sk any individual serious about saving tax, and he will quote two sections of the Income Tax Act, 1961: Section 88 and Section 80L.

At least till now. From the next financial year (April 1, 2005 to March 31, 2006), things will change.

Do note, both these sections are still applicable for this financial year. It will be scrapped only from the next financial year onwards.

What is Section 80L?

If you invest in certain instruments specified by the government, you do not pay any tax on the interest you earn on these instruments.

So while the interest you earn is taxable, if the investment falls under Section 80L, you could claim a deduction.

Under this Section, interest in certain investments can be exempt from tax upto Rs 15,000.

Examples: Interest from the National Savings Certificate and infrastructure bonds.

What is Section 88?

Section 88 offers a rebate. When the government gives you a concession on your income if you invest in certain instruments, that is a rebate.

The actual amount of the rebate varies:

• If your gross total income does not exceed Rs 150,000 = 20% rebate.
• If your gross total income exceeds Rs 150,000 = 15% rebate.
• If your gross total income exceeds Rs 500,000 = Section 88 not applicable.

Let's put figures to this:

You have to pay tax = Rs 18,000
Your rebate = 20%
You invest Rs 50,000 in the instruments eligible for a rebate.
Your savings = Rs 10,000 of your tax (20% of Rs 50,000).
So instead of paying tax of Rs 18,000, you pay a tax of Rs 8,000.

The maximum amount that can be invested under Section 88 is Rs 100,000. In other words, the maximum tax that can be saved is upto Rs 20,000.

If investing for the current financial year, read Smart tax-saving solutions!

What has changed

1. The amount you can invest. You can invest up to Rs 100,000 from your income. This amount will be deducted from your income when calculating the tax. Incidentally, this is now Section 80C.

2. Where you can invest: Post office small savings schemes, equity linked saving schemes of mutual funds, infrastructure bonds, pension funds and provident funds. Basically, the same investments under Section 88.

3. You don't have to worry about which income category you fall under. The highest income category is currently not allowed Section 88 benefits. Next financial year, anyone and everyone can invest in these schemes. A uniform benefit is now available to all investors in the form of Section 80C. Irrespective of your income category, you can take advantage of it.

4. No more sub-caps. The maximum amount under Section 88 (Rs 100,000) has several sub-caps. For instance, just Rs 10,000 in equity linked savings schemes. This really tied up individuals' hands. Now they have much more freedom to select where they want to invest. They can decide how much percentage of their income can go in which investment. As long as it is not over Rs 100,000.

Make it work for you!

1. Think long term. Think aggressive.

2. Investing in pension funds and provident fund will help you do efficient tax planning as well as provide for your future.

3. Now a great option is to invest a substantial portion of your money in equity linked saving schemes of mutual funds referred to as ELSS. They will add that zing to your overall investments.

4. Don't focus too much on infrastructure bonds and post office schemes because the interest there is on the downturn.

Next: Invest in an ELSS fund. Earn big!

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