DEDUCTIONS UNDER SECTION 80C FOR INVESTMENTS IN THE INDIAN IT ACT 1961

Prepared By, NABAJIT GHOSHAL & SAURABH MAITRA

SECTION 80C

Under this section, you can Invest a maximum of Rs 1 lakh and if you are in the highest tax bracket of 30% (Earning Above Rs 8,00,000) you save a tax of Rs 30,000

VARIOUS INVESTMENT OPTIONS

Provident Fund (PF) & Voluntary Provident Fund (VPF)

PF is automatically deducted from your salary. Both you and your employer contribute to it. While employers contribution is exempt from tax, your contribution (i.e., employees contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF). Current rate of interest is 8.5% per annum (p.a.) and is tax-free.

PUBLIC PROVIDENT FUND

Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Current rate of interest is 8% tax-free and the normal maturity period is 15 years. Minimum amount of contribution is Rs.500 and maximum is Rs.70,000. A point worth noting is that interest rate is assured but not fixed.

LIFE INSURANCE PREMIUM

Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that life insurance premium paid by you for your parents (father / mother / both) or your inlaws is not eligible for deduction under section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included. It is not necessary to have the insurance policy from Life Insurance Corporation (LIC) even insurance bought from private players can be considered here.

EQUITY LINKED SAVINGS SCHEME

ELSS is part of the Section 80C instruments that are cumulatively eligible for a deduction from income up to Rs 1 lakh. This gives tax payers benefits from 10% to 30%(excluding the E.C) based on their current tax slab. An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of 80% in equity shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a minimum three year lock-in period for the ELSS mutual funds before which the investment cannot be closed or switched, which ensures that one stays invested.

EQUITY LINKED SAVINGS SCHEME

Salaried people with a tight budget can opt for a monthly investment (SIP using ECS). The automatic investment from the bank through ECS makes it an easy way to invest. Those who want an income in between can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax-free return [under the EEE regime] compared to a bank or company deposit, which is taxable. The top five ELSS funds have given returns from 22% to 26% compounded annually over the past five years. This is again higher than the market returns over the same period, which is at 19%.

HOME LOAN REPAYMENT PRINCIPAL

The Equated Monthly Installment (EMI) that you pay every month to repay your home loan consists of two components Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C. Even the interest component can save you significant income tax but that would be under Section 24 of the Income Tax Act. SUGGESTION Please read Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage, which presents a full analysis of how you can save income tax through a home loan.

STAMP DUTY AND REGISTRATION CHARGES FOR A HOME 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.

NATIONAL SAVINGS CERTIFICTE (NSC)

National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is 8% compounded half-yearly, i.e., the effective annual rate of interest is 8.16%. If you invest Rs. 1,000, it becomes Rs. 1601 after six years. The interest accrued every year is liable to tax (i.e. to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

INFRASTRUCTURE BONDS
These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. (E.g LIC Infrastructure Bonds under SEC 80 CCF) The amount that you invest in these bonds can also be included in Sec 80C deductions.

PENSION FUNDS
Tax benefit Under SEC 80CCC Section 80CCC investment limit is clubbed with the limit of Section 80C , it means that the total deduction available for 80CCC and 80C is Rs. 1 Lakh. This also means that your investment in pension funds upto Rs. 100000 can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC can not exceed Rs. 1 Lakh.

5 YEAR BANK DEPOSITS FDS

Indian government announced in 2006 that, bank fixed deposits booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,000/- will be eligible for exemption. This exemption would be under section 80C of the income tax act 1961, provided the investor makes necessary declarations. The fixed deposits can be purchase for a minimum amount of Rs. 100, and then in multiples of Rs. 100. The maximum amount eligible under a tax saver fixed deposit is Rs. 100,000 for a financial year.

This tax saver fixed deposits do not have the sweep-in facility. It means that this fixed deposit cannot be linked to a savings account and the surplus funds available under the savings account cannot be automatically invested in this fixed deposit.

5 YEAR BANK DEPOSITS FDS

In case two people invest in a tax saver fixed deposit, and become joint holders of the same, the tax benefits under the section 80C of I.T act will be available to the 1st holder. The interest rates on tax saving fixed deposits are generally calculated on a quarterly basis and the interest is reinvested into the fixed deposit. So, after every quarter the principal increases by an amount earned as the interest in the last quarter.

The fixed deposits which were giving interest rates up to 14% or more a decade back have recently slump to around 8.25% for normal citizens and 8.75% for senior citizens.

SENIOR CITIZEN SAVINGS SCHEME 2004 (SCSS)

A recent addition to section 80C list, Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. Current rate of interest is 9% per annum payable quarterly. IMPORTANT NOTE The interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits wont earn any further interest. Interest income is chargeable to tax.

5 YEAR POST OFFICE TIME DEPOSITS (POTD) SCHEME

POTDs are similar to bank fixed deposits. Although available for varying time duration like 1 year, 2 year, 3 year and 5 year, only 5-Yr post-office time deposit (POTD) which currently offers 7.5 % of interest qualifies for tax saving under section 80C. Effective rate works out to be 7.71% per annum (p.a.) as the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable.

NABARD RURAL BONDS

There are two types of Bonds issued by NABARD 1.National Bank for Agriculture. 2.Rural Development NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.

UNIT LINKED INSURANCE PLAN (ULIP)

ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of equity investments. They have attracted the attention of investors and tax-savers not only because they help us save tax but they also perform well to give decent returns in the long-term.

OTHERS
Apart form the major avenues listed above, there are some other things, like childrens education expense (for which you need receipts), that can be claimed as deductions under Sec 80C.

THANK YOU