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Tax Planning with deductions under section 80C of the Income-tax Act



This article would enable us to understand us ways of tax planning with deductions under section 80C of the Income Tax taxAct.

Introduction – Before the introduction of section 80c by the Finance Act 2005, section 88 was there to provide exemption to investors. There was no flat deduction of Rs 100000 u/s 88 as rebate of 20% was provided on the amount of investments. For example if someone had invested Rs 50000, he used to get Rs 10000 as tax rebate under section 88. In the earlier section 88 the overall limit of investment was Rs 60000 and an additional Rs 10000 for power, telecom and infra sector.

However exemption limit is enhanced to Rs 100000.Section 80c deduction limit is flat for all and no distinction is made between assessee falling into different tax slabs. This section has become one of the most powerful and the most popular section in the entire Income Tax Act 1961, mainly because the eligible assesses under section 80c are Individual tax payer and HUFs.

What are the eligible instruments?

  • Life insurance premium, including premium for a unit-linked insurance plan (ULIP)
  • Contribution to Public Provident Fund or Provident Fund
  • Investment in pension plans
  • Investment in Equity Linked Savings Schemes (ELSS) of mutual funds
  • Home loan principal repayment
  • Investment in Infrastructure Bonds, National Savings Certificates
  • Payment of tuition fees to for full-time education of any 2 children of an individual
  • Fixed deposit with any scheduled bank or post office for 5 years
  • Senior citizens savings scheme

Section Particulars Maximum Deduction 80C

  •  Life Insurance Premium on Life Policy(*): (Maximum Premium eligible limited to 20% of sum assured)
  • Contribution to Statutory or Recognized PROVIDENT FUND.
  • Contribution to 15 yr PPF (public provident fund) (*). (Maximum Rs. 70000/-)
  • NSC VIII issue (Including Accrued Interest for Ist Five Yr)
  • Contribution to ULIP of UTI or LIC Mutual Fund
  • Contribution to Notified units of MUTUAL FUND or UTI
  • Contribution to Notified pension fund set up by Mutual Fund or UTI, TUITION FEES: paid to University, College or Educational Inst. In India Max. 2 Children for FULL TIME education. (Excluding Development Fees, Donation etc.)
  • Payment towards PURCHASE OR CONSTRUCTION of residential house property including repayment of Loan taken for the same.
  • Investment in approved Debenture or equity share of Public Company or Units of Mutual funds, engaged in infrastructure development.
  • Subscription to Notified BOND of NABARD.
  • Fixed Deposit for 5 or more years in Sch. Bank in accordance with the scheme framed and notified by Central Govt.
  • Deposit in Senior Citizens Saving Scheme.
  • Deposit in 5 yr TIME DEPOSIT scheme in Post office

 (i) Life Insurance Premium – Life insurance is one of the most popular saving/investment vehicles in India. Ironically, it is probably the least understood too. In India, life insurance is brought first to save tax, then to make some returns and then, as a supplementary benefit, to protect families. Ideally, what works best is the reverse – buy life insurance to cover the family. If one manages to save the tax in the bargain, that’s great! It is important to remember that life insurance is not an investment tool. It is first an insurance policy; an income replacement tool that, in the event of one’s death, will enable financial dependents to maintain their lifestyle for a reasonable period, and meet their financial goals even in his/her absence.

 Investment may be made in the name of self, spouse & children.  Investment Guidelines

a)       Deduction under section 80C is admissible if the amount is invested in an insurance policy taken from any company approved by IRDA.

b)       Late payment fee will not be considered as premium paid.

c)       Renewal insurance premium should be paid in the relevant previous year only, i.e. , between 1st April, 2013 to 31st March, 2014.

d)       Premium paid/payable will be considered for deduction and not sum assured.

(ii) Insurance Pension Scheme – A typical pension plan starts with what is called the ‘accumulation phase’. It is the period from the time one buys a plan until he/she retires. During this period, one will be paying premiums, which will be suitably invested. Depending on the type of the pension plan, one might get to choose how this investment should happen i.e. equity, debt or both.

Investment may be made in the name of -Self, Spouse & Children.  Investment Guidelines

(a)   Deduction under section 80C is admissible if the amount is invested in an insurance policy taken from any company approved by IRDA.

(b)   Late payment fee will not be considered as premium paid.

(c)    Renewal insurance premium should be paid in the relevant previous year only, i.e. , between 1st April, 2011 to 31st March, 2012.

(d)   Premium paid/payable will be considered for deduction and not sum assured.

(iii) National Saving Certificate (NSC) - National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent 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.

