We provide consulting on Indian Income Tax Laws. There are various deductions and exemptions given under the Income Tax Laws. Tax payers are eager to consult us on the various tax savings schemes and deductions from income tax so as to reduce the incident of tax burden on them. The exemptions are given for mainly priority sectors and deductions are given mainly from investment linked schemes. We have no regret on the exemptions given to specific income which are tax free. But for the tax payers point of view and their understanding on the deductions they have to understand the basic concept behind these deductions.
We can start with the deductions under section 80C of Income Tax Act. The section gives deductions from taxable income on the investment made on life insurance premiums, housing loan instalments, mutual fund investments. Further there is deductions under section 24 of the Income Tax Act on the interest paid on housing loan. Many tax payers come to us for tax planning by claiming these deductions. But they never understood that they paid interest on the housing loan and invested in risky investments. They are happy that they saved income tax by opting these investments. But they need to understand that they incurred money on the investment and housing loan interest and saved tax only at 30 percent of it at maximum rate. They have to understand that they incurred huge expenditure on housing loan interest by saving 30 percent of income tax on it at maximum rate. However, we have no objections on making these investments and expenditure on housing loan interest. But we have objections on the understanding of the tax payers on tax planning.
The investments made on tax savings plans would give negative returns. The investment made on housing would depreciate in long term. We have some advice on this matter. The tax payer need not investment in tax saving scheme just to reduce the tax effect on income. On the other hand, the tax payer need invest on the tax savings scheme as matter of necessity and to create the wealth or to protect from the medical relief. We have seen in many cases that tax payer already owned the house property again they borrow money and buy the house property. The intention of the tax payer is to reduce the tax on income and not to create the wealth and property. They never think that they paid interest on housing loan and gained only 30 percent of it at maximum rate.
In short, the tax payers need to understand that the deductions under the income tax are claimed as matter of necessity and not as a matter of tax planning alone. To be clearer we quote an example. Say for example a particular tax payer paid interest of Rs.4 lakhs on housing loan interest. In this case the tax payer will save only 30 percent of Rs.2,00,000/- in the case of self-occupied property under section 24 of Income Tax Act. So, tax saved is Rs.60,000/- in case tax payer taxed at maximum rate and whereas incurred interest expenditure of Rs.4 Lakhs. That means we are not discouraging the tax payer to own house property. But we wanted to convince the tax payer that the investment on the house property cannot be made just to save tax but should be to own house property. The same principle also applicable to buy the insurance policy and in investments in tax savings schemes.