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Check before investing for Section 80C  or  How to Mast Best Use of Section 80C

 

 

by

 

 

Rajesh Goyal

(Latest Reviewed in July 2015)

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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.  Here are some tips for you : -

 

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.

 

(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 expenditure towards education 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 have a minimum lock-in period i.e. the period during which withdrawals are usually not allowed.  If the same are withdrawn, these will be taxable in the year of withdrawal.  For example, National Savings Certificates (NSC)  have a lock-in period of five years (earlier it was 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 :

Background to Section 80C in the Income Tax Act OR KNOW EVERYTHING ABOUT SECTION 80C OF INCOME TAX ACT - INDIA:

Earlier there used to be Section 88 providing certain tax benefits.   However, now Section 80C has replaced the old Section 88.  However, the investment mix available in Section 88 has remained more or less the same. 

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The new section 80C  became effective w.e.f. 1st April, 2006.   Moreover, earlier section 80CCC on pension scheme contributions has also been merged with the new 80C.     However, unlike Section 88, there are no sub-limits and is irrespective of how much you earn and under which tax bracket you fall.

 

Under Sec 80C of the Income Tax, total qualifying investments limit has  been increased upto Rs.1.50 Lakh from the financial year 2014-15 (or AS 2015-16) onwards.  [Before FY 2014-15 the limit was Rs. 1 Lakh ].   Thus, it means actually your income gets reduced by this investment amount (up to Rs.1.50 Lakh), and you end up paying no tax on it at all!   As this benefit is available to everyone, therefore, for people who are in the highest tax bracket of 30%, there is saving of tax upto  Rs. 45,000 by merely investing in the given instruments / schemes.

 

In view of all these benefits, most of the lower and medium Income Tax payee try to save tax by investment in options under Section 80C of the Income Tax Act. 

 

A review of the various options for savings under section indicates that  you can not only save tax by investing your savings in specified investment options, but also on certain types of expenditure which you have to normally incur.   Therefore, it is necessary to understand the full section so that in case you are short of funds, you can claim tax benefits even for certain expenditure incurred by you.

 

There are many small savings schemes like NSC, PPF and other pension plans which are eligible under this Section.  Moreover, the payments towards the principal amount of  housing loan are also eligible for an income deduction. Similarly, there is provision wherein the payments made towards education fees for children are also eligible for an income deduction.  However, in case of premium paid for insurance;-

 

  • The benefit for premium is restricted to 20% of actual Sum Assured 
  • The policy has to be continued for at least 2 years or it will result in reversal of benefits taken.

As the benefits under Section 80C are available across all income levels,  thus, people who are in the highest tax bracket of 30%, save higher tax.

 

 We now discuss below various schemes which are eligible for savings under Section 80 C.   The latest returns on these schemes and tax benefits, if any, on the interest / dividend earned on such investments etc.

 

 Major Saving Schemes to Invest for Saving Tax Under Section 80C

 

Saving Scheme

Sec. under which Tax Benefit available

Return

Tax benefits for earnings (i.e. interest received / dividend received)

Lock in Period and other Remarks

NSCs :-  There are  two types of National Saving Certificates -

 a) For 5 Years maturity ;

 (b) For 10 years maturity

 

Section 80C

8.50% for 5 years Maturity NSCs; and 8.80% for 10 years maturity NSCs  (wef 01/04/2015) i.e. applicable for FY 2015-16

Accrued Interest is Taxable in the year in which it has accrued

Now we have NSCs of 5 years and 10 years maturities (earlier there used to be only one type of NSCs maturing in 6 years).   In NSC  interest is Compounded Half Yearly. While the minimum investment amount is Rs 100, there is no maximum amount. Premature withdrawals are permitted only in specific circumstances such as death of the holder.  Interestingly, , the accrued interest which is deemed to be reinvested qualifies for deduction under Section 80C

Equity Linked Savings Schemes (ELSS) -

 

ELSS stands for an Equity Linked Savings Scheme, which is actually an open-ended Equity Mutual Fund.  It gives an opportunity to invest in equities and get high returns and at the time save tax.  Moreover, long-term capital gains from these funds are tax free.   Dividend payout option enables gains even during lock-in period

Section 80C

Varies from year to year

Dividend is tax free

3 years

 

Life Insurance Policies -

The amount paid by you towards life insurance premium for yourself, your spouse or your children are allowed to be  included in Section 80C deduction.  However, life insurance premium paid by you for your parents (father / mother / both) or your in-laws is NOT eligible for deduction under this section

Section 80C

Varies from year to year

Varies from scheme to scheme

Varies from scheme to scheme

Unit Linked Insurance Plan (ULIP)

Section 80C

Varies from year to year

Varies from scheme to scheme

Varies from scheme to scheme (15 to 20 years)

Infrastructure Bonds - (From FY 2012-13, the separate limit u/s 80 ccf of Rs 20,000/- was withdrawn.  Thus, these are not popular now as they offer low rate of return).

