The Income Tax Act’s section 80C came into effect on the 1st of April, 2006. It states that certain expenditures and investments you make will be exempt from tax. Knowing this section well will help you plan your finances in such a way that you can avail this tax deduction. You can get deductions for as much as Rs 1.5 lakh, and lower your tax liability. The section 80C offers taxpayers a variety of options for investment which will not only generate good returns but can also reduce tax liability.
What is Covered by Section 80C?
A lot of people invest in public provident funds (PPF), life insurance policies, and others to avail the 80C deduction. But, these are only a few of the options that are more popularly known. Many other options are covered by 80C, which are also worth considering. The 80C deduction is not applicable only for investments. Various other expenditures of a taxpayer are also eligible for deductions. But, the spending or investment you want to claim for a particular financial year has to be made in that financial year itself.
Tax Benefit Under 80C
This is a list of the various expenditures and investments that can be claimed under section 80C for the current financial year-
- Investments in EPF (Employee Provident Fund) – Most salaried employees have a retirement benefits scheme. The EPF is generally 12% of the basic salary plus DA that is deducted from your salary by your employer and deposited in your EPF account. But this rate can change from time to time. The employer and employees both contribute to this fund. An employee needs to earn a minimum basic salary of Rs 15,000 per month. This balance can be withdrawn by the employee 2 months after leaving the job if they do not take up employment within the next two months with another employer who is covered by the act. The interest rate for EPF is 8.55%. The whole of this balance is tax-free if you withdraw it after 5 years of continuous service. The entire amount that is deducted in a year from the employee can be claimed as deduction while calculating your total taxable income.
- Public Provident Fund – The Public Provident Fund or PPF is a scheme the government provides, and the investments you make in this are eligible for deductions under 80C. A resident of India, whether salaried or non-salaried can open a PPF account. A Hindu Undivided Family cannot open this type of account. In a year, the lowest contribution you can make towards PPF is Rs 500, while the maximum is Rs 1.5 lakh. The interest on this account is tax-free at present and is compounded yearly. Currently, the interest rate is 8% per annum. The maturity period of PPF is 15 years, but you can extend this period by an additional 5 years. You can make partial withdrawals from your account after 7 years. The interest rate is not fixed, but is assured, and is revised every three months.
- Equity Linked Savings Scheme (ELSS) – Certain mutual fund schemes were explicitly designed to save tax.The investments you make in Equity Linked Savings Scheme are eligible for tax deductions under 80C. This scheme offers the chance to earn higher returns when compared to similar tax-saving investments because it is linked with equity. But, this also means that this has more risks involved. There is no upper limit to the amount you can invest in this scheme. However, the tax benefits you can avail are limited to Rs 1.5 lakh. The Equity Linked Savings Scheme has a lock-in period of 3 years, which is the shortest one of all the options available under 80C. The capital gains you make from the ELSS are taxed under long-term capital gains tax.
- Sukanya Samriddhi Scheme – The Sukanya Samriddhi Scheme is a popular scheme that is offered by the Indian government. It aims to better the lives of women in India, right from a very early age.A Sukanya Samriddhi Scheme can be opened in the name of a female child at any point between her date of birth to her 10th The minimum amount that can be invested in this scheme is Rs 1000 in a financial year, while the maximum limit is set at Rs 1.5 lakh. You can prematurely withdraw as much as half of the amount deposited when the child reaches the age of 18. The interest in the Sukanya Samriddhi Scheme is calculated and compounded every year and is 8.5% at present. The interest you receive is eligible for tax deduction under 80C. The investments, withdrawals and maturity amount in the Sukanya Samriddhi Scheme are all tax-free.
- Home loan principal repayment – The EMI we pay as repayment of our home loans comprises of two parts- the principal and interest. The principal amount is qualified for tax deduction under 80C. Even the interest you pay helps you save income tax significantly, and it comes under section 80EE. So, if you have a home loan that you are currently repaying, then the principal amount you repay in a financial year can be claimed by you for the deduction. If you make use of the tax deductions offered by section 80C to its limits in home loan repayment itself, you do not need to worry about investing in other tax-saving products for the sole purpose of tax benefits. Any payment to development authorities like the Delhi Development Authority or other similar ones for the purchase of a house that has been assigned to you by a scheme is also eligible for tax deduction under section 80C.
