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Under Section 80 C ( Max Limit Rs. 1.5 Lakh)
The total limit under section 80C is Rs 1 lakh.
Included under this heading are 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
Most of the Income Tax
payee try to save tax by saving under Section 80C of the Income Tax Act.
However, it is important to know the Section in toto 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.
Besides these investments, the payments towards
the principal amount of your home loan are also
eligible for an income deduction. Education expense of children is increasing
by the day. Under this section, there is provision that makes payments towards
the education fees for children
eligible for an income deduction
Sec 80C of the Income Tax Act is the section that
deals with these tax breaks. It states that qualifying investments, up to a
maximum of Rs. 1 Lakh, are deductible from your income. This means that your
income gets reduced by this investment amount (up to Rs. 1 Lakh), and you end
up paying no tax on it at all!
This benefit is available to everyone,
irrespective of their income levels. Thus, if you are in the highest tax
bracket of 30%, and you invest the full Rs. 1 Lakh, you save tax of Rs. 30,000.
Isn’t this great? So, let’s understand the qualifying investments first.
Qualifying Investments
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). Current rate of
interest is 8.5% per annum (p.a.) and is tax-free.
Public Provident Fund (PPF):
Among all the assured returns small saving schemes, Public Provident
Fund (PPF)
is one of the best. Current rate of interest is 8% tax-free and the
normal
maturity period is 15 years. Minimum amount of contribution is Rs 500
and
maximum is Rs 70,000. A point worth noting is that interest rate is
assured but
not fixed. Interest on PPF is proposed to increase to 8.60% and
Investment Limit is also expected to increase to Rs. 1,50,000/-
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. 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.
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.
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. Please read “Income
Tax (IT) Benefits of a Home Loan / Housing Loan /
Mortgage”, which presents a full analysis of how you can save income tax
through a home loan.
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.
National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%. If you invest Rs 1,000, it becomes Rs 1601 after six years. The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.
National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%. If you invest Rs 1,000, it becomes Rs 1601 after six years. The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.
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 maeans that the total deduction
available for 80CCC and 80C is Rs. 1 Lakh.This also means that your investment
in pension funds upto Rs. 1 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 Lakh.
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.
Senior Citizen Savings Scheme 2004
(SCSS): A recent addition to section 80C list, Senior Citizen Savings
Scheme (SCSS) is the most lucrative scheme among all the small savings schemes
but is meant only for senior citizens. Current rate of interest is 9% per annum
payable quarterly. Please note that the interest 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.
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) – which currently offers 7.5 per cent
rate of interest –qualifies for tax saving under section 80C. Effective rate
works out to be 7.71% per annum (p.a.) as the rate of interest is compounded
quarterly but paid annually. The Interest is entirely taxable.
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.
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.
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
Sec 80C.
So, where should you invest?
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, 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.
(For more on this, please read “Life after life – Why you should buy Life
Insurance”) 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).
