With every new year comes new joys, new wishes and new dreams coupled with new liabilities and responsibilities including the old ones. One such responsibility is financial planning for ourselves and our family for each financial year. The tax plan has always been a concern of the last minute, be it for the service or business class.
Even in todays tech-savvy generation, there are many people who are not aware of the basic tax planning requirements. Let us understand the various avenues for investment where tax can be saved under Section 80C.
What is 80C tax deduction?
Under Section 80C of the Income Tax Act, 1961, there is a total investment limit of Rs. 1.5 lakh to avail tax benefit. Please do remember that one or more items taken together the total investment amount should be a maximum of Rs. 1.5 lakh to entitle you to a deduction u/s 80C. The benefit of Rs. 1.5 lakh on tax saving instruments is available to everyone, irrespective of his or her income levels. Thus, in the highest tax bracket of 30%, some tax can be saved by investing Rs. 1.5 lakh before the financial year ends.
However, there is a minimum lock in of three years for availing income tax deduction. It means if you wish to avail tax deduction u/s 80C by investing in any of the following investments, you cannot withdraw the money within three years of investment.
What are the various tax saving investment options?
There are many permissible investment opportunities u/s 80C.
Life insurance premiums
All premiums paid towards life insurance policies are eligible for income tax deduction u/s 80C I-T Act. Life insurance premiums paid up to Rs. 1.5 lakh each year is eligible for tax benefit u/s 80C but the policy should not be surrendered within three years of its inception.
Under life insurance, one can choose to invest in
Term plans
Whole life plans
Money back plans
Child plans
Unit linked insurance plans
All ULIPs qualify as life insurance policy and the premiums are exempted from income tax benefit.
Pension Fund
Under Section 80CCC, you can invest up to Rs. 1.5 lakh in a Pension Fund of LIC of India or any other private insurer. Any premium paid towards any annuity plan, whether deferred or immediate will give you tax relief in that financial year.
Contribution towards pension funds is under a Sub Section of 80CCC which is also a part of the 80C Rs. 1.5 lakh limit.
ELSS (equity linked saving schemes)
There are certain mutual funds which have a lock in for three years and are formed with a basic objective of tax saving. Each mutual fund operates according to the fund objective as mentioned in the key operating memorandum.
Thus, investment in certain mutual funds for tax saving purpose is called equity linked saving schemes which qualifies for Section 80C deduction. Not all mutual funds can provide 80C deduction. Some common examples of ELSS areSBI Magnum Tax Gain, HDFC Tax Saver, Fidelity Tax Advantage, Franklin India Index Tax Fund, etc.
Provident Fund
Any contributions to Employees Provident Fund, Voluntary Provident Fund (VPF) or savings made in Public Provident Fund (PPF Account) are eligible for income tax deduction u/s 80C of Indian I-T Act. The maximum permissible limit is increased to Rs. 1.5 lakh for each fiscal, and the minimum investment amount is Rs. 500. The PPF provides an interest rate of 8.8% p.a.
Bank FDs or term deposits of 5 years
According to the new rule for 80C deduction, any investment made in bank fixed deposits for a minimum tenure of five years is also eligible for I-T deduction under Section 80C. Thus, each bank provides a special rate for tax saving FDs since it would mandatorily remain invested for five years.
Home loan benefit
The principal amount of the home loan would be deducted u/s 80C if you are paying EMI (equated monthly installment) on a home loan. There are two parts of the home loanprincipal and interest. The principal part of the EMI on your housing loan is eligible for I-T deduction u/s 80C. Note, the interest part is also eligible for tax deduction u/s 24B.
A home loan is always a good option for tax saving purpose. Currently, an individual with a housing loan gets a deduction up to Rs. 2 lakh, paid as interest for the loan, from his total income, for a self- occupied property.
Tuition fees deduction u/s 80C
This is an avenue most people are not even aware of. Any amount paid as tuition fee for the education of the first two children of the employee / tax payer is eligible for deduction u/s 80C of I-T Act. Most people do not avail this benefit because they are not aware of the same.
National Savings Certificate
NSC (National Savings Certificate) is a good medium term investment option. NSC can also be pledged as security against a loan to banks. The minimum investment starts from Rs. 100 and there is no maximum limit for the investment in a year. Thus, any investment till Rs. 1 lakh is eligible for tax deduction under section 80C.
NSC VIII Issue provides a return of 8.6% per annum. The maturity period is five years. NSC IX Issue offers 8.9% per annum. The tenure is 10 years. Investment up to Rs. 1 lakh per annum qualifies for IT Rebate under section 80C of Income Tax Act. However, the interest that accrues every year is included in your taxable income and is liable for tax payment. To avoid tax deductions, the interest portion can also be reinvested and thus eligible for u/s 80C deduction again. Trust and HUF cannot invest.
Other 80C deductions
There are some other avenues for investment for tax saving purpose u/s 80C. Section 80C also includes 80CCD and 80CCF. The most common ones are listed below:
Now that you are aware of the various tax saving instruments available in the market, you must choose the specific investment tool which is in sync with your investment pattern, financial goals and risk appetite.
