Income Tax Deduction under Section 80CAlthough it may not be able to completely avoid your tax liabilities, there are several deductions and exemptions allowed by the Indian Income Tax Act (for e.g. Section 80C, Section 80D, Section 80DD, Section 80G, Section 24, etc.) which help you reduce your taxable income and thus help you save taxes. One of the most common income tax deductions is Section 80C. One reason why Section 80C is the most popular is that it encourages people to do monthly savings from their income. This post discusses details of Section 80C and how to take maximum benefit of Section 80C for your personal tax planning. If your taxable income is in the highest tax bracket, then taking full advantage of deductions provided by Section 80C can help you reduce your taxable income by Rs. 1 lakh, which means that you can save about Rs. 33,000 taxes by provisions of Section 80C.
You may also be interested in reading my post on : Indian Income Tax deductions, Tax Exemption Limits for Section 80C, Section 80D, Section 80DD, Section 80G, Section 24, etc.
Understanding all tax deductions is important for your income tax planning.
What type of deductions are allowed under section 80C? Tax Exemption limit.For the financial year 2009/2010 (as well as 2008/2009) Section 80C allows a maximum deduction of Rs. 1 lakh from your taxable income for money invested in one or all of the following.
- Life Insurance premium: Any contribution to premium paid for Life Insurance policies, e.g. LIC policies, is eligible for income tax deduction under Section 80C. Note that apart from premium of your own policie's premium paid for Life Insurance policies of your spouse (wife/husband) or your children is also eligible for exemption under Section 80C. Income tax tip: If you and your wife/husband both have LIC policies, and your spouse's taxable income is in the lowest slab (i.e. he/she has does not have to pay income tax anyway) then you can show both your and your spouse's LIC premium and get more benefit of deduction under Section 80C.
- Provident Fund: Any contribution made to Provident Fund can be deducted from your taxable income according to Section 80C. Note that for most of the salaried employes, a fixed amount gets automatically deducted from your salary every month. Note that this amount qualifies for tax exemption under Section 80C. You can also increase this contribution to Provident fund (Voluntary provident fund or VPF) and the increased contribution also qualifies for deduction under Section 80C. You can also open a Public Provident Fund or PPF account and any money saved in your PPF account qualifies for deduction under section 80C. PPF accounts can be opened in most of the well known banks and the minimum investment allowed for PPF account is Rs. 500 while the maximum investment allowed is Rs. 70000.
- Fixed deposits, National Saving Certificate (NSC): Any amount invested in Fixed deposits of term period greater than or equal to 5 years is eligible for tax exemption under section 80C. This is a recent amendment and in my opinion on of the best risk free saving options where you can save money as well as take benefit of Section 80C deduction. Moreover you can get benefit of your savings just in 5 years as compared to PPF option above where you will have to wait for 15 years or certain Life insurance policies where the maturity period is usually over 10 years. Amount invested in National Saving Certificate (NSC) is also eligible for deduction under Section 80C.
- Mutual Fund Investments in ELSS: Investments in certain type of mutual funds called Equity Linked Savings schemes or ELSS are eligible for income tax deduction under Section 80C. Note that not all mutual fund investments qualify for 80C deduction. All mutual funds which qualify for 80C or belong to the ELSS category have a lock-in period of 3 years and most (although not all) have something like 'tax saving' in their name , e.g. SBI Magnum Tax Gain, Reliance Tax Saver, etc. Before planning any mutual fund investments for the purpose of tax planning under Section 80C, it is advisable to make sure whether that Mutual Fund is an ELSS.
- ULIPs - Unit Linked Insurance Plans - ULIPS or Unit Linked Insurance Plans are a combination of Life Insurance as well as stock market investment or mutual fund investment. Money invested in ULIPs is eligible for deduction under Section 80C.
- Principal Part of the Home Loan: If you have bought a new house and have a housing loan for this, then you can take benefit of Section 80C deduction. The EMI or Equated Monthly Installment you pay for your housing loan has two components - The Principal Part and the Interest. The principal part is tax exempt under Section 80C. Note that even the interest part is eligible for tax deduction, not under Section 80C but under Section 24. If you pay rent for your house and dont recieve an HRA, even the rent is eligible for tax deduction but again under some other section, Section 80GG and not Section 80C. Read more about Tax deductions other than Section 80C.
- Stamp Duty and Registration Charges: Stamp duty charges and registration charges paid while purchasing a new house are eligible for tax deduction under Section 80C.
- Tution Fees: Amount paid as tution fees for education of one or two of your children is exempt from Income Tax and you can use it as tax deduction under Section 80C.
How to use Section 80C for your tax planning?There are numerous tax deduction options under Section 80C mentioned above which you can take benefit of. Which option is best for you? In planning your tax and savings for the current financial year it is useful to keep the following in mind.
Which tax saving options of Section 80C are best for you?
Which tax saving options of Section 80C are best for you?
- Keep in mind that the total amount of exemption allowed by Section 80C for financial year 2008/2009 (as well as 2009/2010) is Rs. 1,00,000. For any mount invested or saved in excess of Rs. 1,00,00 you do not get any further tax relief from Section 80C.
- If you pay tution fees, or have just bought a home, then you should definitely take benefit of (6) and (7) deduction options of Section 80C mentioned above. In this case you do not have to do any additional investment or saving to take benefit of Section 80C.
- In case you are going to need money in the near future (i.e. next few years, say for e.g. you are planning to have a baby, buy a house etc.) then go for those tax saving options of Section 80C which have short term maturity period and are risk-free. For example Fixed Deposits is the best 80C option in this case. As compared to PPF which typically have a maturity period of 15 years, in fixed deposits you can get your 80C money back in 5 years. ELSS also has a 3-year lock in period which means you can get your money invested in ELSS after 3 years. However investments in mutual funds involve risk and you must understand the risks before you make any investments.
- I personally do not prefer ULIPs as their fees and charges are somewhat hidden and not easy to understand. So for Section 80C or otherwise, i would prefer ELSS+Life Insurance separately to ULIP alone.