Mar 17, 2008

India Taxing Times - Over and above Section 80C

Over and above 80C

Section 80C is the not the only section under which you get tax benefits, there are some other sections as well.

The Income tax Act, 1961 contains several provisions which can serve as tools for saving your tax outgo. While everyone is more focused on meeting the 80C limits, here are a few more options.

Section 10 (35): This section grants exemption on long-term gains from mutual funds (if they are held for more than a year). Interestingly, the government taxes the interest income on our balance in savings banks and fixed deposits according to the income bracket.

The interest income is taxed in such a manner that only two-thirds of the interest earned is left in the hands of the tax payer if he falls in the highest tax bracket of 33.99 per cent (30 per cent + 10 per cent SC + 3 per cent cess), exceeding Rs 10 lakh. Similarly, post office savings bank interest is fully exempt under section 10(11).

Section 10 (38): This section gives benefits to investors in listed equity shares for more than a year. However, it is important to note that there is a distinction between 365 days and 12 months. Any scrip purchased on April 7, 2007 will complete 365 days on April 8, 2008 but not 12 months.

Courts have laid down that 12 clear months will be completed only on May1, 2008. Hence, the capital gain will be long-term, only when sold on or after 1 May 2008. If someone sells the shares after April 8, 2008 but before May 1, 2008, it will be treated as short-term and not eligible for exemption, even though the securities transaction tax(STT) is duly paid.

Section 80D: This section provides tax relief with respect to medical insurance premium. Union Budget 2008-09 has expanded the scope of this section by increasing the limit. Now, a person can get an additional benefit of Rs 15,000 for self, spouse, children and dependent parents.

Thus, a total tax relief of Rs 30,000 is now possible now. Also, if any of the two parents are above the age of 65 years, the deduction goes up to Rs 20,000. It is not necessary that the parents should be dependent on the taxpayer. It is important to remember though that the payments for the policies should be made by cheques and not in cash or by credit card.

Section 54EC: This section grants long-term capital gains exemption on any asset when the gains are invested within the next six months in the bonds of Rural Electrification Corporation or of National Highways Authority of India.

Last year's Budget, with effect from assessment year 2007-2008, (financial year 2006-2007) had put a ceiling of Rs 50 lakh as the amount that could be invested in such instruments by a taxpayer. But closer reading of the restrictions suggests that the ceiling is with reference to investment in a single financial year only.

In other words, if the investments are so made that they fall in two financial years, the ceiling of Rs 50 lakh could be raised to Rs 1 crore.

To illustrate, let us suppose that the long-term capital gain of Rs 1 crore arises on December 7, 2007, then the taxpayer can invest Rs 50 lakh before March 31, 2008 and another Rs 50 lakh after April 1, 2008 but before May 7, 2008, so that the time between gains and investment do not exceed six months from the sale date of December 7, 2007. Source- BS