Tax filing: Here's how to save your money from being axed

By Suresh Sadagopan, Ladder7 Financial Advisories

Most people are super-conscious about tax savings, they would go to any lengths to take advantage of Sec 80C limit of Rs.1 Lakh. They would want to go for medical insurance just to take advantage of the Rs.15,000/-pa available under Sec 80D. Even if they are in the lowest income tax bracket of 10%, many would still want to invest in infrastructure bonds, though it has a lock-in period of at least 5 years. 

When people are so keen to save tax upfront, why would they want to pay taxes on the money they are earning, especially if they can structure it in a way, they need not?

Let us take an example to understand this.  Ram invested Rs.30,000/- in NSC and Rs.40,000/- in PPF in the previous Financial year. While the amount of tax saved is identical in the year of investment, the interest income accrued from these two, are taxed in different ways. NSC interest is taxable in the hands of the investor, when they get the money after six years.  The return would be 30.9% less ( that would be the tax outgo in the highest bracket ), when they get the money back. 

However, PPF is entirely tax free. Hence, the entire amount one gets is tax-free. Though both of them have offered similar returns, the actual returns they have offered is vastly different.  Ram could have invested the entire Rs.70,000/- in PPF and could have ensured a higher return for himself