Check before
investing for Section 80C or
How to Make Best Use of Section 80C
by
Rajesh Goyal
(Latest Reviewed in Oct 2016)
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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
8.0% for 5 years Maturity NSCs; (wef 01/10/2016) i.e. applicable for FY 2016-17
Accrued Interest is
Taxable in the year in which it has accrued
Now we have NSCs of 5 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
8.80%
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
Decreased from 8.0 to 7.9% wef 01/04/2017 for FY 2017-18 (reviewed quarterly)
Interest earned is tax free
15 years and extendable. Withdrawals allowed after 7 years. The government has also permitted premature closure of PPF accounts “in genuine cases”, like serious ailment or higher education of children.This shall be permitted with a penalty of 1 per cent reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening. 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 7.00%)
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
Decreased to 8.50% wef 01/10/2016 for FY 2016-17 & beyond
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
6.9% for 1-year deposit, 7.0% for 2-year deposit, 7.2% for 3-year deposit, and 7.7% for 5-year deposit for FY 2017-18 (w.e.f 01/04/2017)
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.
Section 80C
8.40% (wef from 1.04.2017) for FY 2017-18 (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. 01.04.2015 (Old rates)
Rate of Interest w.e.f. 01.04.2016
Rate of Interest w.e.f. 01.10.2016
5 year SCSS, 2004
9.30% p.a
8.60% p.a
8.50% p.a
PPF, 1968
8.70% p.a
8.10% p.a
8.0% p.a
Kisan Vikas Patra
8.70% p.a
7.80% p.a
7.70% p.a
Sukanya Samriddhi Account Scheme
9.20% p.a
8.60% p.a
8.50% p.a
Scheme
Old Rate of interest
w.e.f.01.04.2014
Old Rate of Interest
w.e.f. 01.04.2015
Rate of Interest
w.e.f. 01.04.2016
Rate of Interest
w.e.f. 01.10.2016
1.
2.
3.
4.
5.
Savings Deposit
4.0
4.00
4.00
4.00
1 Year Time Deposit
8.4
8.40
7.10
7.0
2 Year Time Deposit
8.4
8.40
7.20
7.10
3 Year Time Deposit
8.4
8.40
7.40
7.30
5 Year Time Deposit
8.4
8.50
7.90
7.80
5 Year Recurring
Deposit
8.40
8.40
7.40
7.30
5 Year SCSS
9.20
9.30
8.60
8.50
5 Year MIS
8.40
8.40
7.80
7.70
5 Year NSC
8.50
8.50
8.10
8.0
10 Year NSC
8.80
8.80
DISCONTINUED
DISCONTINUED
PPF
8.70
8.70
8.10
8.0
Sukanya Samriddhi Account Scheme
9.10
9.20
8.60
8.50
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 :
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