A look at the various tax saving tools available and their significance in your personal finance life.

The Current Tax Benefit Tools - Section 80C

Section 80C of the Income Tax Act gives tax benefits in the form of reduction in the taxable income up to Rs.1, 00,000/- per year. Of the investments in Section 80C, ULIPs and ELSS (Tax Saving Mutual Funds with 3 years lock-in)could be considered by investors with a long term (above 7 years and 3 years respectively)investment purpose. EPF is unavoidable for the salaried employee, so it becomes an automatic investment.

House Rent Allowance

Upto 40% (50% in case of the Metros) of the basic pay OR actual HRA received OR rent paid above 10% of basic pay which ever is LESSER is exempt from income as the House rent allowance.

Travel Allowance

This is an allowance that is still set at the archaic Rs.800 per month.

Leave Travel Allowance

There is flexibility now in the way LTA is to be processed. We do not have to submit the bills to the company to claim it. That looks like good news. However the hitch is that the IT department can ask for the original bills at their discretion.

Section 24 - Housing Loan Interest Component

There is a benefit of reduction in taxable income upto Rs.1,50,000/- per year for the interest component of the housing loan. Though there is a considerable reduction in the taxable income, it should be remembered that this cash flow is a negative cash flow that does not add to one’s wealth.

Creating Wealth Using Tax Breaks

Investments like the ELSS, long term investments in ULIPs (please do not take the sales agent’s view of investing for 3 years), pension plans like the EPF and New Pension Scheme give us the benefit of tax savings and also wealth creation.