Question

One of your clients in India, a government employee, would like to reduce his taxes . He is trying to decide whether he should contribute 50,000 to a Retirement Savings Plan this year. He has life insurance policy to which he pays a monthly premium of 8500.

a. What advice would you give to your client regarding Retirement Savings Plan contribution? Explain your conclusion.

b. What are the other alternative methods through he can plan his income and tax.

Answer 1

Background: In India, according to the Income-tax Act, 1961, various investments made during the year are allowed as deduction from the 'Gross Total Income'. These are detailed in the Chapter VI A of the Income-tax Act, 1961 [which covers all the sections among others, mentioned below].

a. Retirement Savings Plan: Contributions to certain Pension Schemes (Retirement Plans), subject to some amount restrictions are allowed as tax savings measures. Details given below.

• Under Section 80C: There are notified pension schemes of 'Unit Trust of India' or of Mutual Funds, investing in which can be used as a tax savings measure. [For the limit of such deduction, refer Note below].
• Under Section 80CCC: Contribution to Pension Fund of LIC [Life Insurance Corporation] or other Insurance Companies, subject to a maximum of 150,000 Indian Rupees.
• Under Section 80CCD(1): Contribution to Pension Scheme of the Central Government or New Pension Scheme or to a scheme called 'Atal Pension Yojana', subject to 10% of salary.
• Under Section 80CCD(1B): Additional deduction of 50,000 Indian Rupees to the contributions/investments covered in Section 80CCD(1) above.

Note: All these deductions including various other deductions detailed in 80C, other than the addition deduction in 80CCD(1B) shall not exceed 150,000 Indian Rupees or the gross total income before such deductions. That is, if gross total income is 120,000 Indian Rupees, then deduction cannot exceed 120,000. But if income is 400,000, deduction can be 150,000, and then the additional deduction allowed if requisite investment or contribution made. This is only for your academic clarity, because the retirement plan of 50,000 and the life insurance amount of 8,500 can be safely assumed as within limit, and allowed as tax savings measures.

Short answer to question a: Yes, such deduction of 50,000 Indian Rupees is allowed, safely assuming that his gross total income exceeds 50,000 Indian Rupees.

b. Other Alternative Methods:

• Various other plans are mentioned in Section 80C, and other sections such as 80D, 80G, etc. all covered by Chapter VI A of the Act. Section 80D covers the life insurance policy amount. 8,500 Indian Rupees is well within the limit of 25,000 Rupees.
• Some examples in 80C include depositing in notified bonds of NABARD, notified units of Unit Trust of India, fixed deposit in a scheduled bank or post office intended for 5 years or more, etc.

This reply answers your query. For any more details, feel free comment. If this helps, kindly give a 'thumbs up'.