The Tax Effect

Your financial decisions should be based on long-term goals. However, knowing tax concessions will help you manage your taxes better

Sitting with tax consultantTaxation is an instrument used by the government to achieve its social and economic objectives. It is the price we pay to enjoy the benefits of law and order, and access to essential services such as electricity, water, roads, health, education, and sewage disposal. It is undeniably just and equitable that the rich should be called upon to bear a heavier burden of this cost than the poor. However, there is no reason to pay more taxes when taxes can be saved through proper understanding of the concessions.

Why do tax concessions exist

To divert funds from expenditure on consumer goods to productive investments, the government has offered selective tax concessions. The objective is to check inflation and, in the long run, reduce inequalities, and increase opportunities for people. Fortunately, to be able to take full advantage of concessions, a simple understanding of some sections is enough.

So, let’s begin with the basic tax rates. The accompanying table lists the tax incidence on different slabs of income.

Net Taxable

Income Slab [Rs] Tax Rate [%]
Under 1,10,000 Nil
1,00,001 – 1,50,000 10
1,50,001 – 2,50,000 20
Over 2,50,001 30

For women, the basic exemption limit is Rs 1.45 lakh and for senior citizens, it is Rs 1.95 lakh. A surcharge of 10 per cent is applicable on income above Rs 10 lakh.

As you can see from the above table, income above Rs 2.50 lakh is fully taxable. This means that beyond a point, tax-saving isn’t possible. Hence, we should try to optimise post-tax income.

Major tax deductions


A tax deduction up to Rs 15,000 is allowed in respect of medical insurance premiums paid by an individual.

For a senior citizen, a higher deduction of Rs 20,000 is available.

Medical insurance is an unavoidable expense especially in a country like ours where the state does not cover medical costs. Everyone, young or old, male or female, salaried or a business person should get medical cover for themselves.

Of course, if you are salaried, mostly, the employer arranges for medical insurance. Here too, most aren’t aware of the exact amount of coverage. Ideally, have a family floater policy for a minimum amount of Rs 5 lakh. The premium for a family of four would be in the region of Rs 8,000 – 8,500 per annum.

Housing loans

Even if you have the money to buy a house outright, you should opt for housing finance. Home loans are one of the cheapest forms of loans available. On the first house, interest up to Rs 1,50,000 is tax deductible. For the second house, the entire interest is eligible for tax deduction.

Under Sec 80C

Over the past few years, the government has steadily cut down the tax exemptions available to the common man. Standard deduction is no longer available to salaried employees. All perks, almost without exception, are taxable. Those that aren’t have been brought under Fringe Benefit Tax [FBT]. As FBT is payable by the employer, in effect, those perks too have ipso facto disappeared.

The section that offered Rs 12,000 tax-break on interest income stands cancelled. Consequently, all interest incomes, including that on the Senior Citizens Savings Scheme is fully taxable. Tax-free savings bonds are also no longer available.

Now the only meaningful deduction remaining is Sec. 80C. Under Sec. 80C, any investment up to Rs 1 lakh made in certain specified instruments can be reduced from your taxable income. There is a long list of eligible investments including an employee’s provident fund contribution, tuition fees paid for children, principal portion of housing loan instalment, investments made in Public Provident Fund [PPF], Equity Linked Saving Scheme [ELSS], National Savings Certificates [NSC], Senior Citizen Savings Scheme, Post Office Term Deposits, life insurance premiums and so on.

Using the concessions well

For claiming the Sec 80C deduction, how should an investor choose from among the various choices available? Here’s what you should do:

  • First take into account mandatory payments such as provident fund, housing loan instalment and tuition fees.
  • Reduce the total amount spent from the one lakh limit.
  • Distribute the balance in a combination of ELSS and PPF. If you are young and just starting out, put 70 per cent into ELSS and 30 per cent into PPF. As you advance, lower the ELSS and increase the PPF eventually reversing the percentages.

Why PPF? Well, PPF is the best fixed income investment that you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years. Look at it as a fund for the education needs of your children. If you are married, get your spouse to invest too and you would have a retirement fund ready.

An ELSS is nothing but an equity mutual fund that offers a tax deduction. ELSS investments are the most preferable way to build long-term wealth. In terms of numbers, an investment of say Rs 50,000 would have grown to over Rs 4.12 lakh over a five-year time frame. However, this kind of return comes along with the inherent risk of the stock market, hence the proportion of ELSS in your total tax-saving investment should come down as age advances.

Last but not the least

Risk, return, liquidity and tax-efficiency are the four factors that need to be optimised for successful investing. Beyond a point tax-saving isn’t possible. Instead, you should try and maximise post-tax income.

Sandeep Shanbhag
Sandeep Shanbhag, a Mumbai-based Chartered Accountant and Director of Wonderland Consultants, a tax and investment advisory firm in the business for over 20 years. He writes regular columns on investment and tax planning in newspapers and websites such as DNA, and



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