You can claim a maximum deduction of Rs 1.5 Lakhs u/s 80C (including Sections 80CCC, 80CCD) by
investing in eligible instruments. Unfortunately, investments and
expenditures allowed u/s 80C is too crowded and that makes the choice
difficult for most people.
Below is the list of investments/expenses eligible for deduction u/s 80C:
1. Provident Fund (EPF/ VPF)
2. Public Provident Fund (PPF)
3. Sukanya Samriddhi Account (SSA)
4. National Saving Certificate (NSC)
5. Senior Citizen’s Saving Scheme (SCSS)
6. Tax Saving Fixed Deposits (for 5 Years)
7. Life Insurance Premium
8. Pension Plans from Mutual Funds
9. Pension Plans from Insurance Companies
10. New Pension Scheme (NPS)
11. Tax Saving Mutual Funds (ELSS)
12. Central Govt. Employees Pension Scheme
13. Principal Payment on Home Loan
14. Tuition Fees for up to 2 children
15. Stamp Duty for registration of Home
Download: Free e-book for Income Tax Planning for FY 2018-19
The post below suggests the approach to select the investments for tax planning.
Expenditures Eligible for Tax Benefit:
The first step is to check all expenditures which are eligible for tax deduction. Below is the list:
1. Tuition Fees for up to 2 children
The
expenses on tuition fees for full-time courses for a maximum of two
children is eligible for deduction u/s 80C. However, the deduction is
not available for tuition fee to coaching classes or private
tuitions. The following expenses are not considered as tuition fees –
Development Fee, Transport charges, hostel charges, Mess charges,
library fees, Late fines, etc.
2. Stamp Duty for registration of New Home
Stamp
duty and registration charges up to Rs 1.5 Lakh can be claimed for
deduction u/s 80C. The payment should have been made in the same
financial year for which the tax is being paid. i.e. the deduction
cannot be carried forward to next year. Also, the house should be in the
name of assessee claiming the deduction.
In
case you have paid stamp duty for a new home, you most probably would
exhaust your 80C limit for the year and no further investment might be
required.
Compulsory Deductions:
There
are some compulsory deductions that are eligible for tax benefit u/s
80C. Check if you contribute in any of such deductions:
1. Provident Funds (EPF/VPF)
EPF is
a compulsory deduction for most salaried employees. The deduction can
be 12% of the basic salary & dearness allowance or Rs 1,800 every
month. Look at your salary statement to know how much have you
contributed for the year. Count only your contribution. Employer’s
contribution is not eligible for tax saving investment. You can also
have some amount contributed through Voluntary Provident Fund (VPF), which can be up to 100% of the basic salary & DA.
2. National Pension Scheme (NPS)
NPS (Tier 1) is
compulsory for most Government employees who joined after 2004. Look at
your salary slip to check your deduction. Again only your contribution
is a valid deduction. Employer’s contribution is not eligible. The
good thing is you can use this contribution to claim an additional tax
deduction up to Rs 50,000 under the newly introduced Section 80CCD(1B). We have explained this in the last paragraph of the post.
Recurring Deductions:
There are some deductions which happen year on year like home loan repayment, insurance premium etc.
1. Home Loan Principal Amount
Are
you paying the home loan? The principal component paid every year is
eligible as a tax deduction. For this, you can download the tax
statement from the banks’ website. In case not get it from the loan
provider. This would give you an estimate of principal and interest paid
for the financial year.
2. Insurance Premium
Have
you bought life insurance products like ULIP, Endowment Plan or Term
Insurance where you need to pay the premium for subsequent years? If you
want to continue investing in the same you can continue to claim tax
benefit.
3. PPF (Public Provident Fund)
If you have PPF account you should contribute minimum Rs 500 in a financial year. In case you don’t do, a fine is levied.
4. Sukanya Samriddhi Account (SSA)
Minimum deposit of Rs 1,000 needs to be made every year else penalty of Rs 50 is levied.
5. NPS
Do you have NPS account? A minimum contribution of Rs 1,000 is required every financial year to keep the account active.
For
many people, the 80C deduction limit is reached by this time. In case
not, choose from the list below depending on your risk profile and
investment goals:
New Investment for 80C:
1. Term Life Insurance
Do
you have dependents? Would they survive financially in case something
happens to you? Do you have enough life insurance? If no go get a term
insurance first. It’s important to opt for protection first.
Useful Tips:
§ Online term plans are much cheaper than offline. So it makes sense to go for online plans.
§ Do not provide false information in the insurance form. The insurance claim can be rejected for wrong information.
§ Do not buy anything other than Term Plans from insurance companies. No money back, endowment plans!
2. ELSS (Equity Linked Saving Scheme)
Popularly known as Tax saving Mutual Fund. These are equity-based mutual funds and one of the best investment options to create wealth in the long run while saving tax. In case you can digest the volatility of the stock market, this is the recommended option.
Lock-in Period: 3 Years
The Good:
§ Among the tax saving investments, ELSS has least lock-in period of 3 years.
§ The gains on ELSS Fund is Tax-Free.
§ Convenient to buy and manage as ELSS can be bought and redeemed online.
The Bad:
§ There can be considerable volatility in returns and you can get negative returns at the end of 3 years.
Helpful Tips:
§ Invest through SIP (Systematic Investment Plan). This helps in tiding over volatility to some extent.
§ Choose “Growth” option over “Dividend Payout” as this creates wealth in the long run.
