable income up to Rs 1 lakh if certain investments or expenses are made. There are a good many benefits from this section:
- Taxable income itself reduces. For a person earning Rs 2.5 lakh (Rs 250,000), an investment of Rs 1 lakh will bring him below the taxable income bracket. For women, the income can be as high as Rs 2.8 lakh (Rs 280,000) before they pay tax if they use Section 80C to the full limit.
- Forced Savings Habit. Section 80C will ensure that some amount is saved every year for future use.
- Easy Access to 80C instruments. The investment options that are covered under Section 80C can be accessed and availed very easily.
The Options Under 80C
The items that are included in Section 80C, which are available in the market currently are as follows:
- EPF (Employees Provident Fund) upto 12% of the basic salary
- School Fees for Children (No sub limits. Only school tuition fee is acceptable. Transport, special fees, private tuition, etc, cannot be included)
- Life Insurance Premium (only if the premium is less than 20% of the sum insured; in other words life cover has to be at least five times the premium). This includes ULIPs (Unit Linked Insurance Plans) and traditional plans from all insurance companies. No sub limits.
- Pension Plan Premium without any sub limits. This was earlier under Section 80CCC with a sub limit of Rs 10,000. 80CCC has now been merged into 80C itself.
- Housing loan Principal without sub limit. The interest comes under a section 24 with a limit of Rs 1.5 lakh.
- Equity Linked Savings Scheme (ELSS) Mutual Fund schemes. No sub limits
- 5 years Tax Saving Bank Deposits. No sub limits.
- National Savings Scheme Certificates. No sub limits.
- Public Provident Fund (PPF). The limit is Rs 70,000 per person per year. Investments in children's names will also be included in the limit for the parents.
Limit of Rs 1 lakh
Though we have a lot of options for investments and one expense item (school fees) too, the limit to which the tax benefit can be got is only Rs 1 lakh. The investments can be in any proportion and there is no minimum amount that needs to be shown.
In case the tax payer has invested cumulatively say Rs 1.35 lakh (Rs 135,000) and earns Rs 5 lakh (Rs 500,000) per year. The taxable income will be reduced only to the extent of Rs 1 lakh (Rs 100,000) and will be assessed at Rs 4 lakh (Rs 400,000).
Limit not enough
The limit may be enough for those who have income in the less than Rs 3 lakh (Rs 300,000) category. Once the income is more than Rs 3 lakh per year (Rs 25,000 per month), the benefit of this section is on a reducing scale.
Let up see an example of an actual salary slip of Ramesh* (*Name changed for protecting privacy). He is a sole earning member of the family, working as a finance executive in a BPO company. He is married with 2 children in school.
| Salary Slip Analysis of Ramesh related to Section 80C |
| |||
| (all amounts in Rs.) |
| |||
| Per Month | Per year | |||
| Salary | 25,000.00 | 300,000 | ||
| Basic | 10,000.00 | 120,000 | ||
| Section 80C investments |
| |||
| EPF | 1,200.00 | 14,400.00 | ||
| School Fees | 2,000.00 | 24,000.00 | ||
| Life Insurance | 3,000.00 | 36,000.00 | ||
| Pension Plan | 1,250.00 | 15,000.00 | ||
| Housing Loan Principal | 29,601.00 | |||
| Total Section 80C Investments | 119,000.00 | |||
| Note | ||||
| 1. Terms plans for self and spouse -- Rs 6,000, Children' plan ULIPs -- Rs 30,000 |
| |||
| 2. EMI on Rs 8,00,000 loan for 15 years at 10% interest -- Rs 8,600 per month started 2 years ago |
| |||
| 3. Two children. Both in same school. | ||||
The section 80C limit as seen above is quickly exhausted. In another scenario, for a person earning Rs 50,000 per month, the EPF alone may cover as much as Rs 30,000 out of the available Rs 1 lakh.
Need to increase 80C limits
One of the requests from the salaried classes to the finance minister has been to increase the Section 80C limit to Rs 250,000 in the forthcoming Budget. The increased limits can bring in much required investments to build our nation's infrastructure.
This will benefit the country more than the actual tax received as the quantum of investment through such investments will be at least three times more than the tax received (at the 33.3% income tax slab).
To save tax Ramesh (10% income slab) has invested Rs 1 lakh. If he has paid tax till March, it would have been only Rs 15,450 (10% of income between Rs 150,000 and Rs 300,000 plus Educational cess).
In a few days more, we will get to know whether our wishes have been granted.
(http://business.rediff.com/report/2009/jul/03/budget09-why-the-rs-1-lakh-tax-free-investment-limit-is-useless.htm)