Even in todays tech-savvy generation, there are many people who are not aware of the basic tax planning requirements. Let us understand the various avenues for investment where tax can be saved under Section 80C.
What is 80C tax deduction?
Under Section 80C of the Income Tax Act, 1961, there is a total investment limit of Rs. 1.5 lakh to avail tax benefit. Please do remember that one or more items taken together the total investment amount should be a maximum of Rs. 1.5 lakh to entitle you to a deduction u/s 80C. The benefit of Rs. 1.5 lakh on tax saving instruments is available to everyone, irrespective of his or her income levels. Thus, in the highest tax bracket of 30%, some tax can be saved by investing Rs. 1.5 lakh before the financial year ends.
However, there is a minimum lock in of three years for availing income tax deduction. It means if you wish to avail tax deduction u/s 80C by investing in any of the following investments, you cannot withdraw the money within three years of investment.
What are the various tax saving investment options?
There are many permissible investment opportunities u/s 80C.
Life insurance premiums
All premiums paid towards life insurance policies are eligible for income tax deduction u/s 80C I-T Act. Life insurance premiums paid up to Rs. 1.5 lakh each year is eligible for tax benefit u/s 80C but the policy should not be surrendered within three years of its inception.
Under life insurance, one can choose to invest in
Term plans
Whole life plans
Money back plans
Child plans
Unit linked insurance plans
All ULIPs qualify as life insurance policy and the premiums are exempted from income tax benefit.
Pension Fund
Under Section 80CCC, you can invest up to Rs. 1.5 lakh in a Pension Fund of LIC of India or any other private insurer. Any premium paid towards any annuity plan, whether deferred or immediate will give you tax relief in that financial year.
Contribution towards pension funds is under a Sub Section of 80CCC which is also a part of the 80C Rs. 1.5 lakh limit.
ELSS (equity linked saving schemes)
There are certain mutual funds which have a lock in for three years and are formed with a basic objective of tax saving. Each mutual fund operates according to the fund objective as mentioned in the key operating memorandum.
Thus, investment in certain mutual funds for tax saving purpose is called equity linked saving schemes which qualifies for Section 80C deduction. Not all mutual funds can provide 80C deduction. Some common examples of ELSS areSBI Magnum Tax Gain, HDFC Tax Saver, Fidelity Tax Advantage, Franklin India Index Tax Fund, etc.
Provident Fund
Any contributions to Employees Provident Fund, Voluntary Provident Fund (VPF) or savings made in Public Provident Fund (PPF Account) are eligible for income tax deduction u/s 80C of Indian I-T Act. The maximum permissible limit is increased to Rs. 1.5 lakh for each fiscal, and the minimum investment amount is Rs. 500. The PPF provides an interest rate of 8.8% p.a.
Bank FDs or term deposits of 5 years
According to the new rule for 80C deduction, any investment made in bank fixed deposits for a minimum tenure of five years is also eligible for I-T deduction under Section 80C. Thus, each bank provides a special rate for tax saving FDs since it would mandatorily remain invested for five years.
Home loan benefit
The principal amount of the home loan would be deducted u/s 80C if you are paying EMI (equated monthly installment) on a home loan. There are two parts of the home loanprincipal and interest. The principal part of the EMI on your housing loan is eligible for I-T deduction u/s 80C. Note, the interest part is also eligible for tax deduction u/s 24B.
A home loan is always a good option for tax saving purpose. Currently, an individual with a housing loan gets a deduction up to Rs. 2 lakh, paid as interest for the loan, from his total income, for a self- occupied property.
Tuition fees deduction u/s 80C
This is an avenue most people are not even aware of. Any amount paid as tuition fee for the education of the first two children of the employee / tax payer is eligible for deduction u/s 80C of I-T Act. Most people do not avail this benefit because they are not aware of the same.
National Savings Certificate
NSC (National Savings Certificate) is a good medium term investment option. NSC can also be pledged as security against a loan to banks. The minimum investment starts from Rs. 100 and there is no maximum limit for the investment in a year. Thus, any investment till Rs. 1 lakh is eligible for tax deduction under section 80C.
NSC VIII Issue provides a return of 8.6% per annum. The maturity period is five years. NSC IX Issue offers 8.9% per annum. The tenure is 10 years. Investment up to Rs. 1 lakh per annum qualifies for IT Rebate under section 80C of Income Tax Act. However, the interest that accrues every year is included in your taxable income and is liable for tax payment. To avoid tax deductions, the interest portion can also be reinvested and thus eligible for u/s 80C deduction again. Trust and HUF cannot invest.
Other 80C deductions
There are some other avenues for investment for tax saving purpose u/s 80C. Section 80C also includes 80CCD and 80CCF. The most common ones are listed below:
- Under Section 80CCD, you can invest in National Pension System of the central government up to 10% of your salary. Any contribution to this scheme of more than 10% of your salary will not be eligible for tax deduction
- Amount paid as stamp duty and registration charges while buying a new home are eligible for income tax deductions under section 80C of Indian Income Tax Act
Now that you are aware of the various tax saving instruments available in the market, you must choose the specific investment tool which is in sync with your investment pattern, financial goals and risk appetite.
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