An in-depth look at section 80C and its various constituents
Section 80 C is probably the most popular section which is used for saving taxes, much debate goes into where you should invest to ensure that you take full advantage of the 1.5 lakh exemption available under this section.
While most of us are aware of options like EPF, PPF and Insurance premiums we rarely venture beyond this. We have attempted to put the plethora of options available to you together to help you choose something which is aligned to your overall financial plan.
Instruments mentioned below qualify for a deduction of INR 1.5 lakhs. One should bear in mind that the total exemption available under sec 80 C is INR 1.5 lakhs, you may choose to take entire deduction through one of the below mentioned instruments or a combination of few.
The way to use this article would be to follow the following order, if EPF is being deducted, subtract the amount being deducted from INR 1.5 lakhs. Now check if you have incurred any of the expenses listed below and deduct that from what is left after deducting EPF. This will give you the amount you need to invest and you can choose the instrument depending on the time frame, your risk appetite and returns.
Default savings for salaried
Employees’ Provident Fund (EPF)
For most salaried employees contribution towards EPF is a default investment. EPF is one of the few instruments in this basket which enjoys an EEE status. This would mean the contributions as well as the interest earned are exempt from tax. This goes to say if you en-cash your EPF after 5 years the proceeds would be tax free. The interest payable towards EPF is declared on a yearly basis and for this fiscal it is 8.75%. Only employee contributions towards EPF can be claimed for deduction and not the employers.
1) Principal repayment on Housing Loan
If you own a house which has been financed, the principal component of you EMI will qualify as a deduction under section 80C.
- If the property is jointly owned, each of the owners can claim deduction up to a maximum of 1.5 lakhs individually.
- This deduction can be claimed only for properties which are complete and possession for the same has been given. It is not applicable for properties under constructions.
- You would need to submit statement from the lender showing repayment of principal as well as interest for the year.
2) Tuition fees paid for children’s education
School fees paid towards education of children is available as a deduction under this section, however one needs to keep the following features in mind for claiming the deduction.
- This deduction is allowed for two children only (if one has more than two children the husband and wife can claim for two children each).
- The deduction is allowed only for school fees paid towards children’s education and not towards fee paid for self or Spouse.
- Fee related to any period can be claimed in the year when the payment is made.
· Part time course
· Distance learning course
· Fee towards Private tuitions
· Coaching classes
· Fee paid for educational institution outside India
· Development fee
· Late Fee
· Transport charges
· Hostel charges
· Term fee
· Building fee
3) Stamp Duty and Registration Charges on purchase of a House
Very few people are aware that Stamp duty and Registration charges are allowed as deduction under Section 80 C. The following are the things to bear in mind to claim this expense as a deduction.
- This can be claimed only if the construction of property is completed and you have possession of the house.
- The deduction can only be claimed in the year the payment is made towards these expenses.
- If the property is in joint name the co-owners can claim these expense based on the share in the property subject to maximum limit of 1.5 lakhs.
Small Savings Scheme
1) Public Provident Fund (PPF)
PPF is one of the most popular small saving schemes for long term investments since it is backed by the government. The following are the salient features of the scheme
- The tenure of the scheme is for 15 years and can be extended in blocks of 5 years after the stipulated 15 years.
- Minimum investment per year is INR 500 pa and maximum is INR 150000.
- Premature with drawls and loan facility is available after a certain number of years but this is not recommended if you intend to build a substantial corpus.
- This is one of the very few instruments which enjoys and EEE status along with EPF i.e. while investment can be claimed under 80C even the interest earned is tax free.
- The interest rate for PPF is announced on an yearly basis and for this year it is fixed at 8.7%.
- PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.
- While you can open account in the name of a minor child the combined limit for investment in PPF account as self and guardian is INR 150000.
2) Senior Citizens Savings Scheme (SCSS)
This is a small saving scheme available to senior citizens
- Entry age for this scheme is minimum 60 which is reduced to 55 for retirees on superannuation or voluntary or special voluntary scheme.
- It comes with guaranteed interest which is fixed at 9.2% this year.
- Maximum deposit in this scheme is restricted to 15 lakhs and minimum is Rs.1000.
- The interest is compounded quarterly and payable quarterly.
- Interest paid is taxable and TDS is deducted.
