by PersonalFN.com
The Section 80C of the Indian Income Tax Act enables you to effectively invest in income tax saving instruments, in order to optimally reduce your tax liability; and this is seen as one of the most sought after sections when it comes to tax planning. It offers a host of popular investment instruments mentioned below which qualify you for a deduction from your Gross Total Income (GTI):
* • Life Insurance Premium
* • Public Provident Fund (PPF)
* • Employees’ Provident Fund (EPF)
* • National Saving Certificate (NSC) , including accrued interest
* • 5-Year fixed deposits with banks and Post Office
* • Senior Citizens Savings Scheme (SCSS)
* • National Pension Scheme (NPS)
* • Unit-Linked Insurance Plans (ULIPs)
* • Equity Linked Savings Schemes (ELSS)
* • Tuition fees paid for children’s education (maximum 2 children)
* • Principal repayment on Home Loan
Hence, if you invest in any or / all of the aforementioned instruments; you would qualify for deduction under this section subject to the maximum of Rs. 1 lac per year.
But we think rather than just merely investing in any of the above income tax saving instruments, one can also can use these tax saving instruments for prudent tax planning by recognising your age, income, financial goals and risk appetite.
Now you may ask “how”?
Well, it’s simple! In the aforementioned list you can classify the income tax saving instruments into those offering variable returns (i.e. market-linked instruments) and those offering fixed returns (i.e. assured return instruments). By doing so you would be able to ascertain which suits you best (taking into account the factors mentioned above) and will also extend your tax planning exercise to investment planning too.
Let’s discuss in detail the classification into market-linked tax saving instruments and assured return tax saving instruments.
Income Tax Planning with share market-linked instrument..!
If you are young, income is high, and therefore willingness to take risk is high along with your financial goals being far away, then this category would suit you.
Under this category you are investing in the capital markets, giving you variable returns. Following tax saving instruments are available for investment.
** Equity Linked Savings Schemes (ELSS) MF..!
These are MF (mutual fund) schemes, which are 100 % diversified equity funds providing income tax saving benefits. And these are popularly known as Tax Saving MFs.
A distinguishing feature about them is that they are subject to a compulsory lock-in period of three years, but the minimum application amount in most of them is as little as Rs. 500, with no upper limit.
You can either make lump sum investments or investments through the Systematic Investment Plan (SIP).
It is noteworthy that, in the long-term if you intend to create wealth by hedging the inflation risk, then this tax saving instrument can give you luring returns.
Yes, you may say – “but there is risk involved”. Well, no doubt about that, but in order to even out the shocks of volatility in the equity markets you can adopt the SIP route of investing here which will provide you the advantage of “compounding” along with “rupee-cost averaging”.
However a noteworthy point in SIP investing for ELSS is that your every SIP installment (which can be monthly, quarterly or half yearly) should complete the minimum lock-in period of 3 years.
Deduction..!
The maximum tax benefit which you can enjoy under section 80C is Rs. 1 lakh per financial year. Moreover, if you make any long term gains at the time of exit any time after the end of the lock-in period; then you would not have to pay any Long Term Capital Gains Tax (LTCG) too.
Unit-Linked Insurance Plans (ULIPs)..!
These are typically insurance-cum-investment plans which enable you to invest in equity and / or debt instruments depending on what suits you as per your age, income, risk profile and financial goals.
All you simply need to do is, select the allocation option as provided by the insurance company offering such a plan.
Generally they are classified as “aggressive” (which invests in equity), “moderate or balanced” (which invests in debt as well as equity) and “conservative” (which invests purely in debt instruments).
Hence apart from the insurance cover (which is 10 times your annual premium) offered under these plans, the returns which you would get would be completely market-linked as your premium amount (after accounting for allocation and other charges) is invested in equity & debt securities.
And in order for you to track such plans the NAV is declared on a regular basis. These policies have a minimum 5 year lock-in period, and also have a minimum premium paying term of 5 years. The overall term of the policy would vary from product to product.
In case of any eventuality the beneficiaries would be paid the sum assured or fund value, whichever is higher.
But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the long-term; your insurance and investment needs should be dealt separately, thus enabling you to have the optimum insurance coverage & the right investment instruments for long-term wealth creation.
Deduction..!
The premium which you paying for your ULIP would be eligible for tax benefit, subject to the maximum eligible amount of Rs. 1 lakh p.a. as available under Section 80C. Moreover, a positive point is that at maturity the amount which you or your beneficiary would receive is tax free (exempt) as per the provisions of Section 10(10D) of the Income Tax Act.
National Pension Scheme..!
National Pension Scheme (NPS) which was earlier available only for Government employees was later on May 1, 2009 also introduced for people in the unorganised (private) sector, as need for deeper participation in the pension contribution (through this product) was felt.
