Legitimately reducing tax liability is every taxpayer’s dream. Planning investments in tax saving schemes can be particularly useful in reducing taxable income. One of the ways to enjoy tax benefits is to claim deductions under Section 80C of Income Tax Act. Section 80C has come into effect from April 1, 2006 and allows an assesee to claim tax exemption on specific investments. As on date, the total amount of deduction that can be claimed under Section 80C stands at INR 1.5 lakh. As it is a substantial amount, planning your investments well can reduce your tax burden to a great extent. There is a large variety of investments that are exempted under various sub-sections of Section 80C.
Deductions on investments under Section 80C of Income Tax Act
Set out below is a snapshot of the various investments that can be made to claim tax benefits under Section 80C:
Public Provident Fund: is one of the most popular savings schemes in India. PPF is a retirement focussed investment. It encourages individuals to start saving early into their careers and offers attractive tax benefits in return. The goal of PPF is to secure the future of individuals who do not have the benefit of an employee pension scheme. It is offered by all leading commercial banks in India as well as India Post. PPF requires a subscriber to invest a minimum of Rs.500 and a maximum of Rs.1.5 lakh towards a PPF account in a financial year. The interest for PPF is announced by the Government of India annually. The present rate of interest offered is 7.6% per annum (for FY 2017-18). The interest is compounded annually. The amount is credited to the PPF account at the end of every financial year. All deposits made by a subscriber towards a PPF account can be claimed as tax deductions under Section 80C of the Income Tax Act. Even the interest earned on the deposits made is also not taxable.
Provident FundThis is usually in the form of an employee provident fund. The contributions for an employee provident fund are deducted from the monthly salary. The provident fund account receives contributions from both employers and employees. Any contributions made by the employees towards provident fund account enjoy the tax benefits under Section 80C. Any voluntary contributions made by the employees are also eligible for tax deductions under Section 80C of Income Tax Act.
Equity Linked Savings SchemeELSS is a popular tax saving scheme. You can start investing with INR 500 only. There is no upper limit on the amount of money you can invest in ELSS. You have the option of choosing between two types of ELSS: dividend and growth. The average returns offered by ELSS are in the range of 15%-18%. It is the only pure equity investment that offers tax benefits up to INR 1.5 lakh in a financial year under Section 80C of Income Tax Act.
Sukanya Samriddhi Scheme: Sukanya Samriddhi Scheme is a small savings scheme introduced by the Government of India as part of its BetiBachao- BetiPadhao initiative. The scheme exclusively for a girl child and is part of the National Saving Schemes of the Government of India. The account under the scheme should be opened in the name of the girl child. A minimum of INR 250 is required for the initial deposit, the minimum amount is INR 250. The maximum amount of deposit is capped at INR 1.5 lakh (per SSY account) per year. The deposits should be made in multiples of INR 100 subject to the annual cap. The interest received is compounded annually. Sukanya Samriddhi Scheme is an attractive option to save taxes. The amount at maturity and the interest earned on the deposited amount are eligible for the tax benefit available under Section 80 C of Income Tax Act. The deposits made to the account are also exempt from taxation under Section 80C of Income Tax Act, subject to a maximum of INR 1.5 lakhs.
Repayment of housing loans: If you have availed a housing loan, you are eligible to claim tax deduction under Section 80C of Income Tax Act. The deduction is available for the principal amount of the loan. The interest to be paid on the housing loan does not enjoy tax benefits under Section 80C.
Investment in infrastructure bonds:Infra bonds are a very popular investment option. These bonds are issued by various infrastructure companies. If you invest in these bonds, you are eligible to claim tax deductions up to INR 1.5 lakh under Section 80C of Income Tax Act.
Investment in Unit Linked Insurance Plans (ULIPs):Unit Linked Insurance Plans are a popular investment option for insurance policies. They are also a great way to reduce tax burden as you can claim deduction under Section 80C of Income Tax Act for the investment.
Payment of registration fees and stamp duty during purchase of house: When you buy a house, you are required to pay stamp duty for the transaction. You have to also pay registration fees to register your property details with the Sub-Registrar. Section 80C of Income Tax Act provides tax benefits for these charges as you can claim them as tax deductions.
When should I Invest to Claim Deductions under Section 80C of the Income Tax Act?
Planning for your tax deductions requires dedicated and consistent efforts. It is always advisable to start early and plan your investments for the year. This is particularly helpful as certain schemes also offer tax benefits on the interest amount. If you start your investments at the beginning of the financial year, you can claim the tax deduction under Section 80C for the interest earned for the entire year. Having said that, it is never advisable to invest blindly.
Make a thorough assessment of your investment goals and pick schemes that are suited to your investment objectives. There are a number of sub-sections of Section 80C of Income Tax Act that offer tax deductions for investments in schemes like National Savings Schemes and LIC. You can also receive tax deductions for availing educational loans and medical insurance policies. As the old adage goes: the early bird catches the worm. Therefore, the right time to commence your investments for claiming the deduction is as early as you can identify the schemes you want to invest in.
Deductions on Investments under sub-sections of Section 80C
Here is a snapshot of the various deductions that can be claimed under the respective sub-sections of Section 80C:
-Under Section 80CCD (2), deduction up to 10% of the salary amount can be claimed for the contribution by the employer to the National Pension Scheme account.
