This article explains how the income tax Section 80c deductions of the Income Tax (IT) Act can help reduce your income tax liability in your yearly financial planning.
Though most of us use some of the deductions under Section 80C each year, we might be doing so unknowingly. Read on to understand what are the various options available under Section 80C of the Income Tax (IT) Act to help you better your next years tax savings.
This article is applicable for assessment year 2011-2012 or previous year 2010-2011.
Income tax Section 80C deductions
The income we earn is liable to tax. The government of India prods us to save our hard earned money for our future. It offers tax breaks on the savings that investors do annually.
Section 80C of the Income Tax Act is the section that deals with tax breaks. It states that if investments are done in specific instruments, then one’s income becomes deductible by a maximum of Rs 1,00,000/-.
Investments made under specified schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000.
To state with an example, if your gross total income is Rs 8,00,000/- and if you have invested Rs 1,25,000/- in the qualifying instruments, then your gross total income is reduced by Rs 1,00,000/- to Rs 7,00,000/- and you do not have to pay tax on this Rs 1,00,000/- at all !
Qualifying Investments under Section 80c
Following are the qualifying instruments under Section 80C which investors can use.
1. Life insurance premiums
Any amount of money that you pay as premium for yourself, spouse or your children will qualify for Section 80C. The children may be married/unmarried, dependent or not dependant.
Note that if the premium paid exceeds 20% of the sum assured of the life insurance policy, the amount eligible for deduction under section 80C shall be limited to 20% of the sum assured.
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2. Employees Provident Fund (EPF)
You automatically begin saving in your EPF when you begin working. Under the EPF, 12% of your basic salary goes into this fund. Not only this, your employer matches an equal 12% ! From your employers contribution, 8.33% goes towards the Employees Pension Scheme (EPS) and 3.67% into the EPF. Your EPF earns a tax free interest.
3. Public Provident Fund (PPF)
The favorite of the masses among the various Section 80C options, PPF is a risk free tax free investment avenue that investors should mandatorily subscribe to. You can invest a minimum of Rs 500/- and a maximum of Rs 70,000/- in this in a year. With a lock in period of 15 years and a return of 8%, this stands as one of the best Section 80C deduction for saving tax.
4. Home Loan Principal Repayment
Any payment for the purchase or construction of a residential house property will also qualify under Section 80C.
Such payments should have been made towards :
# the principal component of the home loan that was taken.
# stamp duty, registration fee and other expenses for the purpose of transfer of such house property.
5. Bank Fixed Deposits
Any sum deposited in a fixed deposit for a period of not less than 5 years with a scheduled bank or post office will also qualify for deductions under Section 80C.
6. National Savings Certificate(NSC)
A zero risk investment avenue, NSC will give you a return of 8% for a duration of 6 years. Your Rs 1 lakh will become Rs 1.6 lakh after 6 years.
7. Senior Citizens Savings Scheme (SCSS)
Targeted at retired individuals, you are expected to put in Rs 15 lakh for 5 years in this scheme. You can earn 9% interest a year and get the Section 80C deduction benefit.
8. Equity-linked savings schemes (ELSS)
ELSS are diversified equity mutual funds that allow investors to get tax breaks and target a higher return as well. The lock in period is three years – this means, once you invest in the ELSS fund, you can sell only after 3 years are over. The best part is that there is no long-term capital gains in this. You can invest via lump sum or take the systematic investment planning route. The latter is advised.
9. New Pension System (NPS)
A new kid on the block, NPS is for those who do not have an EPF facility to target long-term retirement needs. NPS is market linked and boats of features like zero front load, minimal annual charges and a decent variety of fund managers to invest with.
10. Tuition fees
School fees for the purpose of full time education of up to two children can also be availed as deductions in Section 80C. The conditions are that the payment cannot be towards donations or development fees and the institution should be situated in India.
11. Unit-linked insurance plans (ULIPs)
ULIPs are hybrid products that bundle insurance and investment together. The premium needs to be paid for a minimum of three years. Since ULIPs have very high front end charges, they work only in the long run of over 9-10 years. Heavily mis sold and abused product, they are every insurance agents hot selling item between January to March each year.
Subscription to bonds issued by NABARD(National Bank for Agriculture and Rural Development) will also qualify for Section 80C deductions.
Here is a small snapshot on the risk return trade off of some of these instruments.