Tax Planning u/s 80C of Income Tax Act 1961
Sec 80C of the Income Tax Act is the section that deals with providing tax benefits for investing in some notified investments. It states that qualifying investments, up to a maximum of Rs. 100,000.00, are deductible from your income. This means that your income gets reduced by this investment up to a maximum amount of Rs. 100,000.00
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 8.70% tax-free (Compounded Yearly) and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500 and maximum is Rs 1,00,000. A point worth noting is that interest rate is assured but not fixed.
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.
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) (VIII Issue): National Savings Certificate (NSC) is a 5-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is 8.50%t compounded half-yearly. If you invest Rs 1,000, it becomes Rs 1516.20 after five 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) IX Issue – 10 year tenure
- No maximum limit for investment.
- INR. 100/- grows to INR 234.35 after 10 years.
- Minimum INR. 100/- No maximum limit available in denominations of INR. 100/-, 500/-, 1000/-, 5000/- INR. 10,000/-.
- A single holder type certificate can be purchased by an adult for himself or on behalf of a minor or to a minor.
- Rate of interest 8.80%.
- Maturity value of a certificate of INR.100/- purchased on or after 1.4.2012 shall be INR. 236.60 after 10 years.
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 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 9.20% 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. The account may be opened by an individual,
- Who has attained age of 60 years or above on the date of opening of the account.
- Who has attained the age 55 years or more but less than 60 years and has retired under a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme on the date of opening of the account within three months from the date of retirement.
- No age limit for the retired personnel of Defence services provided they fulfill other specified conditions.
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 8.40 per cent rate of interest –qualifies for tax saving under section 80C. 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.
How you will make your investments
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. 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. 1,00,000, 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?
When you start Investing?
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.
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