The most sections of the Income Tax Act which lead to Zero-tax- Investment relate to the provisions as contained in section 10, and section 80C. First up all Zero-tax could be achieved by making investment in certain Bonds and securities of the government which are completely tax-free. For example, the dividend income, income from tax-free bonds, income from mutual funds, and so on. Another mode of investment which helps achieve zero-tax investment is by making investment in certain specified areas so as to get the full benefit of section 88 of the I.T . Act, 1961. The optimum planning of investors, therefore, can be achieved by making zero-tax investments in terms of provisions of the Income Tax Act, 1961 as contained in sections 10, and section 80C of the Income tax Act , 1961.
In respect of tax deduction on tax under Section 80C, the maximum eligible amount is Rs 1, 00,000. Some of the important items in which investment can be made to achieve tax deduction under the overall limit of Rs. 1 Lakhs are investment in PPF, PF, NSC,NSS, Equity lined Savings Schemes, 5-year Bank Fixed Deposit, 5-year P.O .Deposit Schemes and Senior citizen Savings schemes. Besides, within the above limit one can also make repayment of housing loans and tuition fees for two children to avail the said deduction. The contribution made by a tax payer to the Pension Plan also enjoys the above tax deduction within the overall limit of Rs 1 Lakhs tax deduction. The best zero-tax investment would be in shares of companies because the entire dividends in the hands of a shareholder will be completely exempt from income tax under Section 10(34) of the I.T . Act, 1961.
The income received in respect of all units from the Unit Trust of India or any Mutual Fund would be fully exempt from income tax in the like manner as dividends under Section 10(35). This is applicable for all categories of tax payers. The 6.5% Savings Bonds, 2003 is one very attractive zero-tax investment proposal which was available from the Reserve Bank of India. The entire interest income from this Bond is fully exempt under the Income Tax Act, 1961 . Presently the investment in these bonds cannot be taken advantage of because they have been scrapped. The investment in listed securities and units of an equity- oriented mutual Funds also result into zero tax for the investor because there is no tax liability on long-term capital gains arising from the sale of listed securities and units of equity-oriented fund in case they are held for more than one year and securities transaction tax paid. The post office savings account interest is fully exempt from income tax.