The 80s don't just symbolize Amitabh Bachchan's blockbuster hits, or Kapil's Devils winning the World Cup, or the first Indian to travel in space. For us personal finance people, the 80s are all about section 80C of the Income Tax Act that offer you various kinds of income tax deductions. Here we cover all the relevant 80C deductions and the suitability of each eligible instrument or deduction for you.
Any individual or HUF (Hindu Undivided Family) can claim a deduction under 80C.
What is the annual limit of the deduction?
Rs 1 lakh is the maximum deduction that can be claimed under 80C. However, this cap is not limited to 80C but extends to 80CCC and 80CCD. The total deduction under these 3 sections cannot exceed the Rs 1 lakh cap.
I know this already, tell me something I don't know.
Sure, most people know the annual deduction limit. However, in our experience of having interacted with 100,000s customers, most of us fail to fully claim the deduction amount, or end up choosing an unsuitable deduction. As a result, we either end up paying a higher amount in taxes, or end up with the wrong product respectively. So, here is a quick summary of the widely used deductions. For your ease, we have classified them into: Insurance, Housing, Investments, Retirement and Family Expense related eligible deductions.
Life Insurance
Conditions and Caps
Suitability For You
Life Insurance Premium
Premium paid on life of individual, spouse and any child or member of HUF
Premium in excess of 20% of sum assured is not eligible
Invest only if you need life insurance coverage, not only for tax savings
Understand that you will likely need to have enough money next year as well to continue paying the premium, unless it is a single premium policy
Unit-Linked Insurance Plan (ULIP)
ULIPs have a lock-in period of 5 years for 80C deduction purposes
Anyone who needs life insurance protection along with a market-linked investment
You can have the flexibility of choosing your investment options
If you already have adequate insurance, then consider only an alternative investment related tax saving instrument
Housing
Conditions and Caps
Suitability For You
Home Loan Repayment (Loan for purchase or construction of house property)
Principal repayment of loan taken from Government, bank, co-op bank, National Housing Bank, LIC, your employer ( employer can be public company, PSU, university, college or co-op society)
You must hold the property for at least 5 years after completion or possession of property
For those having home loans outstanding, and don't need to use the Rs 1 lakh deduction towards other instruments
Can invest through a regular Systematic Investment Plan throughout the year, rather than a lump sum payment
Anyone who wants exposure to the equity capital markets
Higher risk, but potentially higher reward than other 80C investment options
Prospect of capital gains offers protection against inflation
Public Provident Fund (PPF)
Can be made to PPF account of any individual, spouse and any child or member of HUF
No maximum limit under the tax law, but an annual limit of Rs 70,000 exists under the public provident scheme
Lock-up is for 15 years
Returns earned are totally tax exempt
Anyone who wants a predictable return. Current annual return is set at 8%. Not the best protection against inflation
If you don't have the flexibility to leave your money untouched during the lock-up, consider other options. Withdrawals are allowed for specific purposes
Provident Fund (Contribution by the Employee)
Monthly contribution is deducted by employer and deposited into employee's PF account
Balance accumulates and is also eligible for deduction
Anyone who wants a predictable return.Current annual return is set at 8.5%. Not the best protection against inflation
NSC - National Savings Certificate
Lock-up of 6 years
Along with the initial investment, interest accrued is also covered within the 80C limit of Rs 1 lakh (which is deemed to be reinvested) is also eligible for the deduction, but only for the first 5 years
Anyone who wants a predictable return. Current annual return is set at 8%, compounded half-yearly. Not the best protection against inflation
Interest earned on NSC is taxable after the Rs 1 lakh 80C limit
Fixed Deposit for 5 years in Bank, or Term Deposit for 5 years in Post Office
Cannot access money before end of 5 years
Anyone who wants predictable returns and a low risk investment. Not the best protection against inflation
Interest earned is not tax exempt
Retirement Related
Conditions and Caps
Suitability For You
Senior Citizen's Savings Scheme
Lock-in is for 5 years with a 3 year extension
Suitable for Senior Citizens who want predictable returns in the retirement stage of their lives. Annual returns are 9%, compounded quarterly
Not a good protection against inflation
Interest earned is not tax exempt
Notified Pension Fund and Pension Schemes
Contribution to Pension Scheme cannot exceed 10% of employee's salary or 10% of gross total income for self-employed
For anyone who is looking for retirement planning
Family Expense Related
Conditions and Caps
Suitability For You
Tuition Fee Payment
For up to 2 children's fees towards school, college, university for wholetime education in India
Cannot be development fees, donations or payments of similar nature
For those incur the expenses of children's tuition fees
Especially useful if you have not been able to use the full Rs 1 lakh amount on another eligible deduction
Next week, we will cover what is the most relevant 80C deduction related to your age and stage in life and according to the financial goals that you wish to achieve.
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As mentioned "Individual must hold the property for at least 5 years after completion or possession of property" to avail the tax benefit.
Dose the tax benefit start after the completion of 5 years?
sanjeev malhotra said :
12/01/2010
there are so many misconceptions regarding ULIPS.
One should have it or not for tax saving purposes/ investments
