Deduction under section 80C of the Income Tax Act and Tax Planning

Deduction under section 80C of the Income Tax Act and Tax Planning




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Deduction under section 80C of the Income Tax Act and Tax Planning

 

Section 80C of the Income Tax Act has become effective w. e. f. 1st April, 2006.  Even the section 80CCC on pension scheme contributions was merged with the above Section 80C of the Income Tax Act.

 Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt.

The 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. Under this heading many small savings schemes like NSC, PPF and other pension plans. Payment of life insurance premiums and investment in specified government infrastructure bonds are also eligible for deduction under Section 80C.

This benefit is available to everyone, irrespective of their income levels.

Investments qualifying for deduction under section 80C of the Income Tax Act

  1. Provident Fund & Voluntary Provident Fund: Contribution to Provident fund (PF) is made by the employer and employee. PF is automatically deducted from your salary. While employer’s contribution is exempt from tax, employee’s contribution is counted towards 80C investments. Additional contribution can be made through Voluntary Provident Fund.  Besides, the interest earned on it is tax-free. Since it is a scheme run by the Government of India, it is also totally safe.
  2. Public Provident Fund: PPF refers to Public Provident Fund and is a Long Term Debt Scheme of the Govt. of India on which regular interest is paid. Interest is compounded yearly and the normal maturity period is 15 years. Minimum contribution is Rs. 500 and maximum contribution is Rs.150000.

Other Points Related to Public Provident Fund (PPF)

  • Any individual can invest in this Scheme but HUF’s and NRI are not allowed to open any PPF account.
  • You can have only one PPF account in your name
  • PPF account cannot be opened jointly with another individual. One can nominate one or more individuals. On the death of the account holder, nominees cannot keep the account going by making contributions.
  1. Life Insurance Premiums: 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. Maximum deduction allowed is Rs. 150000.
  1. Equity Linked Saving 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.3

Advantages of ELS Scheme:

  • Opportunity to grow your money.
  • Qualifies for tax exemptions under section u/s. 80C of the Indian Income Tax Act.
  • Long-term capital gains from these funds are tax free in your hands. However as per Finance Act 2018 LTCG on ELSS (equity oriented) in Excess of Rs 1 lakh is taxable @ 10% (Surcharge + Higher Education Cess) without indexation under section 112A.
  • Shorter lock-in period of 3 years as compared to National Saving Certificate(NSC) & PPF.
  • Exposure to equity results in high earning potential.
  1. 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.
  1. Stamp Duty and Registration Charges 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.
  1. National Savings Certificate (NSC): NSC is a time-tested tax saving instrument with a maturity period of five and Ten Years.  Interest is Compounded Half Yearly. While the minimum investment amount is Rs 100, there is no maximum amount. Premature withdrawals are permitted only in specific circumstances such as death of the holder. Investments in NSC are eligible for a deduction of up to Rs 150,000 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.
  1. Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount that you invest in these bonds can also be included in Sec 80C deductions.

 

  1. Pension Funds Sec 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 up to Rs. 1.50 Lakh can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC cannot exceed Rs. 1.50 Lakh.
  1. Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80Clist, 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.
  1. Others:

 

  1. 5-Year bank fixed deposits (FDs)
  2. 5-Year post office time deposit (POTD) scheme: Interest in Post office Time Deposit is compounded quarterly but paid annually. The interest is entirely taxable.
  3. NABARD rural bonds
  4. Unit linked Insurance Plan (ULIP)
  5. Sukanya Samriddhi Scheme

 

When to make investments u/s 80C?
There are many investors, who start to make investments just near the end of a financial year. This is a wrong decision on the part of the investor. It has two implications:

  • Firstly, the investor will end up investing money without proper planning.
  • Secondly, the investor stands to lose the interest/appreciation for the entire year.

Therefore, the investor should evaluate different investment option carefully before taking investments decision and should start investing right from the beginning of a financial year i.e. from the month of April. This will have two implications:

  • Firstly, it will enable the investor to take informed decisions.
  • Secondly, the investor will earn the interest on investments for the entire year from April to March.




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