17 September2020

Income Tax Saving Investments

Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt. One must plan investments well and spread it out across the various instruments specified under this section to avail maximum tax benefit. Most of the Income Tax payee tries to save tax by investing in instruments specified under Section 80C of the Income Tax Act. However, it is important to know the Section in totality so that one can make best use of the options available for exemption under income tax Act. One important point to note here is that one can not only save tax by undertaking the specified investments, but some expenditure which you normally incur can also give you the tax exemptions.
Most common instrument / expenses under Sec 80C are:

  • Life Insurance Premium
  • Children Education Expenses
  • Housing Loan principal repayment
  • PPF (Public Provident Fund)

  • What is maximum limit of Sec 80C?
    Maximum limit of deduction under section 80C is Rs 1.50 lakh from financial year 2014-15 / Assessment Year 2015-16. Before FY 2014-15 the limit was Rs. 1 Lakh.
    Who is eligible for Sec 80C?
    This benefit is available to every Individual and HUF irrespective of their income levels.
    How you save Income Tax?
    Section 80C of the Income Tax Act is the section that deals with tax saving expenses. It states that qualifying investments, up to a maximum of Rs. 1.50 Lakh, are deductible from your income. This means that your income gets reduced by this investment amount (up to Rs. 1.50 Lakh), and you end up paying no tax on it at all!
    If you are in the highest tax bracket of 30%, and you invest the full Rs. 1.50 Lakh, you save tax of Rs. 45,000. Isn’t this great? So, let’s understand the qualifying investments first.
    A. Investments qualifying for deduction under section 80C

    i. Provident Fund (PF) & Voluntary Provident Fund (VPF):
    PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF). Interest is tax-free.
    ii. Public Provident Fund (PPF):
    Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Interest is compounded yearly and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500 and maximum is Rs 1,50,000. A point worth noting is that interest rate is assured but not fixed. Also the interest on Public Provident Fund (PPF) is exempt under Income Tax Act, 1961.
    iii. Life Insurance Premiums and deferred annuity:
    Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that life insurance premium paid by you for your parents (father / mother / both) or your in-laws is not eligible for deduction under section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included. It is not necessary to have the insurance policy from Life Insurance Corporation (LIC) – even insurance bought from private players can be considered here.
    iv. Equity Linked Savings Scheme (ELSS):
    There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C.
    v. Home Loan Principal Repayment:
    The Equated Monthly Installment (EMI) that you pay every month to repay your home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C. Even the interest component can save you significant income tax – but that would be under Section 24 of the Income Tax Act.
    vi. Stamp Duty and Registration fees for a home:
    The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C in the year of purchase of the house....
    vii. Sukanya Samriddhi Account :
    Sukanya Samridhi Account’ can be opened at any time from the birth of a girl child till she attains the age of 10 years, with a minimum deposit of Rs 250. A maximum of Rs 1.5 lakh can be deposited during the financial year. Interest on this account is fully exempt from tax in the year of accrual as well as in the year of receipt. Sukanya Samriddhi Account meaning Girl Child Prosperity Scheme is a special deposit scheme launched by Prime Minister Narendra Modi on 22 January 2015 for girl child.
    The details of this scheme is as under:
    • Per girl child only single account is allowed. Parents can open this account for maximum two girl child. In case of twins this facility will be extended to third child
    • Minimum deposit amount for this account is ₹ 250/- and maximum is ₹ 1,50,000/- per year
    • Money to be deposited for 15 years in this account.
    • Interest is calculated on yearly basis ,Yearly compounded.
    • Passbook facility is available with Sukanya Samriddhi account.

    viii. National Savings Certificate (NSC) (VIII Issue):
    NSC is a time-tested tax saving instrument with a maturity period of Five Years. Interest is Compounded Yearly. While the minimum investment amount is Rs 1000, there is no maximum amount. Premature withdrawals are permitted only in specific circumstances such as death of the holder or on forfeiture by a pledgee or when ordered by a court. Investments in NSC are eligible for a deduction of upto Rs 1,50,000 p.a. under Section 80C. Furthermore, the accrued interest which is deemed to be reinvested qualifies for deduction under Section 80C. However, the interest income is chargeable to tax in the year in which it accrues.
    ix. Pension Funds – Section 80CCC:
    This section – Sec 80CCC – stipulates that an investment in pension funds is eligible for deduction from your income. Section 80CCC investment limit is clubbed with the limit of Section 80C – it means that the total deduction available for 80CCC and 80C is Rs. 1.50 Lakh. This also means that your investment in pension funds upto Rs. 1.50 Lakh can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC can not exceed Rs. 1.50 Lakh.
    x. 5-Yr bank fixed deposits (FDs):
    Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction.
    xi. Senior Citizen Savings Scheme 2004 (SCSS):
    Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. Interest Senior Citizen Savings Scheme 2004 is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest. Interest income is chargeable to tax. The account may be opened by an individual,
    1. Who has attained age of 60 years or above on the date of opening of the account.
    2. Who has attained the age of fifty-five years or more but less than sixty years, and who has retired on superannuation on the date of opening of the account.
    3. Retired personnel of Defence Services (excluding Civilian Defence employees) shall be eligible to open an account under this Scheme on attaining the age of fifty years subject to the fulfilment of other specified conditions

    xii. 5-Yr post office time deposit (POTD) scheme:
    POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) qualifies for tax saving under section 80C. Interest is compounded quarterly but paid annually. The Interest is entirely taxable.
    xiii. NABARD rural bonds:
    There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.
    xiv. Unit linked Insurance Plan :
    ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of equity investments. They have attracted the attention of investors and tax-savers not only because they help us save tax but they also perform well to give decent returns in the long-term.
    xv. Others:
    Apart form the major avenues listed above, there are some other things, like children’s education expense (for which you need receipts), that can be claimed as deductions under Section 80C. Education expenses include tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether at the time of admission or thereafter, -
    (a) to any university, college, school or other educational institution situated within India.
    (b) for the purpose of full-time education of any of 2 children of individual.

    B. So, where should you invest for Section 80C Deduction?
    Like most other things in personal finance, the answer varies from person to person. But the following can be the
    broad principles:
    • Provident Fund: This is deducted compulsorily from your salary, and there is no running away from it! So, this has to be the first. Also, apart from saving tax now, it builds a long term, tax-free retirement corpus for you.
    • Home Loan Principal: If you are paying the EMI for a home loan, this one is automatic too! So, it comes as a close second.
    • Life Insurance Premiums: Every earning person having dependents should have adequate life insurance coverage. Therefore, life insurance premium payments are the next.
    • Voluntary Provident Fund (VPF) / Public Provident Fund (PPF): If you think that the PF being deducted from your salary is not enough, you should invest some more in VPF, or in PPF.
    • Equity Linked Savings Scheme (ELSS): After the above, if you have not reached the limit of Rs. 1,50,000, then you should invest the remaining amount in Equity Linked Savings Scheme (ELSS).
    Equities provide the best, inflation-beating return in the long term, and should be a part of everyone’s portfolio. After all, what can be better than something that gives great return and helps save tax at the same time?

    C. When to Invest for Section 80C deduction?
    Many of us start looking for investment avenues only in February or March, just before the Financial Year is getting over. This is a big mistake! One, you would end up investing your money without putting proper thought to it. And secondly, you would end up losing the interest / appreciation for the whole year. Instead, decide where you want to make the investments, and start investing right from the beginning of the financial year – from April. This way, you would not only make informed decisions, but would also earn the interest for the full year from April to March.