INCOME TAX CASE STUDIES 
Facts
Ms. Amrita Rao (aged: 28) is working as a software engineer in an MNC and has a gross income of 4.02 lakhs/annum. She has a monthly surplus of 10,000 which is being put in the savings account of the bank. She has invested 20,000 into NSC and has no other investments. She has a term insurance policy for which she pays an annual premium of around 4,000. She has a tax liability of 37,230 per annum. Let us analyze the case and in the process highlight the importance of proper tax planning.
- Ms. Amrita Rao has a monthly surplus of 10,000.
- Salary basic is 10,000.
- Investments of worth 20,000 are done in NSC.
- Yearly premium paid for the term policy is 4,000.
- Total Tax Liability for a year is 37,230.
Diagnosis
Let us see the present tax liability of Ms. Amrita Rao.
- As we see here, due to improper planning of investments, the tax being paid is as high as 37,230.
- The benefits of Sec 80C have not been fully utilized.
- The surplus amount of 10,000 is in the savings account which gives a meager 3.5%.
- Other investment avenues like ELSS, ULIPs, PPF etc have totally been ignored.
Tax Computation
| Gross Salary | 4,02,000 |
| Profession Tax | 0 |
| Gross Salary after Section 10 & 17 exemptions | 3,41,400 |
| Accommodation Perquisites | 0 |
| Income chargeable under head 'Salaries' | 3,41,400 |
| House property / other income or loss | 0 |
| Other income | 0 |
| Gross Total Income | 3,41,400 |
| Deductions under sec 80C | 41,400 |
| Net taxable income | 3,00,000 |
| Tax on Income | 36,500 |
| Surcharge on Income Tax | 0 |
| Tax including Surcharge | 36,500 |
| Education Cess | 730 |
| Total Tax Liability | 37,230 |
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| Total Income tax paid from salary | 0 |
| Tax paid outside of salary | 0 |
| Income tax due | 37,230 |
| Remaining months in year | 12 |
| Tax per Month | 3,103 |
Recommendations
- Section 80C has come as a boon to investors who have an appetite for risk. Until the previous year, investment in tax-saving funds (ELSS) for the purpose of availing a tax benefit was restricted to Rs. 10,000 per year.
- In the current fiscal year all such restrictions have been done away with; an individual assessee now has the flexibility to invest the Rs. 1,00,000 that is allowed under Section 80C in any proportion that he wishes (only in PPF is there an upper limit of Rs. 70,000 p.a.) in specified instruments.
- Investments up to Rs. 70,000 per annum into PPF are eligible for deduction under Section 80C; further the interest earned is tax exempt under Section 10 of the Income Tax Act.
- PPF can be an ideal tool while planning for long-term objectives like one's retirement or children's education and marriage.
- There are a lot of advantages in investing into a unit linked insurance plan (ULIP) which enables us to avail the deductions under sec 80c and also gives us good returns as major investment of these funds are into the equity and equity related instruments.
| Deductions under Chapter VI (sec 80C) | Produced | Limited |
| Dedn under Pension scheme (sec 80C) | 0 | 0 |
| NSC (sec 80C) | 20,000 | 20,000 |
| Public Provident Fund (sec 80C) | 0 | 0 |
| Employees Provident Fund & Voluntary PF (sec 80C) | 14,400 | 14,400 |
| Tution fee (sec 80C) | 0 | 0 |
| Housing loan principal repayment (sec 80C) | 0 | 0 |
| Insurance premium (sec 80C) | 4,000 | 8,000 |
| Infrastructure Bonds & others (MF, ULIP, etc.) (sec 80C) | 70,000 | 70,000 |
| Total Investments | | 1,00,000 |
Ideally it's advisable to allocate the 1,00,000 in the above manner to avail sec 80C
Conclusion
The present structure of investment would result in the tax liability reduced to 1,681 per month. It is therefore advised to select the present investment pattern to gain the tax exemptions and deductions available. Thus the surplus should be directed in this fashion for effective financial planning.
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