Deduction Under Section 80C & Tax Planning.

Deduction Under Section 80C & Tax Planning

Tax deductions provide a means for individuals to reduce their tax burden. Among the various tax-saving options, most individuals prefer to claim tax deduction under Section 80C of the Income Tax Act, 1961.

Articles deal with deduction under Section 80C of the Income Tax Act and explain who is eligible for deduction, Eligible Investments, Limit for deduction, who can invest for whom and time period for investment. 

What are eligible investments for Section 80C

Section 80C replaces Section 88 with more or less the same investment mix available in Section 88.  The new section 80C has become effective w.e.f. 1st April, 2006.  Even the Section 80CCC on pension scheme contributions was merged with the above Section 80C.  However, this new section has allowed a major change in the method of providing the tax benefit.  Section 80C of the Income Tax Act allows certain investments and expenditures 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. Unlike Section 88, there are no sub-limits and is irrespective of how much you earn and under which tax bracket you fall.

Section 80C enables taxpayers to claim a deduction of Rs 1,50,000 from total income. Claimants can include individuals or a Hindu Undivided Family (HUF).  For those who have paid excess taxes and made suitable investments in LIC, PPF, Mediclaim, and expenses incurred towards tuition fees, etc., filing Income Tax Return will enable people to get a refund.

Most of the Income Tax payee tries 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 the best use of the options available for exemption under the income tax Act. 

A. Investments Qualifying for deduction under section 80C

The following investments and payments are eligible for deduction under Section 80C of the Income Tax Act, 1961:

1) Life Insurance: Premiums paid toward all life insurance policies are eligible for tax benefits under Section 80C. This deduction can be claimed for premiums paid towards insuring self, spouse, dependent children and any member of Hindu Undivided Family. An important point to be noted is that if the policy is issued on or prior to March 31, 2012, annual premium up to a maximum of 20% of the sum assured becomes tax-deductible. For insurance policies issued on or after April 1, 2012, annual premium up to a maximum of 10% of the sum assured is tax-deductible.

2) Sukanya Samriddhi Yojana: Investments made in Sukanya Samriddhi Yojana, which is a saving scheme for the girl child, are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. A parent or legal guardian of a girl child, who has not reached the age of 10 years, can open this account. Sukanya Samriddhi Yojana account can be opened for two girl children (one account per girl child) and can be extended to a third if twins are involved. 

3) Public Provident Fund: Public Provident Fund (PPF) contributions are eligible for tax deductions under Section 80C. PPF accounts have a maximum deposit limit of Rs. 1,50,000 per year, therefore, all deposits made to your PPF account can be claimed as deductions under Section 80C. The money that you put into a PPF account will be locked-in for a period of 15 years. Partial withdrawals are permitted after 7 years.

4) Equity Linked Saving Scheme:  Investments in equity-linked savings scheme qualify for tax deduction under section 80C of the Income Tax Act. Now, an essential point to be noted about the equity-linked savings scheme is that they have a mandatory lock-in period of three years from the date of investment. If you are considering investing in this scheme, make sure to invest for longer periods like five to seven years as they are equity schemes. Equity schemes are an ideal option for wealth creation over a long period.

5) Five Year Bank Deposit: Most banking institutions offer tax-saving fixed deposits where deductions can be claimed under Section 80C of the Income Tax Act. The condition associated with tax saver fixed deposits is that they come with a lock-in period of 5 years. Premature withdrawal is not allowed under this investment. Interest earned on tax saver fixed deposits, however, are taxable and will be deducted at source.

6) Stamp Duty and Registration Charges: While buying a property, one of the largest expenses you will have to bear is the stamp duty and registration charges. To give taxpayers some relief, the government has included these expenses under Section 80C of the Income Tax Act, 1961. The deduction can only be claimed once the property construction is complete and you have legal possession of the house.

7) Senior Citizens Savings Scheme: Investments in Senior Citizens Saving Scheme, which as the name would suggest is suitable for senior citizens, qualify for deduction under Section 80C of the Income Tax Act. This scheme has a tenure of 5 years. To participate in the Senior Citizens Saving Scheme, an individual has to be at least 60 years of age. Those who have taken VRS (voluntary retirement scheme) can opt for it after the age of 55.

8) National Savings Certificate: To encourage taxpayers to park their money in National Savings Certificate scheme, the government has allowed tax deductions to be claimed under Section 80C on the investments made in it. Interest earned on National Savings Certificates are liable to tax. However, if this interest is reinvested, it will be eligible for deduction under Section 80C. The interest rate on this scheme is similar to that of tax-saving fixed deposits, PPF and other fixed-income earning instruments.

9) Home Loan Principal Repayment: The amount that goes into repaying the principal on a home loan is eligible for deduction under Section 80C. To claim this tax benefit, construction of the property should be complete. If you transfer the property before the end of 5 years from the year you had taken its possession, no tax benefits will be awarded. Additionally, the amount claimed as a deduction in the earlier years shall become taxable in the year that the property is transferred.