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Can I really save Rs. 33,660 in tax?

Mutual funds advertise that you can save upto Rs. 33,660/- per year if you invest in ELSS mutual fund schemes. Does this always apply to you? The short answer is : NO.

Let me tell you when you will save Rs. 33,660.

Let me assume your income is Rs. 15,00,000. (Fifteen lakhs) per year.

If you didn’t do ANY 80 C investments, here is how your tax is calculated.

First Rs. 135,000 : no tax
Next Rs. 15,000: 10% tax = Rs. 1500.
Next Rs. 100,000: 20% tax = Rs. 20,000.
Remaining Rs. 12,50,000= 30% tax = Rs. 375,000.
Total: Rs. 396,500.

Since your income is above Rs. 10 lakhs a year, you have a 10% surcharge on tax = Rs. 39,650.

Tax then = 396,500 + 39,650 = 436,150
Add 2% surcharge and you get a payable tax of Rs. 444,873.

If you put in Rs. 100,000 in ELSS funds or other 80c instrucments, net taxable income becomes Rs. 14 lakhs. Tax calc is:

First Rs. 135,000 : no tax
Next Rs. 15,000: 10% tax = Rs. 1500.
Next Rs. 100,000: 20% tax = Rs. 20,000.
Remaining Rs. 11,50,000= 30% tax = Rs. 345,000.
Total: Rs. 366,500.
Add 10% surcharge and 2% cess to get a payable tax of Rs. 411,213.

The difference between the two options is Rs. 33,660. This is only if your income is greater than 10 lakhs in the financial year. (The actual figure you need to be above is Rs. 11 lakhs, since after you invest 1 lakh in 80C instruments, you will have a net taxable income of Rs. 10 lakhs)

So how much can I really save?
Your income may be different, so the rule of thumb is: If your total income is greater than 10 lakhs, you can save upto Rs. 33,660 in tax.

For incomes above Rs. 3.5 lakhs but less than 10 lakhs the maximum tax that can be saved is Rs. 30,600. The funda there is – Rs. 3.5 lakhs minus Rs. 100,000 in ELSS (or 80C instruments) yields a net taxable income of 2.5 lakhs, which is the limit on that tax slab.

And below 3.5 lakhs and upto Rs. 2 lakhs (2.35 for women) you can save between 30,600 and 15,300 (depending on how much your income is).

If your income is below Rs. 2 lakhs (2.35 for women) you will save lesser than 15,300 (again, depending on your income). In fact in this bracket, you should not invest Rs. 1 lakh in ELSS, only that much required to bring your tax to zero.

  • Praveen says:

    >A salaried individual whose income is above 1 million slab also can’t save INR. 33600. Let me tell you how.

    What would be the basic for a person who is getting 1.4 million per annum. It is going to be somewhere around 500,000 per annum. The EPF he should invest would be 60,000 which will be taken into account in 80C. Even if the individual doesn’t have any other 80C savings, he could have only 40,000 under 80C which will give him a savings of approximately 14,000.

  • Deepak Shenoy says:

    >Praveen: It’s not mandatory to pay 12% of your basic pay into EPF. The minimum that’s required is Rs. 780 or so per month, which adds up to about Rs. 10,000 (Most small companies pay about that much only) Essentially the PF department expects a “floor” level of salary of Rs. 6500 beyond which it is the employees (and employers) discretion to pay.

    Of course, if you choose to take that route you are essentially taking advantage of the 80C route anyhow. There’s another way you can structure your salary to reduce tax: ask your company to reduce your CTC by Rs. 1 lakh and buy a pension product from an insurer instead. No FBT applies and no income tax for you (this is not part of the 80C limit)

  • Anonymous says:

    >Good explaination , will help many.

  • Anonymous says:

    >Good math. Thanks!