The year 1973-74 will go down as one of the darkest years in the history of personal income tax. In that year, the highest rate of personal income tax was 85%. Plus, there was a surcharge of 15%; therefore, the maximum marginal tax rate was 97.75%. Not surprisingly, it was perfectly normal for taxpayers to focus only on tax-saving instruments.
Things are different today. We are in a lower tax regime. Therefore, we should focus on our financial goals. Another advantage is that, within Income Tax Act, there are tax benefits for most of our basic financial responsibilities.
To begin with, when we pay for our health insurance we get tax deduction under section 80-D. Our life insurance premiums get tax deductions u/s 80-C. After protecting our health and life, our next need is housing.
If we are staying in rented house, we get tax benefit u/s 80-GG. If there is housing loan, the principal repayment of loan is deducted u/s 80-C. Interest paid on housing loan has tax benefit up to Rs 150,000 u/s 24. There is benefit on capital gains when we sell one house and purchase another one u/s 54. Further u / s 54-F, if we are purchasing house and there has been long-term capital gains on any asset, the same is exempt to the extent of price of new house.
When we pay school fees of our children we get tax deduction u/s 80-C. In case funds are borrowed for higher education, there is tax advantage u/s 80-E. Saving for retirement also has tax benefit u/s 80-C and 80-CCC. Initially, there was separate limit for Sec 80-CCC. However, now there is combined limit of Rs 100,000 among Sec 80-C, 80-CCC and 80-CCD. There is a tax benefit if we have incurred medical expenses on ourselves or dependents on certain major illness u/s 80DDB.
Over and above this, tax deduction is available for investing in debt as well as equity-based instruments. ELSS is equity-based mutual fund. Investing in ELSS entitles for tax benefit u/s 80-C. Similarly, investment into debt based instrument like NSC, PPF and certain fixed deposit of banks also attract tax deduction u/s 80-C.
There was a joke, which said that maximum Indians die in the month of February and March. During these months, the maximum life insurance policies are sold (with tax saving angle). As we approach financial year-end, taxpayers will be bombarded with a variety of tax-saving instruments. Accountants will want us to invest in tax-saving instruments. Media will carry stories on â€œhow to save tax?â€? While it is definitely prudent to take advantage of legitimate tax-saving schemes, focus should always be on our financial goals. We save money not to save tax, but to ensure that we have sufficient funds for our future responsibilities. Therefore focus on future responsibilities, tax saving will follow on its own.