- The tenure of deposit is for 5 years and can be extended by 3 years.
- Premature withdrawals are permitted after one year with penalty.
3) Sukanya Samruddhi Account ( Small Saving Scheme)
This is the latest addition to list of instruments already available under this section. Under this scheme parents of girl child aged less than 10 years can open the above account and the deposits into this account can be claimed as deduction.
Salient features of the scheme are as follows
- Account can be opened by the parent or legal guardian in the name of the girl child who is less than 10 years of age.
- Maximum of 2 accounts (one per girl child can be opened) unless the second is a twin.
- Min and max amount of deposit per year is INR 1,000 and INR 1,50,000 respectively. Subsequent deposit in multiple of INR 100.
- The deposit is to be made for 14 years from the date of opening the account.
- The account matures 21 years from the date of opening or if the girl gets married before the completion of 21 years.
- Premature withdrawal towards the girls education to the extent of 50% is allowed only after the girl attains 18 years of age while full withdrawal is possible after she turns 21.
- The rate of interest will be decided on an annual basis as with PPF and has been pegged at 9.1% for the year 2014-2015.
4) National Saving Certificate (NSC) , including accrued interest
NSC was among the more popular small saving schemes until a few years back.
- The minimum lock in period for NSC is 5 years.
- INR 100 invested will grow to INR 151.62 in 5 years. The Rate of interest is decided on a yearly basis and for the current year it is 8.5%.
- Not only is the amount deposited taken as a deduction the interest accrued in the account can also be taken as a deduction under section 80C. This should not be confused as tax exemption. It is important to note that while the interest earned can again be considered for 80c the interest is not tax exempt!
Insurance and Equity linked Investments
1) Equity Linked Savings Schemes (ELSS)
These are mutual fund schemes approved for tax savings
- Comes with a lock in period of 3 years.
- The returns are linked to the market and not guaranteed.
- Long term capital gains and dividends received are tax free.
2) National Pension System (NPS)
National Pension System (NPS) is a defined contribution based pension system, regulated by PFRDA and promoted by Government of India. The features of this scheme are as follows
- Any Indian citizen between age 18 and 55 can invest in NPS.
- Minimum investment required is INR 6000 p.a. , there is no maximum limit
- Investments need to be maintained till retirement and on retirement part of the corpus can be withdraw and the rest will be given as an annuity.
- Part withdrawals are possible and the amount which can be withdrawn depend on the age of the subscriber.
- You will have multiple options for investments depending on your risk appetite you can choose to invest in equity, government securities fixed income instruments and corporate debt.
- The expenses charged by NPS are a fraction of those charged by traditional mutual funds and this give you a huge advantage especially given the long duration of investments.
- The negative currently would be the amount received post retirement both the lump sum and annuity will be taxable.
3) Life Insurance Premium
- You can avail deductions for life insurance premium paid for self, spouse and child (premium for parents & in laws are not permitted).
- Deduction will be allowed only for premiums up to a maximum of 10% of sum assured.
- Premium paid for multiple policies can be claimed subject to above & overall limit of 1.5 lakhs.
- The deduction shall be reversed if the policy is terminated or ceases to be in force 2 years after the date of commencement.
- Deduction is available on payment basis.
4) Unit-Linked Insurance Plans (ULIPs)
Unit linked insurance plans mix insurance along with investments attempting to provide wealth creation along with life cover. If the sum assured is at least 10 times the premium paid the premium paid is eligible for deductions under 80 C.
We would recommend that you keep a close watch on the expenses charged by ULIP before you take the leap. Unless you get a scheme with very low expenses it is best to keep your investments and insurance separate!
1) 5-Year fixed deposits with banks and Post Office
Tax-Saving fixed deposits of scheduled banks with tenure of 5 years are entitled for deductions under this section. While the deposits can be claimed as deductions the interest earned above Rs.1500 overall limit will be taxed.
2) Infrastructure bonds
These bonds popularly known as infra bonds, they are issued by infrastructure companies and come with a lock in period. Investments in infra bonds can also qualify for deduction under Sec 80C. Till last year an extra Rs. 20000 deduction was available for investment in these bonds but for this year investment in these bonds will be within the overall limit of 1.5 lakhs. While Tax is not deducted at source the interest earned will be taxable and taxed as income from other sources.
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