§ Try
to invest directly to fund as this would give you 0.5% to 1% higher
returns as compared to when you invest through a broker If doing
lump-sum check for stock market valuations. If you invest at high
valuations, you might see very low or negative returns at the end of 3
years.
§ Avoid “closed-ended” ELSS NFOs which are launched at this time of the year.
3. PPF (Public Provident Fund)
PPF is another popular tax saving investment option for 80C, especially for people without any other provident fund.
Lock-in Period: 15 Years. However partial withdrawal is allowed from 7th year
The Good:
§ The interest earned on PPF is Tax-Free
§ After opening the PPF account, investment can be done online every Year (for some banks)
§ Highest Safety – backed by Govt. of India
The Bad:
§ The lock-in is for 15 years but there is partial liquidity from 7th year onwards.
Helpful Tips:
§ Investment done till 5th of the month earns interest for the month. So deposit your money before 5th of a month
§ You
can use a combination of PPF and ELSS for tax saving investments. In
case you find stock market over-valued, PPF is a good option.
4. Senior Citizen’s Saving Scheme (SCSS)
SCSS
is a good option for senior citizens (above 60 years of age) as it
gives regular quarterly interest income directly in a bank account.
Lock-in: 5 years
§ Highest Safety – backed by Govt. of India
§ The interest rate offered is highest among the small saving schemes
The Bad:
§ The interest received is taxable.
§ TDS
would be deducted if the total interest in a year is over Rs 10,000.
However, if eligible Form 15H can be submitted to avoid TDS.
Helpful Tips:
§ SCSS account can be closed after 1 Year (with penalty) but in case you have availed Sec 80C benefit, it would be reversed.
§ The joint account can be opened only with your spouse. There is no age limit applicable for the joint account holder.
5. Sukanya Samriddhi Account (SSA)
SSA
can be opened by parents of girl child subject to certain conditions.
SSA can be a good option for fixed income investment for the child.
However, you should also invest in ELSS or other equity mutual funds for
goals related to the child.
Lock-in: Deposit to the account to be made for 14 years and account matures at 21 years from the date of opening
The Good:
§ The interest earned on SSA is Tax-Free and also higher than that offered to PPF
§ 50% withdrawal allowed when a girl turns 18 for marriage/higher education
§ Highest Safety – backed by Govt. of India
The Bad:
§ No provision of Loan or pre-mature withdrawal unlike PPF
Helpful Tips:
§ Minimum deposit of Rs 1,000 needs to be made every year else penalty of Rs 50 is levied
§ Account can be closed before 21 years in case of marriage
6. National Saving Certificate (NSC)
NSC
can be bought at post offices to save tax u/s 80c. It is available for 5
years (NSC VIII) only. The interest offered is 7.8%.
Lock-in: 5 Years
The Good:
§ The interest is higher than most tax saving bank fixed deposits.
§ Certificates can be kept as collateral security to get a loan from banks
§ No Tax deduction at source
§ The interest accrued for NSC qualifies for Sec 80C deduction in subsequent years
§ Highest Safety – backed by Govt. of India
The Bad:
§ The interest earned is taxable
§ You
need to visit the Post office for buying and redeeming NSC units. This
can be a hassle for people who shift addresses frequently.
Also Read: Calculate Tax on Arrears in 7 Easy Steps
Helpful Tips:
§ You can buy NSC in denominations of Rs 100, 500, 1000, 5000 and 10000
§ NSC
is better to tax saving option than banks Tax Saving FD (offering
similar interest) as interest accrued for NSC qualifies for Sec 80C
deduction in subsequent years
7. Tax Saving Bank Fixed Deposits
Also Read: Highest Tax Saving Bank Fixed Deposit Rates U/S 80C across 44 banks
Lock-in: 5 years
The Good:
§ Convenient to invest. Many banks offer online facility for Tax Saving FD
§ High Safety – FD up to Rs 1 Lakh is insured by RBI
The Bad:
§ The interest received is taxable. (Tax treatment of Fixed Deposits)
§ Cannot be withdrawn prematurely
§ Cannot be pledged to secure a loan or as security
Helpful Tips:
§ The minimum tenure is of 5 Years. Some banks offer special schemes for longer tenures with slightly higher interest rates
§ Don’t be mislead by banks advertisements about their yield on Tax Saving FDs. Those are manipulative calculations. [SBI Tax Saving Deposit Scheme – Interest & Annual Yield]
§ Be cautious of small co-operative banks as they have a higher risk than bigger private and public sector banks.
8. Pension Plans from Mutual Funds
There are Pension plans from mutual funds which offer tax benefit u/s 80C:
1. Templeton India Pension Plan
2. UTI Retirement Benefit Pension Fund
3. Reliance Mutual Fund Pension Plan
The
above funds are hybrid or balanced mutual funds – the first two funds
are debt oriented mutual fund while the one from Reliance has two funds –
one debt oriented and other equity-oriented.
Lock-in: 5 years
Helpful Tips:
§ Reliance
Mutual Fund Pension Plan is a better option among the three funds as
you use Wealth option (which is equity oriented fund) to create the
corpus and then switch to Income option (which is debt oriented fund)
for regular income after retirement.
§ All 3 funds levy exit load to discourage people from exiting early
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9. NPS (National Pension Scheme)
Some
of you might have to contribute compulsorily to NPS. In this case, you
can take a deduction up to Rs 50,000 under the newly introduced Section
80CCD(1B). And then you can choose a more efficient investment in 80C.