CS Professional – Advance Tax Laws and Practice – 80C : Tax deductions

CS Professional – Advance Tax Laws and Practice 80C – Tax Deductions

80C Tax Deductions

The article deals with deduction under Section 80C of the Income Tax Act and explains who is eligible for the deduction, eligible Investments, limit for deduction, who can invest for whom and time period for investment.

What are eligible investments in Section 80C?

Section 80C has allowed a major change in the method of providing the tax benefit.  Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt.  One must plan investments well and spread it out across the various instruments specified under this section to avail maximum tax benefit. Even the section 80CCC on pension scheme contributions was merged with the above Section 80C.

From FY 2014-15 / AY 2015-16 deductions has been raised from Rs. 1 Lakh to Rs. 1.50 lakh that can be claimed from your total income. Under this heading many small savings schemes like NSC, PPF and other pension plans. Payment of life insurance premiums and investments in specified government infrastructure bonds are also eligible for deduction under Section 80C.

One can not only save tax by undertaking the specified investments, but one can claim the tax exemptions/benefits on the expenditure which you normally incur. For example- Tuition Fee paid for the education of your child etc.

This means that your income gets reduced by this investment amount (up to Rs. 1.50 Lakh), and you end up paying no tax on it at all!

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An individual or a Hindu Undivided Family (HUF) is eligible for claiming tax deduction under section 80C.

What are the Qualifying Investments?

1. Investments in Tax-saving Fixed Deposits (FD)

Tax-saving FDs are like regular fixed deposits but come with a lock-in period of 5 years.

Interest income is taxable at maturity. The investment qualifies for deduction under 80C and maturity amount is exempt from tax.

2. Purchase of National Savings Certificates (NSC)

NSCs are postal department saving scheme and are considered a highly secured investment. However, Non-Residents, Trust, and HUF cannot invest in this scheme.

Interest accrued on the amount invested in NSC is taxable but it is counted as a fresh investment and qualifies for the 80C deduction. The investment is eligible for deduction under 80C and maturity amount is tax-free.

III. Investments in Equity Linked Savings Scheme (ELSS) funds

ELSS is an open-ended Equity Mutual Fund that helps save tax, and also provides an opportunity to grow money at a comparatively faster rate. ELSS provides inflation-adjusted growth in the long-term. It has a minimum lock-in period of 3 Years.

ELSS falls under EEE category i.e. Exempt – Exempt – Exempt category.

IV. Investments in Employee Provident Fund (EPF)

An EPF is a retirement benefits scheme available to all salaried employees. PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF).

EPF falls under EEE category.

V. Investments in Life Insurance Premiums (LIP)

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 in-laws is not eligible for deduction under section 80C. If you are paying a 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.

Note: The deduction is valid only if the premium is less than 10% of the sum assured.

VI. Home Loan Principal Repayment

The principal repayment of a home loan either to buy a home or to build a residential property qualifies for a tax deduction.

Note: Even the interest component can save you significant income tax – but that would be under Section 24 of the Income Tax Act.

VII. Children’s Tuition Fee

The tuition fee for full-time education of children is eligible for deduction. Conditions for eligibility:

• The tax deduction on tuition fee is available for two children only.
• The development fee/capitation fee is not included under this section.
• The education institute should be situated in India.

VIII. Stamp Duty and Registration Charges for House Property

Apart from the principal repayment of home loan, expenses incurred on stamp duty and registration charges for purchase of house property also qualify for tax deduction.

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