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What to Check before investing for Section 80C 

 

or

 

How to Make Best Use of Section 80C


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by

 

 

Rajesh Goyal

 

 

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.

 

Sec 80C of the Income Tax Act states that qualifying investments, up to a maximum of Rs.1 Lakh, are deductible from your income. Thus, it means actually your income gets reduced by this investment amount (up to Rs.1 Lakh), and you end up paying no tax on it at all!   Most of the lower and medium Income Tax payee try to save tax by saving 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.

 

 

 

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

New Scheme :- Now We have two types of National Saving Certificates -

 a) For 5 Years maturity ;

 (b) For 10 years maturity (started wef 01/12/2012)

 

Section 80C

8.50% for 5 years Maturity NSCs; and 8.80% for 10 years maturity NSCs (wef 01/04/2013) i.e. applicable for FY 2013-14

Taxable

Now we have NSCs of 5 years and 10 years maturities (earlier there were only one type of NSCs maturing in 6 years)

Old Scheme :

National Saving Certificates -      ( NSC scheme  )

Section 80C

8.40% (increased from 8.00% to 8.40%wef Dec 2011); 

 

On 10 year NSCs rate of interest was fixed as 8.70% in December, 2011

Taxable

5 years (reduced wef  Dec 2011 from 6 years to 5 years for new investments).   - See PS note below

Equity Linked Savings Schemes (ELSS)

Section 80C

Varies from year to year

Dividend is tax free

3 years

 

Life Insurance Policies

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

Section 80C

Varies from issue to issue. These are around 8%+ in Dec 2011

Taxable

3 to 5 years

Contribution to EPF / GPF

Section 80C

8.50%

Interest earned is tax free

Till retirement (loans are permitted)

Public Provident Fund (PPF)

Section 80C

Increased to 8.70% wef 01/04/2013 for FY 2013-14 (earlier it was fixed at  8.80% wef 01/04/2012)

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

8.50% for FY 2013-14 fir VIII Series (5 years maturity); and it is 8.80% for IX series (10 years maturity) for FY 2013-14

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.

Section 80C

Not applicable

Not applicable

Not applicable

Repayment of Housing Loan (Principal)

Section 80C

Not applicable

Not applicable

Not applicable

Bank Fixed Deposits

Section 80C

Varies (around 8.00%)

Nil

5 Years

Senior Citizens Savings Scheme 2004 (from financial year 2007-08)

Section 80C

Decreased to 9.20% wef 01/04/2013 for FY 2013-14 (earlier it was fixed at 9.30% wef 01/04/2012)

Taxable

See PS below

Post Office Time Deposit Account (from financial 2007-08)

Section 80C

Interest payable annually but calculated quarterly.

Period          Rate

1 yr. A/c      8.20%

2 yr. A/c      8.20%

3 yr. A/c      8.30%

5 yr. A/c      8.40%

w.e.f. 01.04.2013  

 

 

 

 

       

 

 

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.

 

 

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

 

 

 

 

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