Section 80C is one of the great tax saving tools for all of us. In my last post, I explained all options available for tax saving. But in this post, I will concentrate only on the deduction under Section 80C.
History of Section 80C
Section 80C replaced the old Sec.88 and came into effect from 1st April, 2006. The current maximum limit of Deduction under Section 80C is Rs.1,50,000 in a financial year. The earlier limit of Section 80C was Rs.1,00,000 up to FY 2014-15. Later on, it was increased to Rs.1,50,000 and same is continued.
Section 80C constitutes many investment options for tax savers. Hence, it is the top most choice to many. But many believe that only investments can be claimed for Deduction under Section 80C but the reality is some expenses like tuition fee or home loan are also part of such Deduction under Section 80C.
This section is available only for individuals and HUF only.
Deduction under Section 80C options for Individual and HUF-# Life Insurance Premium
Long back, I wrote a complete post on this. You can refer the post “Tax Benefits of Life Insurance“. Just I am copy pasting the same content here as below.
- Any premium paid towards a life insurance policy on self, spouse or kids and if the policy was issued on or before 31st March 2012 then the eligible deduction under Sec 80C will be only 20% of the sum assured. Let us say Mr.X took life insurance plan before 31st March 2012 with Sum Assured as Rs.3,00,000 term being 10 years and yearly premium Rs.65,000. But according to above rule, only 20% of Sum Assured (in this case 20% of Rs.3,00,000 which is Rs.60,000) is eligible for tax deduction under Sec 80C. So Mr.X can avail benefit only up to Rs.60, 000 but not Rs.65, 000.
- Any premium paid towards a life insurance policy on self, spouse or kids and if the policy was issued on or after 1st April 2012, then eligible deduction under Sec 80C will be only 10% of the sum assured. Let us say Mr.X took life insurance plan after 1st April 2012 with Sum Assured as Rs.3,00,000 term being 10 years and yearly premium Rs.65,000. But according to above rule only 10% of Sum Assured (in this case 10%
- Kids may be minor, major, married, unmarried, dependent or independent. It does not matter at all.
- You can’t claim Deduction under Section 80C towards the life insurance premium paid towards parents or in-laws.
- You can claim Deduction under Section 80C if you paid the premium to any of the insurance company. So there is no such condition that your policy must be from LIC. Life insurance premium paid towards private sector insurance policies are also form part of tax benefit.
- In case of HUF, the deduction can be claim towards the premium paid on the life of the member of HUF.
Sec 80C Reversal-Benefit you availed under Sec80C will be reversed if your policy closed or terminated within 2 years for traditional policies and 5 years for ULIP products after the date of commencement of policy.
# Public Provident Fund
- Any amount you invested towards Pubic Provident Fund (PPF) in the name of self, spouse or child.
- Please remember that child may be minor, major, married, unmarried, dependent or independent. It does not matter at all.
- Let us say you have PPF account and if your wife deposited the amount from her source of income, then she can claim the deduction under section 80c, but you can’t claim the deduction. Because source of investment is from your wife. So only the person depositing into PPF will be eligible for tax benefit but the person who is holding it.
- You can’t claim any deduction under section 80c by investing in parents, siblings or in-laws PPF account.
Few posts related to the public provident fund are as below.
- All about Public Provident Fund (PPF)
- PPF-Loan and Withdrawal
- PPF-When to contribute to get higher returns?
- Excel PPF Calculator-Calculate goal, loan or withdrawal amounts
- How to transfer PPF Account from Post Office or Bank to another Post Office or Bank?
- 15 Rules of availing Loan against PPF (Public Provident Fund)
- Public Provident Fund -20 unknown facts
- PPF withdrawal rules & options after 15 years maturity
- Premature closure of PPF account – New Rules 2016
# Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF)
Any contribution you made (employees) made towards EPF and VPF will qualify for deduction under Section 80C. This is the automatic option of investment, which salaried will enjoy. Hence, you can claim this investment without any hassle.
# Equity Linked Savings Scheme or Tax Saving Mutual Funds (ELSS)
These are actually equity oriented mutual funds. Such Mutual Funds will offer you 3-years lock-in. After three years you are free to withdraw the amount. But keep in mind that If you start SIP in the month of July, 2016, then you are eligible to withdraw this invested amount (units) only after July, 2019. Next month SIP will be after August, 2019. So if you start the SIP of a year, then you will not be eligible to withdraw all amount exactly after the 3 years from first SIP investment. But after 4th-year completion, you can withdraw the whole amount.
One more thing to keep in mind that ELSS mutual funds are equity-oriented products. Hence, do keep in mind that equity investment is meant for long term. Therefore, never enter into ELSS with a belief that after 3 years you can withdraw it. Market may give you negative returns too.
I wrote a post on top-rated equity-linked tax saving schemes. Refer below link for the same.
# Sukanya Samriddhi Account Scheme
Any amount you invested under Sukanya Samriddhi Account Scheme will be eligible for deduction under Section 80C. Note that this the girl child scheme launched by Government. I wrote about this product long back. Please click on below post to read about the same.
