Free Press Journal

Investment Qualifying for claiming deduction u/s 80C of Income Tax


saving_income tax

It is necessary to understand the full section so that in case you are short of funds, you can claim tax benefits even for certain expenditure incurred by you, writes RAJKUMAR JAISWAL.

What is 80C?

Most of us try to save tax by saving under Section 80C of the Income Tax Act. It is important to know the Section in toto so that one can make best use of the options available for exemption under Income Tax Act. One important point to note here is that one can not only save tax by undertaking the specified investments, but some expenditure which you normally incur can also give you the tax exemptions. Deduction u/s 80C is available only to Individual or a Hindu Undivided Family (HUF).

You are saving every year and while saving you normally have some goal in mind, e.g. to meet the expenditure on education of children, purchase of a vehicle or house or marriage of your children. Therefore, you should always look at the investments from the angle whether it will meet your specific requirements on maturity. You should also try to diversify your savings in different instruments.

For instance, if you have already invested a fair portion of your money in equity (shares and mutual funds that invest in shares), avoid an ELSS. Opting for an ELSS means a huge portion of your investments will be in equity and that may not be what you want.

What is the maximum total limit I can go for Investment u/s 80C?

Maximum total limit under this section is INR 1.50 lakh from Financial year (FY) 2014-15. Before FY 2014-15 the limit was INR 1 Lakh.

When should I start Investing?

Never thought of but the biggest mistake many of us do is to start looking for investment avenues only in February or March, just before the Financial Year is getting over. One should start investing right from the beginning of the Financial Year i.e right from April. This not only helps executing planned investment but your investment is also growing by earning interest/ dividends/bonus.

What are the Investments that qualify for deduction u/s 80C?

Below are some of the Investment / Expenditure which qualify for the deduction u/s 80C:

  • Repayment of Home Loan Principal:  Repayment/Part payment of any loan borrowed for the purpose of purchase of construction of any residential house property, the income of which is chargeable under’ Income from House Property’. The 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.
  • Registration Charges and Stamp Duty paid for a House Property: When you buy your dream home the amount you pay as stamp duty and registration of the documents of the house is eligible for deduction under section 80C.
  • Life Insurance Premiums (LIP): Life insurance premium paid for yourself, your spouse or your children is eligible for deduction u/s 80C. If you are paying premium for more than one insurance policy, all the premiums can be included. Premium paid on life insurance policy, deduction shall be eligible only to extent of 10% of Capital sum assured.
  • Provident Fund (PF) & Voluntary Provident Fund (VPF): Only employer’s PF contribution is exempt from tax, your contribution is counted towards section 80C investments. One can also contribute additional amounts through voluntary contributions (VPF). Rate of interest currently on VPF is 8.5% per annum (p.a.) and also is tax-free. If you think that the PF being deducted from your salary is not enough, you should invest some more in VPF, or in PPF
  • Public Provident Fund (PPF): Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Current rate of interest is 8.70% tax-free (Compounded Yearly) and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500.
  • Equity Linked Savings Scheme (ELSS): There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C.
  • National Savings Certificate (NSC) (VIII Issue): Investment in NSC instrument is eligible for section 80C tax benefit. Rate of interest is 8.50%t compounded half-yearly.  If you invest Rs 1,000, it becomes Rs 1516.20 after five years.
  • Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount that you invest in these bonds is eligible for deduction Sec 80C.
  • Pension Funds – Section 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. 1.50 Lakh. This also means that your investment in pension funds upto Rs. 1.50 Lakh can be claimed as deduction u/s 80CCC.
  • Contribution to New Pension Scheme (NPS) – Section 80CCD: Section 80CCD investment limit is clubbed with the limit of Section 80C – it means that the total deduction available for 80CCD and 80C is Rs. 1.50 Lakh.
  • Fixed Deposit with Scheduled Bank: Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction.
  • Unit linked Insurance Plan: ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of equity investments. Due to good returns in long term this instrument has attracted the attention of investors and tax-savers.

A review of the various options for savings under section indicates that you can not only save tax by investing your savings in specified investment options, but also on certain types of expenditure which you have to normally incur. Therefore, it is necessary to understand the full section so that in case you are short of funds, you can claim tax benefits even for certain expenditure incurred by you.

CA Rajkumar Jaiswal [FCA, ASA (Aust), MBA, DISA]