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How to claim deduction under Section 80C?

Premium paid for any life insurance plan is eligible for deduction from gross total income under Section 80C of the Income Tax Act.

Q. I could not pay the full amount payable as income tax for the previous financial year.Can I now pay the balance? What are the implications of the delayed payment?                     

—Prashant

A. If you missed the 15 March deadline for paying your income tax (either in full or in part), you can still pay it along with the interest applicable. Under Section 234 of the Income Tax Act, a simple interest of 1% per month is charged on late payments. For instance, if the balance tax payable was Rs 10,000, a taxpayer making the payment in July will have to pay about Rs 10,500 (Rs 100 per month since March). You are required to calculate your tax liability and pay the tax in periodic instalments—30% of the tax is payable by 15 September, 60% by 15 December and the balance by 15 March. Of course, if you are a salaried person and tax is deducted at source, you don’t have to worry about paying advance tax unless you have other sources of income.

Q. My brother is studying in a recognised university. I paid the tuition fees of his college. Can I avail tax benefits on the money I paid as tuition fees?

—Manish Chauhan

A. You are not eligible for any tax benefit on the tuition fees you paid for your brother’s education. Under Section 80C of the Income Tax Act, 1961, a person is eligible for tax benefits on the tuition fees paid to a recognised university, college, school or any other educational institution for full-time education of any two of his children. The amount paid as tuition fees can be deducted from the annual income of the individual while computing the tax liability. Of course, this is subject to the overall limit of Rs 1 lakh a year under Section 80C. But there is no provision for any tax deduction of tuition fees paid for a sibling’s education. Also, the tax benefit is only on tuition fees and not on development fees, donations or other payments to the educational institute.

Q. I have invested about Rs 12.5 lakh in a bank fixed deposit which fetches me an interest of Rs 9,000 monthly. How will this income be taxed? I am 50 years old. Is there a better option to invest in?

—Shashi Sridhar

A. Interest income from bank fixed deposits is fully taxable. It is to be clubbed with your income for the year and taxed at the applicable rate. Considering your age and the fact that you are risk averse, you could invest in fixed maturity plans (FMPs) of mutual funds. These FMPs are of different maturities and offer returns that are roughly equal to the prevailing interest rate on fixed deposits, only they are more tax efficient. If the holding period is more than a year, the income from an FMP is treated as long-term capital gains and taxed at a flat rate of 10% or at 20% with indexation benefits. Indexation takes into account the inflation during the holding period and reduces your tax accordingly. If the holding period is spread over three financial years, the investor can claim double indexation benefit. In times of high inflation, your tax liability can be reduced to almost zero.

You can also invest in debt funds which are expected to do well in the coming months. If you are willing to take a small risk, you can opt for a monthly income plan (MIP) which invests a small portion (10-20%) of the corpus in equities and the rest in safe avenues. Here too, the income is treated as long-term capital gains if the holding period is more than a year. If you opt for the dividend option, the dividend received will be tax free though the mutual fund will deduct a dividend distribution tax.

Q. I claimed leave travel allowance last year and wish to do the same for this year. Do I get tax benefits in both the years?

—Rajat Agarwal

A. You can claim tax exemption for leave travel allowance (LTA) for two journeys in a block of four calendar years. The current block started in 2006 and ends in 2009. You have claimed LTA only once in this block and can therefore claim it once again in any year from 2007 to 2009. Furthermore, if an individual is not able to claim LTA in a particular block of calendar years, he can carry forward the exemption for one journey to the next block. But the rolledover exemption from the previous block will have to be availed within the first year of the next block.

Q. Are investments in mutual funds—whether lump sum or through SIP—eligible for deduction under Section 80C of the Income Tax Act?

—Manish Haswani

A. All mutual funds investments are not eligible for tax benefits. Only investments in equity-linked saving schemes (ELSS) and pension plans get deduction under Section 80C within the overall limit of Rs 1 lakh a year. Any investment in these funds during the financial year—as lump sum or in instalments—will get tax benefits under Section 80C. ELSS funds are also known as tax plans and have a three-year lock-in period. If your intention is to save tax, it is better to check beforehand whether the fund you are investing in offers you tax deduction or not.

Q. Is it mandatory to file tax return if the annual income is less than Rs 1 lakh?

—Amit

A. No, it is not mandatory to file income tax return if the annual income is below Rs 1 lakh for the financial year 2006-7. From financial year 2007-8 this limit has been enhanced to Rs 1.1 lakh for a male below 65 years. For women, the limit is Rs 1.45 lakh. For senior citizens (age above 65 years) the existing limit of Rs 1.85 lakh and has been enhanced to Rs 1.95 lakh. The One-by-Six scheme, which made it compulsory to file return even in cases where income was below the threshold exemption limit, has been withdrawn.

Q. I invested Rs 10,000 in LIC’s Money Plus unit-linked insurance plan. Am I eligible to claim deduction under Section 80C?

—Amit Madan

A. Yes, you can claim deduction of Rs 10,000 paid as premium for the Money Plus Ulip. Premium paid for any life insurance plan is eligible for deduction from your gross total income under Section 80C of the Income Tax Act. The overall limit for tax saving investments under Section 80C is Rs 1 lakh a year.

Q. I am buying a used car from my office that has a book value of Rs 3 lakh. But I am buying it for Rs 3.5 lakh. Will this affect the tax treatment of the transaction?

—Avinash

A. The tax treatment of the transaction will not be affected because the written down value (or book value) of the car is lower than your purchase price. According to the Income Tax Act, if a moveable asset belonging to the employer is transferred to an employee at a concessional rate, the difference between the book value and the actual amount paid is liable for the fringe benefit tax. The fringe benefit tax in such cases is 30% of the benefit. However, in your case, the book value is lower than what you are paying for the car so the fringe benefit tax does not come into play.

Are matters of tax taxing your brain?

Sood, Sharma and Associates, a Gurgaon-based accounting firm, will answer your queries on taxation. Log on to www.moneytoday.in and click on Tax Quer ies to submit your questions.