Check before investing for Section 80C or How to Mast Best Use of Section 80C
(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;-
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
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 ].
CAUTION : INTEREST RATES GIVEN BELOW WERE APPLICABLE FOR EARLIER YEARS AS SPECIFIED :
Revision of Interest Rates wef 01/04/2013 for Small Saving Schemes :
Interest Rates applicable from 01/12/2011 to 31/03/2012 for Small Saving Schemes :
Latest Income Tax Slabs in India - Income Tax Act 1961 (FY 2015-16 or AS 2016-17)
(Last updated in July 2015)