-Under Section 80CCD (1B), an additional deduction of INR 50,000 can be claimed as a deduction for the contribution made to the National Pension Scheme
-Under Section 80TTA(1), a deduction up to INR 10,000 can be claimed for the interest earned from the savings account.
-Under Section 80TTB, senior citizens are eligible to claim a deduction of INR 50,000 for the interest earned on savings with post offices or banks
-Under Section 80GG, if the assessee is not receiving any housing rent allowance from the employer and paying house rent, a tax deduction of INR 5000 per month, rent less than 10% of total income or 25% of the total income, whichever is lower can be claimed as a tax deduction.
-Under Section 80E, you can claim a deduction on the interest paid on educational loans availed. This deduction can be claimed for a period of 8 years.
-Under Section 80D, the tax deduction is available for premium payments made for insurance policies. The amount of deduction is capped at INR 25,000 for self, spouse, parents, and dependent children. In case the parents are above the age of 60 years, the amount of deduction of INR 50,000.
-Under Section80DD, you can claim a tax deduction for the medical treatment of handicapped persons who are dependent. The amount of deduction is INR 75,000, where the disability is more than 40% but less than 80%. If the disability is more than 80%, the amount of deduction is capped at INR 1.25 lakh.
It is also important to remember that only a maximum of INR 1.5 lakh can be claimed as tax deduction under Section 80C after taking into account all the investments made.
Rajesh wants to invest in some tax saving schemes. Will the interest component earned be eligible for tax deduction under Section 80C?
Interest is usually taxable at the hand of the investors. However, investments made to public provident fund and sukanya samriddhi yojana are exceptions where the interest component is also eligible for tax deductions under Section 80C.
Neha wants to take a housing loan for carrying out extensive repairs in the house. Can she claim deduction under Section 80C?
While Section 80C deduction is available for home loans, Neha will not be eligible to get the tax benefits as the loan is for renovations.
Are members of Hindu Undivided Family eligible for the tax deduction benefits under Section 80D?
Members of Hindu Undivided Family are eligible to claim tax benefits under Section 80D in case of premiums paid for mediclaim policies. The quantum of deduction stands at INR 25,000 at present where the members who are covered under the insurance policy are less than 60 years old. If the members are more than 60 years old, the quantum of the deduction is INR 50,000. Dependent children and spouses are covered under this benefit. Even financially independent parents are eligible if the premium is paid for health insurance policies covering them.
Geeta’s mother has passed away. She is currently paying the insurance premium for a mediclaim policy that covers her father. Is she eligible to claim benefit under Section 80D of Income Tax Act?
Yes, she is eligible to claim tax benefit in this case as well. In the case of a single parent, Section 80D deduction can be claimed as per the actual amount of premium paid. Therefore, the amount eligible for deduction will be the actual premium paid or INR 50,000 (or INR 25,000), whichever is lower.
Raja pays the insurance premium for a mediclaim policy that insurers his parents. However, his mother is employed with a bank. Does this impact his eligibility to claim deduction under Section 80D?
No, Raja is still eligible to claim the benefit of tax deduction under Section 80D, even though his mother is not financially dependent on him.
Mr. Gupta is a senior citizen. What kind of tax saving schemes can he invest in to claim 80C deduction?
One of the best options for Mr. Gupta is to invest in senior citizens saving scheme. He can get attractive returns on investments. The interest is computed on a quarterly basis. Investments in senior citizens saving scheme are eligible for a tax deduction of INR 1.5 lakh under Section 80C of Income Tax Act.
Are five-year post office term deposit schemes eligible for deduction under Section 80C?
Only the interest component that is earned from such investments is eligible for 80C deduction. The duration of such schemes can be between one to five years.
NABARD offers rural bonds. Are these bonds eligible for deduction under Section 80C?
NABARD rural bonds are eligible for 80C deduction. The maximum amount of tax deduction that can be claimed is capped at INR 1.5 lakh.
Is the interest paid for availing a housing loan eligible for deduction under Section 80C?
Only the principal amount of the housing loan can avail 80C deduction. The interest is fully taxable at the hand of the loan applicant.
In case of employee provident fund, is the entire amount eligible for deduction under Section 80C?
No, only the contribution by the employee can enjoy the 80C deduction. A similar benefit is not available for the amount contributed by the employer.
What is the ideal time to start investments in order to avail 80C deduction?
One should start investments as early as possible. However, it is advisable to not follow the crowd and invest blindly. The risk appetite and investment objectives are not the same for all individuals. This factor should be taken into account before deciding on the investments.
I have submitted my claim for 80C deduction. How will I receive the money?
The claims for deduction are submitted at the time of filing the IT returns. Once the department processes the returns, the amount that is claimed as deduction is refunded.
What is the Rajiv Gandhi Equity Savings Scheme? Can individual claim tax deductions under this scheme?
Section 80CCG provides tax deductions for investments made in Rajiv Gandhi Equity Savings Scheme for Financial Year 2018-19. This benefit is available to those assessees who are residents and have a total gross income less than INR 12 lakh. Further, the assessee must fulfill the eligibility criteria set out under the scheme. The investments should be made the investor as per the procedure specified in the scheme. The scheme sets out a minimum lock-in period of 3 years for investments from the date of acquisition. The amount of deduction is 50% of the amount invested in equity shares or INR 25,000 for three consecutive assessment years, whichever is lower.