Special Note – NSC interest accrued during the year shall be taxable under the head ‘Income from other sources’. However, it shall be eligible for deduction under section 80C.

(iv) 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 and the normal maturity period is 15 years. Minimum amount of contribution is Rs. 500 and maximum is Rs. 100,000. A point worth noting is that interest rate is assured but not fixed.

(v) Mutual Funds – Equity Linked Saving Scheme ( i.e. ELSS) are funds invested primarily in equity shares of companies. They have been in limelight for their superior performance in the recent past and are a popular tax saving investments. Due to their tax saving nature, they are also known as tax saving mutual fund schemes. Like all investment avenues under section 80C, ELSS funds also involve a certain lock-in-period. In this case, the lock-in-period is for three years which means that they cannot be withdrawn for a period of three years from the date of investment. The ELSS Fund manager basically invest 80% of the total amount in the equity shares and the remaining 20% is invested in other instruments like bonds, debentures, Government securities and others.

However the basic risk with ELSS is that since it has a considerable equity exposure, the returns are linked to market returns and, hence, there is no guarantee of returns and even capital. At the same time, ELSS can also be seen as a way to long term investing in equity markets and with India growth story unfolding and fundamentals looking intact, investment experts anticipate that equities would continue to outperform other investing avenues for at least next 5-7 years. Investing in ELSS provides dual benefit of capitalizing on superior returns as well as tax saving. With the current market turmoil avoid this instrument unless you are looking for a long term investment. If that is the case look for good fund managers with stellar tax records.

(vi) Unit Linked Insurance Policy (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.

Unit Linked Insurance Policy-Schemes

Insurer

LIC

SBI Life

Birla Sunlife

Allianz Bajaj

Reliance Life

ICICI Pru

ULIP Plans

Wealth Plus

Smart ULIP

Platinum Premier

Max Gain

NAV Guarantee

Pinnacle

Term 8 Years 10 Years 10 Years 10 Years 10 Years 10 Years
Risk Cover SP 1.25-5 Times Annual 5-10 Times 5 Times of Annual Premium 5 Times of Annual Premium 5 Times of Annual Premium SP 1.1-6 Times; Annual 5-30 Times 5 Times of Annual Premium
Death Cover SA+ Fund Value SA or Bid Value SA or Bid Value SA or Fund Value SA + Fund Value SA or Fund Value
Partial 3 Years 5 Years 3 Years 3 Years 3 Years 3 Years
Surrender 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years
Surrender Charges NIL 3rd Year 9%4th Year 2%5th Year Nil Within 3 Year 40%4 Year 20%5 Year 10% Within 3 Year 20%4 Year 10% Applicable, No Mention in Brochure 3rd Year 4%4th Year 2%5th Year Nil

Acronyms Explanation -

SA = Sum Assured

Bid Value = Bid value is the value at which one can sell the ULIP instruments.

Fund Value = Same is the total of the fund in which the policyholder chooses to invest his fund. Hence, this is the return of the investment in the open market according to his risk appetite.

Sum assured is the minimum death benefit in a Unit Linked Insurance Plan or ULIP.

Death Benefits in ULIPs can be of 2 types:

(a)  Sum Assured or Fund Value, whichever is higher. (Sum Assured is the Minimum Guaranteed Death Benefit. It can be more if the Fund Value exceeds the Sum Assured.)

(b)  Sum Assured+ Fund Value. This is possible in a double benefit plan where both Sum Assured and Fund Value is payable to customer as death benefit.

(vii) 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.

(viii) Principal Repayment of Housing Loan – The Equated Monthly Installment (EMI) that one pays every month to repay his/her home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under section 80C. Even the interest component can save one’s significant income-tax – but that would be under section 24.

(ix)  Stamp Duty and Registration Charges for a home: The amount one pays as stamp duty when he/she buys a house, and the amount he/she pays 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.

(x) Post Office Term Deposit> 5years (POTD) - POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) – which currently offers 7.5 per cent rate 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.

(xi) 5-Yr Bank Fixed Deposits (FDs) – Tax-saving fixed deposits (FDs) of scheduled bank with tenure of 5 years are also entitled for section 80C deduction.

(xii) Long Term Infrastructure Bonds (under section 80CCF) - These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the Government. However, the deduction for investment in long-term infrastructure bonds is available under section 80CCF subject to maximum limit of INR 20,000.

To Conclude

Timely and efficient tax planning go long way in lowering your total taxes by employing and taking advantages of in-built provisions of tax exemptions, deductions under section 80C, concessions, rebates, relief’s, allowances and other benefits granted by the tax laws so that the incidence of tax is reduced.

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About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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