For NPS, if you (eligibility age: from 18 years to 60 years) belong to the unorganised sector (i.e. private sector); the contributions done by you towards the scheme would be voluntary, and you can invest in any of the two under-mentioned accounts:
Tier-I Account..!
In this account your minimum investment amount is Rs. 500 per contribution and Rs. 6,000 per year, and you are required to make minimum 4 contributions per year. Under this account, premature withdrawals upto a maximum of 20 % of the total investment is not permitted before attainment of 60 years, however the balance 80 % of the pension wealth has to be utilised by you to buy a life annuity.
Tier-II Account..!
For opening this account you will have to make a minimum contribution of Rs. 1,000 per annum. The minimum number of contributions is 4, subject to a minimum contribution of Rs. 250. However, if you open an account in the last quarter of the financial year, you will have to contribute only once in that financial year.
You will be required to maintain a minimum balance of Rs. 2,000 at the end of the financial year. In case you do not maintain the minimum balance in this account and do not comply with the number of contributions in a year, a penalty of Rs. 100 will be levied.
Moreover, in order to have Tier-II account, you first need to have a Tier-I account.
Tier-II account is a voluntary account and withdrawals will be permitted under this account, without any limits.
Even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for tax benefits.
While investing money in NPS, you have two investment choices i.e. “Active” or “Auto” choice. Under the “Active” choice asset class, your money will be invested in various asset classes viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities) & G (Central Government and State Government bonds); where you will have an option to decide your asset allocation into these asset classes.
In case of Auto Choice, your money will be invested in the aforesaid asset classes in accordance with predetermined asset allocation.
But remember, the return on your investment is not guaranteed as it is market-linked. At your age of 60 years, you can exit the scheme; but you are required to invest a minimum 40 % of the fund value to purchase a life annuity. And the remaining 60 % of the money can be withdrawn in lump sum or in a phased manner upto your age of 70 years.
In opinion this product is not very appealing for creating a substantial corpus to meet your retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial planner, and invest wisely as per the plan laid out (which would mostly recommend you equity allocation at younger age, and then as your age progresses balance the asset allocation between equity and debt instruments), then the corpus which you would be able to create will be substantial enough to meet your retirements needs. Also under this scheme, when one withdraws money, at the age of 60 it is taxable.
Deduction..!
If you are an employed individual, you can claim deduction under Section 80 CCD up to 10 % of your salary, which comprises Basic + DA; In case you are a self-employed individual, the restriction up to which you can claim tax benefit under Section 80 CCD is capped at 10 % of your gross total income.
So, the contributions which you make to the NPS account, would be eligible for tax benefit but subject to the maximum eligible amount of Rs.1 lakh p.a. as available under Section 80 C.
Tax Planning the “assured return” way..!
Unlike the case presented above (i.e. tax planning with market-linked instruments), if your age, income, risk profile and financial goals do not permit you to invest in market-linked instruments (for your income tax planning) along with the fact that your risk taking ability is low; then you should plan investing in income tax saving instruments which offer you assured returns.
Under these instruments there is zero risk of erosion to your capital. Following are the income tax saving instruments available under this category:
** Non-Unit Linked Life Insurance Plans..!
Life Insurance plans can be broadly classified as “pure term life insurance plans” and “investment-cum-insurance life insurance plans”.
Pure term life insurance plans are authentic in nature, as they cater to the need of only protection and not investment. Hence such plans offer a high life insurance coverage at low premiums. Generally the term insurance plans offer a policy term of 10, 15, 20, 25 or / 30 years.
Investment-cum-insurance plans on the other hand, as the name suggest offer you an investment option as well as an insurance option. But here your insurance coverage is far lesser, than the one provided under pure term insurance plans. So, you pay a high premium which gets invested, but insurance coverage on the other hand is meagre. Such insurance plans can be offered in various forms such as ULIPs (as discussed above), endowment plans, money back plan, pension plans etc.
Think that while you are considering your insurance needs, you should ideally look at only pure term life insurance plans, thus keeping your insurance needs separate from investment needs.
Deduction.!
Over here too the premium which you paying for your such non-ULIP life insurance plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs. 1 lakh p.a. as available under Section 80 C.
Moreover, a positive point is that at maturity the amount which you or your beneficiary would receive is exempt (tax free) as per the provisions of Section 10(10D) of the Income Tax Act.
** Public Provident Fund..!
The Public Provident Fund (PPF) scheme is a statutory scheme of the Central Government of India.
In order to invest in PPF, you are required to open a PPF account (which is irrespective of your age) at your nearest post office or public sector (nationalized) bank providing this facility.
You can open the account in your name, and also in the name of your wife as well as children. If you do not wish to open a separate account in the name of your wife as well as children, you can nominate them; but joint application is not permissible.
The account so opened will have an expiry term of 15 years from the end of the year in which the initial investment (subscription) to the account is made. You can invest in the account ranging from a minimum of Rs. 500 to a maximum of Rs. 1 lakh in a financial year in order to enjoy the income tax saving benefit under Section 80 C, and the amount to the credit of your account will be entitled to a tax-free interest at 8.8 % p.a.