Section 80C

Varies from year to year

Taxable

3 to 10 years

Contribution to Provident Fund (viz  EPF / GPF / VPF ) -  PF is usually automatically deducted from the salary.  As per PF laws, it is  you and your employer that  contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments.   The employee has the option to contribute additional amounts through voluntary contributions (VPF).

Section 80C

8.50%

Interest earned is tax free

Till retirement (loans are permitted)

Public Provident Fund (PPF) - 

This scheme is the most popular among middle class as it gives good returns and  interest income is tax-free, thought  interest is compounded Yearly only.  .

Section 80C

Increased to 8.70% wef 01/04/2015 for FY 2015-16

Interest earned is tax free

15 years and extendable.  Withdrawals allowed after 7 years.  Yield on PPF will vary and will be fixed at 25 basis point above the 10 year government bonds.  - See PS Note below

 

Interest accrued in respect of NSC VIII issue

 

Section 80C

See NSCs above

Taxable

Till maturity of NSCs

Tuition Fees including admission fees or college fees paid for full time education of any two children of the assessee. The provision under this section provide that payments towards the education fees for children eligible for an income deduction

Section 80C

Not applicable

Not applicable

Not applicable

Repayment of Housing Loan (Principal) -  Once your repayment of HL starts, EMIs consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C.  However, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year.

[ Remember that the saving of tax on interest component is available under Section 24 of the Income Tax Act  ].

 

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. - See more at: http://taxguru.in/income-tax/all-about-deduction-under-section-80c-and-tax-planning.html#sthash.rPK9BOoM.dpuf
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. - See more at: http://taxguru.in/income-tax/all-about-deduction-under-section-80c-and-tax-planning.html#sthash.rPK9BOoM.dpuf

 

Section 80C

Not applicable

Not applicable

Not applicable

Stamp Duty & Registration Charges  on Purchase of the House :  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.

Section 80C

Varies (around 8.00%)

Nil

5 Years

Bank Deposits - Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction

 

Section 80C

Varies (around 8.00%)

Nil

5 Years

Senior Citizens Savings Scheme  - 

SCSS is one of the most popular schemes among the senior citizens.  As per the scheme, the interest is payable quarterly ( thus interest is received on quarterly basis and not compounded. 

Section 80C

Increased to 9.30% wef 01/04/2015 for FY 2015-16

Taxable

See PS below

Post Office Time Deposit Account (POTDs)  -

POTDs are quite similar to bank fixed deposits, but are available for varying time duration like one year, two year, three year and five year.  However, remember that  only 5-Yr post-office time deposit (POTD)  qualifies for tax saving under section 80C. Interest is compounded quarterly but paid annually.

Section 80C

 8.50% for FY 2015-16

 

The Interest is taxable. 

5 years 

 

Sukanya Samriddhi Account :–  ThisAccount can be opened at any time from the birth of a girl child till she attains the age of 10 years, with a minimum deposit of Rs 1000. A maximum of Rs 1.5 lakh can be deposited during the financial year. 

Per girl child only single account is allowed. Parents can open this account for maximum two girl child. In case of twins this facility will be extended to third child. 

The account shall mature on completion of twenty-one years from the date of opening of the account.   However, premature withdrawal is allowed in case of death of the girl child or on permission of central government.   In case child is married after the age of 18 years, there is a provision to stop operation of the account.

 

Sukanya Samriddhi Account

Section 80C 

9.20% for FY 2015-16 (Yearly compounded) Interest on this account is fully exempt from tax  in the year of accrual as well as in the year of receipt Maturity of the account is after  21 years from the date of opening the account.   However, partial withdrawal, maximum up to 50% of balance standing at the end of the preceding financial year can be taken after Account holder’s attaining age of 18 years

 

       

 

       

 

 

PS Note:   On 4th January, 2012 the Centre clarified that, barring the Public Provident Fund (PPF), the rates of interest on all small savings schemes will remain fixed throughout the tenure of investment.  In an official statement here, the Finance Ministry said that the interest rates applicable on small savings instruments schemes would be announced on April 1 each year and that the rate would remain valid till the maturity of the scheme.

