What to Check before investing for Section 80C 

or

How to Make Best Use of Section 80C

Google
Web www.allbankingsolutions.com

Background for Section 80C of the Income Tax Act (India) / What are eligible investments for Section 80C:

Section 80C replaced the existing 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 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 expenditure 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.

The total limit under this section 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. 

The investments that fall under Section 80C can be broadly classified as contributions / investments to: 

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

In 2008, Senior Citizens Saving Scheme 2004 and the Post Office Five Year Term Deposit Account have been added to the basket of saving instruments under Section 80(C) of the Income Tax Act..  An additional deduction of Rs.15,000 under Section 80D has been allowed to an individual who pays medical insurance premium for his/her parent(s).

As given above, the limit under this section 80C is Rs 100,000, irrespective of how much you earn and under which tax bracket you fall.  Also, there are no sub-limits under this overall Rs 100,000 amount.  Therefore, if you like, you can invest the entire amount in ELSS or NSCs.  If you are repaying a home loan and the principal repayment amounts to Rs 100,000, then you can claim the entire amount as a deduction and thus no further savings will be needed 

 

All the above must be made from the current year's earnings and not past earnings

 

 

Here are some tips for you as to how to make the best of this section 80C: -

(1) Always Check  YOUR FORCED SAVINGS / EXPENDITURE ELIGIBLE FOR DEDUCTION :

(A) Home Loan : 

There is a provision that  the payment made for repayment of the  principal amount  (not interest payment) of the Home Loan  is eligible for a deduction under Section 80C if you have taken a home loan and you fulfill certain conditions.

(B) Payment towards Education Fee of the children :

Most of the young couples and middle aged income tax payee incur quite high payments  towards the education fees of their  children.  The expenditure incurred on education fees is  also eligible for a deduction under Income Tax Act,   Thus, if you are incurring expnediture towards educatin fee of your children, please check whether these are eligible for deduction under the IT Act.

(C) Payment towards Provident Fund :

Salaried income tax payee are usually have a forced saving which are eligible for deduction under section 80C.    A fixed percentage of basic salary  (ranges from 8.33% 12%) is deducted by your employer towards the Employees Provident Fund (EPF).   Some employers allow higher deduction towards EPF.  Thus, you should first of all check the total amount that is expected to be deducted towards EPF during the financial year.     The total amount deducted from your salary will be eligible for investments under Section 80C.

(D) Interest on National Saving Certificates :

In case you have purchased NSCs during some earlier years, then the accrued interest as per the tables released by authorities is eligible for deductions under Section 80C.

(2) Always Check the Lock-In Period of the Investments

Tax saving investments normally  have a minimum lock-in period i.e. the period during which withdrawals are usually not allowed.  If the same are withdrawn before the lock in period, these will be taxable in the year of withdrawal.  For example, National Savings Certificates (NSC)  have a lock-in period of six years, Public Provident Fund (PPF) has a lock-in of 15 years,  Equity Linked Saving Schemes (ELSS)  have a lock-in period of three years.  Insurance policies have even greater period of lock in.

(3) Always Check Whether the investment you intend to make will meet your goals :

You are saving every year and while saving you normally have some goal in mind, e.g. to meet the expenditure on education of children, purchase of a vehicle or house or marriage of your children.  Therefore, you should always look at the investments from the angle whether it will meet your specific requirements on maturity. You should also try to diversify your savings in different instruments.

For instance, if you have already invested a fair portion of your money in equity (shares and mutual funds that invest in shares), avoid an ELSS. Opting for an ELSS means a huge portion of your investments will be in equity and that may  not be what you want. Small savings schemes are usually preferred by the risk-averse people. Equity-linked savings schemes (ELSS) are a good option to consider for those with appetite for risk. ELSS tax savers are like any other diversified equity fund, but with a three-year lock-in, providing benefits under Section 80C.