Your each deposit in the PPF account should at least be Rs. 500, and one has the convenience of depositing in either lump sum or in installments not exceeding 12 such installments.
However, a noteworthy point is that it is not necessary to deposit every month and the amount too can be any amount subject to the minimum (Rs. 500) and maximum (Rs. 1 lakh) amount.
The interest to the account will be calculated on the lowest balance to the credit of the account between the close of the 5th day and the end of the month, and will be credited to account on 31st of March, each year.
As regards withdrawal from the account is concerned; it is permitted any time after the expiry of 5 years from the end of the year in which initial investment (subscription) to the account is made.
However, your withdrawal will be restricted to 50 % of the amount which stood to the credit of your account in the immediate 4th year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is over, you can withdraw the entire amount together with the interest accrued till the last day of the month, preceding the month in which application for withdrawal is made.
After your term of 15 years is over if you wish to renew your account, you can do so for a period of another 5 years at the rate of interest prevailing then, without having the compulsion of putting any further deposits in case of extension. The withdrawal in case of extended accounts is permissible once in every financial year. But the total withdrawal should not exceed 60 % of the balance accumulated to the account at the commencement of the extension period (of 5 years).
It is noteworthy that if you are risk averse, then this product is best in its class for tax planning. Moreover, it also offers you an appealing tax-free return of about 8 % p.a. (compounded annually).
Deduction..!
The contributions which you make to the accounts mentioned above, would be eligible for tax benefit but subject to the maximum eligible amount of Rs. 1 lakh p.a. as available under Section 80 C.
National Savings Certificate..!
The National Savings Certificate (NSC) is also a scheme floated by the Government of India, and one can invest in the same through your nearest post offices, as the scheme is available only with the India Post.
The certificates can be made in your own name, jointly by two adults, or even by a minor (through the guardian), and has a tenure of 5 years or / 10 years.
The minimum amount which you can invest is Rs. 100, with no maximum limit to the same. NSC maturing in 5 years offers interest at 8.6 % per year compounded half-yearly whereas NSC maturing in 10 years offers interest at 8.9 % p.a. compounded half-yearly, thus giving you an effective interest rate of 8.78 % p.a. and 9.09 % p.a.
The interest income accrues annually and is reinvested further in the scheme till maturity (i.e. 5 or / 10 years) or until the date of premature withdrawals.
Premature withdrawals are permitted only in specific circumstances such as death of the holder.
Deduction..!
Your investment in NSC is eligible for a deduction of upto Rs.1 lakh p.a. under Section 80C. Furthermore, the accrued interest which is deemed to be reinvested qualifies fordeduction under Section 80 C.
However, the interest income is chargeable to tax in the year in which it accrues. But in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable.
** Bank Deposits and Post Office Time Deposits..!
The 5 Year income tax saving bank fixed deposits available with your bank is also eligible for a deduction under Section 80 C and comes with a lock in period of 5 years.
The minimum amount that you can invest is Rs. 100 with an upper limit of Rs. 1 lakh in a financial year.
The interest rates offered by some of the popular banks are as under:
| Bank Name | Interest Rate (%) | ||
| General | Senior Citizens | ||
| Axis Bank | 8.25 | 9.00 | |
| HDFC Bank | 8.75 | 9.25 | |
| ICICI Bank | 8.50 | 9.25 | |
| IDBI Bank | 9.00 | 9.75 | |
| State Bank of India (SBI) | 8.75 | 9.25 | |
** Tuition fees paid for children’s education...!
The tuition fees (maximum 2 children) that you pay to any school, college, university or other educational institution situated within India for your children’s education is also eligible for deduction under section 80 C.
However the fees paid towards any coaching center or / private tuition may not be eligible. Also you need to note that this deduction is available only to Individual Assesse and not for HUF, and is limited to Rs.1 lakh and a maximum 2 children. If someone has 4 (Four) children, then husband & wife both enjoy a separate limit of two children each, so they can separately claim deduction (upto Rs.1 lakh) for 2 (Two) children each, subject to the amount they have actually paid.
Principal repayment on Home Loan..!
You always wanted to have your dream house and now you have been able to get it with the help of home loan from a bank or financial institution. But after you have got your home through this loan, you have the obligation to repay the principal amount of the loan on time.
The “repayment of principal amount”, makes you eligible to claim a deduction upto a sum of Rs. 1 lakh under section 80 C; and that benefit is available with you immaterial of the fact whether you stay in the same property (Self Occupied Property - SOP), or / have let it out on rent (Let Out Property LOP).
You can also claim tax benefit on the interest you pay on your housing loan, but under a separate section (this is covered in detail at the later stage in the guide)
Src: www.PersonalFN.com
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