 

In the case of the 15-year PPF scheme, however, the rate of interest would NOT remain fixed for the entire period as the interest accruals in the PPF account each year would vary, depending on the interest rate announced for that particular year.    “… although the rate of interest on small savings schemes will be aligned every year with rates of government securities of similar maturity, with suitable spread, the rates are fixed and not floating so far as individual investments except PPF are concerned,” the statement said.

 

To clear the confusion over the returns on investment in small savings schemes, the Finance Ministry pointed out that the rate prevailing at the time of investments will remain fixed and unchanged till the maturity of the investment. Any revisions in interest rates in the subsequent years, it said, would only be applicable to the investments made in the relevant period.

 

“For instance, investment made in an instrument other than PPF on December 1, 2011, will remain valid till the maturity of that instrument, irrespective of the revision of the interest rate with effect from April 1, 2012. As regards PPF, the interest rate fixed every year will be applicable to all PPF accounts,” the statement said.

 

///////////////////////

 

The Government of India have vide their Office Memorandum (OM) No.6/01/2011-NS.II dated March 31, 2015, advised the rate of interest on various small savings schemes for the financial year 2015-16. Accordingly, the rates of interest on PPF 1968, SCSS 2004, Kisan Vikas Patra & Sukanya Samriddhi Account Scheme for the financial year 2015-16, effective from April 01, 2015, on the basis of the interest compounding/payment built-in in the schemes, will be as under: [Remember the schemes like PPF, Term Deposits below 5 years etc. not eligible for saving tax under section 80C ].

 

Scheme

Rate of Interest w.e.f. 01.04.2014 (Old rates)

Rate of Interest w.e.f. 01.04.2015

5 year SCSS, 2004

9.20% p.a

9.30% p.a

PPF, 1968

8.70% p.a

8.70% p.a

Kisan Vikas Patra

8.70% p.a

8.70% p.a

Sukanya Samriddhi Account Scheme

9.10% p.a

9.20% p.a

 

 

Scheme

Old Rate of interest

w.e.f.01.04.2014

Rate of Interest

w.e.f. 01.04.2015

1.

2.

3.

 Savings Deposit

4.0

 

4.00

 

 1 Year Time Deposit

8.4

8.40

 2 Year Time Deposit

8.4

8.40

 3 Year Time Deposit

8.4

8.40

 5 Year Time Deposit

8.4

8.50

 5 Year Recurring

Deposit

8.40

8.40

 5 Year SCSS

9.20

9.30

 5 Year MIS

8.40

8.40

 5 Year NSC

8.50

8.50

 10 Year NSC

8.80

8.80

PPF

8.70

8.70

 

Sukanya Samriddhi Account Scheme

9.10

9.20 


 

 

 

CAUTION :   INTEREST  RATES  GIVEN  BELOW WERE  APPLICABLE  FOR EARLIER YEARS AS SPECIFIED  :

 

Revision of Interest Rates wef 01/04/2013 for Small Saving Schemes :

 

Scheme

Rate of interest w.e.f.1.04.2012 to 31/03/2013

Rate of interest w.e.f.1.4.2013

Saving deposit

4.0

4.00

1 year time deposit

8.2

8.20

2 year time deposit

8.3

8.20

3 year time deposit

8.4

8.30

5 year time deposit

8.5

8.40

5year recurring deposit

8.4

8.30

5year SCSS

9.3

9.20

5year MIS

8.5

8.40

5year NSC

8.6

8.50

10 year NSC

8.9

8.80

PPF

8.8

8.70

 

 

 

 

 Interest Rates applicable from  01/12/2011 to 31/03/2012 for Small Saving Schemes :

 

cheme

Rate of interest w.e.f.1.12.2011

Saving deposit

4.0

1 year time deposit

7.7

2 year time deposit

7.8

3 year time deposit

8.0

5 year time deposit

8.3

5year recurring deposit

8.0

5year SCSS

9.0

5year MIS

8.2

5year NSC

8.4

10 year NSC

8.7

PPF

8.6

 

 

 SOME VERY POPULAR SCHEMES FOR INVESTMENTS (INCLUDING FOR TAX SAVINGS)

 

Latest Income Tax Slabs in India - Income Tax Act 1961  (FY 2015-16  or AS 2016-17)

 

(Last updated in July 2015)

 

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