- Sukanya Samriddhi Account-An investment scheme for your girl child
- Sukanya Samriddhi Account -When to invest to earn more returns?
Do remember that this is debt product. Hence, you can’t achieve your financial goals by investing ONLY in this scheme. Treat this product as debt product and include the equity funds to achieve the kid’s long-term education and marriage goals.
# National Savings Certificate
This is the post office savings scheme. Minimum you can invest Rs.100 and there is no maximum limit. It is a 5-year product. This is the most famous product among all tax savers. But do remember that it is an illiquid product. I wrote about NSC long back. Please refer below posts for the same.
- NSC-Accrued Interest taxation and way to reduce it
- Post Office Savings Schemes (RD, NSC, MIS, SCSS)-Premature closure rules
- How to encash or withdraw NSC bought from different Post Office?
# Senior Citizen Savings Scheme
This product is mainly meant for senior citizens. You have to invest in a lump sum and you start to get the interest rate on a quarterly basis. The minimum amount is Rs.1,000 and maximum is Rs.15 lakh for an individual. Maturity period is 5 years. Any individual whose age is above 60 years can open this account. The complete detail about this product can be read from below link of my blog post.
# 5 Yrs Bank and Post FDs
These are fixed deposit meant for tax saving purpose and lock-in will be 5 years. Any amount you invested under such FDs will qualify for deduction under Section 80C. Please note that there are many variants of FDs like a year, 2 yrs, 3 years or 5 years (in both bank and Post Office). But 5 years FDs will only qualify for tax saving purpose.
# Home Loan Principal
In your home loan EMI, the total part of principal repayment will qualify for deduction under section 80C. Few points to remember.
- Tax Benefit will be on payment basis but not on due basis. Let us your repayment towards principal was due on March, 2016. But you paid it in April, 2016 means such principal repayment will be considered for deduction under section 80c for FY 2016-17 but not for FY 2015-16.
- Principal repayment during construction period will not qualify for tax deduction. You can claim the deduction only after the construction is over.
- You will not get any tax benefits for those periods of construction during which you paid principal.
- If you transfer (sold) the property before the expiration period of 5 years from the end of the Financial Year in which he obtains the possession, then aggregate amount of tax deduction already claimed in respect of previous years shall be deemed to be the Income of the Assessee of such year in which the property has been sold and the Assessee shall be liable to pay tax on such income.
# Stamp Duty and Registration Charges of home buying
Any amount you pay towards stamp duty and registration charges while buying a home will be eligible for deduction under Section 80C for the year in which you buy the house.
Anything you invest in notified special NABARD Bonds for agriculture and rural development will qualify for tax deduction under section 80C.
# Tuition Fee-
Any amount you paid towards tuition fee of your kids (maximum 2 kids per individual) will eligible for deduction under section 80C. Few points to remember-
- An individual can claim up to the maximum of 2 kids.
- Deduction is available only towards tuition fee.
- Full-time courses are only eligible for deduction.
- Development fees or donations will not be eligible for deduction.
- Education institute must be situated in India.
- The school, college or university in which child studies should have necessary affiliations.
- You can claim the tax benefits for your adopted kid also (but within a limit of 2 kids).
# Retirement Mutual Funds
Thre are few special equity mutual funds which are meant for retirement. Such schemes qualify for deduction under Sec.80C. I wrote about such plans long back. Please refer below posts for the same. Currently, there may be few more in the market. But these two below posts will give you an idea of how such mutual funds will work.
- Reliance Retirement Fund-Is it a best pension plan with 80C benefit?
- Two Mutual Funds-Tax Efficient (Sec. 80C) and Pension Plans in India !!!
Other options to claim deduction under Section 80C of IT Act-
I discussed the major options available for an individual or HUF to avail the deduction under section 80C. Below are few other options which are also be part of this Section 80C.
- Payment in respect of non-commutable deferred annuity. It should be taken in the name of the individual, his wife or any child. In case of HUF, it is on the life of any member.
- Contribution towards approved superannuation fund.
- Sum paid towards notified annuity plan of LIC (LIC’s New Jeevan Nidhi).
- Subscription to notified deposit scheme or notified pension fund set up by National Housing Bank [Home Loan Account Scheme/National Housing Banks (Tax Saving) Term Deposit Scheme, 2008].
Along with all these default list, I want to add one more point here regarding NSC investment. The yearly interest accrued can be shown as income under the head of “Income from Other Sources” and claim the deduction under section 80c for the same amount as re-invested. I explained this concept in my earlier post. Please go through the below link for the same.
Conclusion-I am not saying that tax saving is BAD idea. But make sure that each of your investment should be linked to your financial goals. Many invest only to save tax. First, analyze your financial goals. Once they are identified, then while investing choose the product which suits to your risk appetite and goal tenure.
The second major mistake almost all does is to start investing after January month of every year. This is the bad idea. In a hurry, you may not plan well. This leads to investing in a wrong product.
I tried to cover all relevant options available for tax saving under section 80C. If anything is missing then you are free to comment.