- National Pension System – The Indian Government started this pension scheme that permits the unorganized sector and working professionals to receive a pension after they retire. Investments made in this system can avail tax deductions under 80C too, and the maximum amount that can be claimed is Rs 1.5 lakh. Every Indian citizen in between the ages 18 to 60 is eligible to open a National Pension System account. This account permits partial withdrawals under special conditions after 15 years are over. Rate of returns vary from 12% to 14%, and there is no upper limit to the investment permitted.
- National Savings Certificate – The National Savings Certificate is one of the most widely used tax-saving instruments that are at the disposal of Indian citizens. The maturity period of the NSC is 5 years, and the interest is compounded annually. But, since the interest remains in the account, it is considered as a reinvestment. A reinvestment qualifies for deduction under 80C in the next year. The current rate of interest is 8%. The minimum amount for investment is as low as Rs 100, and there is no upper limit. The sum you invest in the NSC is eligible for tax exemption under 80C, with the upper limit for such a tax deduction being Rs 1.5 lakh per year.
- Senior Citizen Savings Scheme – One of the best possible investment schemes for senior citizens is the Senior Citizen Savings Scheme. It provides moderate returns compared to other options, and interests are paid every three months. Individuals above 60 years can make long term investments under this scheme and can also claim tax benefits amounting to Rs 1.5 lakh for it under section 80C. Individuals who have retired using a Voluntary Retirement Scheme are also eligible to open this scheme. They need to be in between 55 to 60 years old and must open the account within 3 months of their retirement. The rate of interest that is being offered at present is 8.7% per annum.
- Unit linked Insurance Plans – If you want a plan that is a mixture of insurance and investment, you should go for Unit-linked Insurance Plans. A portion of the amount you invest in a ULIP is used to provide coverage, while the rest is invested in the stock market. An individual can purchase a ULIP for the benefit of oneself, spouse or child. The interest rates fluctuate since it is linked to the market. The rate of return you can expect on your ULIP investment is between 12% – 14%. In the long term, a ULIP offers substantial profits. There is no upper investment limit of this plan. These plans have gained so much popularity in recent times because of these features. Investments and withdrawals are free of tax, as is the maturity amount.
- National Bank offers NABARD Rural Bonds – Two types of bonds for Agriculture and Rural Development- the NABARD Rural Bonds and the Bhavishya Nirman Bonds. The NABARD Rural Bond is eligible for tax deductions under 80C of the Income Tax Act. But, it is essential to note that the availability of these bonds for investment that is eligible for the section 80C tax benefit depends on the government.
- Five-year Post Office Time Deposit Scheme – The deposit schemes offered by post offices are quite similar to the fixed deposits of banks. These schemes could range from 1 year to 5 years in duration. The interest is eligible for the section 80C tax deductions. It is paid annually, even though it is compounded quarterly. The interest rate is also revised by the government each quarter. The interest you earn is entirely taxable.
- Tax Saving FDs – Tax saving Fixed Deposits are like regular fixed deposits but have 5 years as the lock-in period. You can receive tax deduction benefits under 80C on investments going up to Rs. 1.5 lakh. The interest rates vary from 5% to 7.75%. The minimum investment amount in this kind of investment is Rs 1000.
- Children’s Tuition Fees – The amount you pay as tuition fee, whether it is at the time of admission or later, is eligible for deduction. This excludes the development fee you pay of the donation amount, and it must be a school, college or university in India.
People often wonder when is the best time to make investments to claim Tax benefit under 80C. Should they do it at the end of the financial year? Or at the beginning? Most individuals go for the former and start making investments just to avail tax deductions benefits. Tax experts say that it is best if you make these investments at the beginning of the financial year. This would give you more time to consider various options and invest in the best one. This would also guarantee that you earn interest throughout the financial year.