Deduction under Section 80C is not only available for investments but also for specified expenditures/payments made by the tax-payer.
It’s the story of every year end - you run around looking for various options to save tax. In the last-minute scramble to save tax, you may end up putting money in avenues that do not suit your needs. Hence, it is advisable to plan your taxes, ideally from the beginning of the financial year itself. But if you have not yet invested to save income tax, it is better late than never! You still have three more months in this financial year.
Most of us are already aware of the investment options available for deduction under section 80C of the Income tax Act, 1961. Deduction under Section 80C is not only available for investments but also for specified expenditures/payments made by the tax-payer. Are you making the maximum use of the deductions available under section 80 for individuals? Let us find out.
Here's a list of different investments and expenditures/payments, which can be claimed as deduction under Section 80C, 80D & 80CCD. A maximum of Rs. 1,50,000 can be claimed u/s 80C for the year 2017-18.
Tax saving expenses/payments u/s 80C & 80D:
The following are the expenses and investments which can be claimed as deduction u/s 80C.
Expenses - Tuition or school fees paid for the education of children, life insurance premiums, and home loan principal repayments.
PPF – Public Provident Fund, NSC – National Savings Certificate, ULIP – Unit Linked Insurance Plan, SCSS -Senior Citizen Savings Scheme – One can invest a maximum of Rs 15 lakh in Senior Citizens' Savings Scheme (SCSS) in individual capacity
*Interest Rate of PPF, SCSS, NSC & Sukanya Samriddhi are as on Oct-Dec’17 and are revised on quarterly basis.
^Max and Min returns of last 10 years for ELSS Category
#Interest rate of SBI 5-year Fixed Deposit w.e.f 01/11/2017
Medical insurance premium (u/s 80D):
The premium paid towards medical insurance is tax deductible u/s 80D of the Income Tax Act, 1961.The table below shows the quantum of tax deductions applicable on health insurance premiums.
Additional investing option under section 80CCD:
National Pension Scheme (NPS): To encourage investors to invest for retirement in the National Pension Scheme, the government allowed an addition tax deduction of Rs 50,000 under section 80CCD.
So many options, which one(s) to choose?
While investing in a tax-saving instrument, it is important to know the taxability of income earned from it. If the income earned is taxable, then it is difficult to create wealth over the long term as taxes will eat into the returns. To create wealth, the objective of investment should be to earn positive real returns i.e. beat inflation on a post-tax basis.
The following table shows how different investments have fared with respect to earning real returns on a post-tax basis:
From above table it is clear that choosing tax savers that come with E-E-E status (i.e. exempt- exempt- exempt) helps. The investment in these get E-E-E benefits on the income earned.
ELSS as an investment instrument has clearly been a WEALTH CREATOR by generating real returns of approximately 8.42% per annum. However, investing in ELSS comes with its own risk of equity market volatility. On the other hand, returns from PPF, bank deposits and life insurance policies are fixed and stable, but you are not able to create wealth from these instruments.
Tax planning is critical for the success of your investment options. Sound tax planning is very important for these savings to become meaningful investments. Hence, it is very important that one is not just saving tax but also investing his/her savings in the right manner to ensure optimum returns. So, don’t wait till March to plan your taxes. Act NOW.(The writer is director at Ventura Securities)