Jigar M. Patel
International Tax Attorney
‘Be happy and gay… saving tax the 80C way!’ This should be the ‘Magic Mantra’ of all taxpayers with taxable income above Rs.10 lakhs, who attract the tax bracket of 31.20%.
No excuses please!
“My liquidity constraints do not permit me to invest,” some may retort. But let this not be your excuse. Infact, you should be prepared to even beg or borrow to make up for your investment limit of Rs.1,50,000 and thus plan to lawfully avoid your tax sorrow. Fortunately, Section 80C as drafted does not require you to invest out of your ‘income chargeable to tax’. You can thus venture to even go for an interest bearing personal loan to ensure that you do not miss out on the potential tax saving of Rs.46,800. An interesting Case Study below will highlight the significance of this strategy.
Case Study: Mishra’s gross total income is Rs.11,50,000 on which the Income-tax payable works out to Rs.1,63,800. He borrows Rs.1,50,000 from his retired father (whose income is not taxable), promising him to pay interest at 7.5% per annum and invests this amount in the Five Years National Savings Certificates (NSCs). Mishra saves income tax of Rs.46,800 right away in the year of investment, since his resultant tax liability on the taxable income of Rs.10,00,000 (after deduction of Rs.1,50,000 under Section 80C) stands reduced to Rs.1,17,000.
In the first completed year of investment, Mishra would earn accrued interest of Rs.11,550 (at 7.7%), which would be taxable, but against which he would also be entitled to deduct a similar amount of Rs.11,250, considering it as interest payable to his father on the 7.5% loan of Rs.1,50,000. This would effectively determine his net taxable interest at a meagre Rs.300, thus neutralizing his tax liability on the NSC interest.
However, as per the CBDT Circular treating NSC accrued interest as deemed to have been reinvested for purposes of Section 80C, Mishra would be able to claim 80C deduction of Rs.11,550 and actually save Rs.3,604 (at 31.20%) by way of income-tax. Such tax saving (as per chart) can be reaped during the four years of interest accrual, prior to the maturity of NSCs in the fifth completed year.
Mishra would receive Rs.2,17,355 as maturity amount of the NSCs at the end of five years. He can from this repay the amount to his father who would have become eligible to receive similar amount, considering interest working at 7.5% on the loan of Rs.1,50,000. As mentioned above, Mishra’s father does not carry any tax worry for the interest earned by him. But Mishra has reaped tax saving of Rs.62,967 through 80C Deduction (as per chart).
Year Interest Accrued Deduction Tax Saving
Interest on Loan u/s.80C (at 31.20%) By P
Rs. Rs. Rs.
Year of Investment — 1,50,000 46,800
Year 1 11,550 11,550 3,604
Year 2 12,439 12,439 3,881
Year 3 13,398 13,398 4,180
Year 4 14,428 14,428 4,502
Year 5 15,540 Nil Nil
——— ———– ———
67,355 2,17,355 62,967
Note: In the fifth completed year, interest of Rs.15,540 not being eligible for deduction under Section 80C, tax saving is Rs. Nil.
Both father and son are happy indeed! Mishra’s father receives back his loan with 7.5% interest thereon. And Mishra saves a good Rs.62,967 as income-tax, without even investing a penny from his pocket, thanks to the tax saving magic of Section 80C!
