Investment for Tax Savings under Sction 80C

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Around this time of the year, our investment decisions are more linked to what Section 80C of the Income Tax Act, 1961 (‘Act’) says than by the historical trends of the investment. For the uninitiated, Section 80C lists down certain investments / expenses which can be deducted by an individual (or a Hindu Undivided Family) in computing his taxable income. This deduction, clubbed with investments under sections 80CCA, 80CCB and 80CCD of the Act, is subject to a limit of Rs.1,00,000/- per financial year (‘FY’). Simply put, if Mr. Nayak earns an income of Rs.10,00,000/- in FY 2013-14 and invests / spends Rs.1,00,000/- in products eligible for Section 80C deduction, he would be liable to pay taxes only on the balance Rs.9,00,000/-.

Thus, an individual / HUF can save taxes up to Rs.30,900/- for taxable income up to Rs.1 crore in FY 2013-14. Tax savings would be Rs.33,990/- in case the taxable income exceeds Rs.1 crore.

Here we have identified the appropriate investments under sections 80C, 80CCA, 80CCB and 80CCD.

A. Mandatory Investments / Expenses

1. Contribution to Employee’s Provident Fund (‘EPF’) – For a salaried person, this is an automatic deduction from the salary. And if you are lucky enough that this amount exceeds Rs.1,00,000/-, fret no more as your investment for 80C is done! EPF deposits yielded tax free interest of 8.75% per annum in FY 2013-14.

2. Repayment of Home Loan – Repayment of the principal portion of a home loan to any institutions specified u/s 80C is eligible for Section 80C deduction and should be accounted for before deciding on further 80C investments. Such a house cannot be sold for 5 years from the end of the FY in which it was purchased; else the 80C deduction claimed in earlier years will be taxed in the year of sale.

Institutions specified u/s 80C include banks, LIC, National Housing Bank, public companies providing long term finance to construct / purchase residential houses, housing finance companies or your employer, if it is established under any law.

3. Children’s Education – Tuition fees to any educational institution in India for full time education of any 2 children is eligible for 80C deduction.

B. Voluntary (but necessary) Investments / Expenses
If after the above investments, 80C limit still remains, look at the following expenses which are necessary but can be entirely planned by you.

1. Public Provident Fund – PPF is an important retirement planning tool, especially if you are not eligible for EPF. PPF yielded a tax free interest of 8.70% in FY 2013-14 and is subject to a lock in of 15 years but can be partially withdrawn after 5 years or borrowed against. One can annually invest up to Rs.1,00,000/- in PPF.

2. LIC Premium – You haven’t planned smart if you and your family members aren’t insured. The premium, if it is less than 10% of the actual sum assured, is eligible for 80C deduction. In certain cases, premium up to 15% of the sum assured can be used.

3. Senior Citizens Savings Scheme (‘SCSS’) – For persons above 60 years or those who have taken voluntary retirement and are older than 55 years, this is the safest investment avenue. Deposits in SCSS earned a pre-tax interest of 9.2% in FY 2013-14. Lock in period is 5 years but account can be closed prematurely after 3 years.

4. Equity Linked Savings Scheme (‘ELSS’) – While SCSS is best suited for senior citizens, ELSS offers to youngsters the potential to earn high returns; albeit with higher risks. Lock in period for 80C purpose is 3 years and dividends and capital gains are tax exempt. CRISIL-AMFI ELSS Fund Performance Index computes a 3-year annualized return of 2.73% as at 31st December 2013 from ELSS schemes forming its part.

4. National Savings Certificate (‘NSC’) – NSCs, which earned an annual pre-tax interest of 8.5% and 8.8% on 5 and 10 year certificates respectively, with a lock in of 5 years, are also a good alternative.

C. Other Voluntary Investments / Expenses
Apart from the above, investment options available are Fixed Deposits, NABARD Bonds, ULIPs, Post Office Time Deposits, etc.

 

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