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How to Best Use of Section 80C Deduction of Income Tax

You can avail tax benefits under various sections of the Income-Tax Act. But the most common, and also most popular, are the deductions available under Section 80C of the I-T Act, which are allowed for making investments in certain specified instruments.

In fact, several investments, expenses and payments are allowed to be claimed under Section 80C, which sometimes become the only investment option for a lot of taxpayers. Maximum deduction, however, cannot exceed Rs 1,50,000.

Here we are taking a look at some of the specified instruments for 80C deductions and how to make the best use of it:

Eligible Investments
1. PPF: You can open a PPF account and claim deduction on the deposits made. A maximum of Rs 1,50,000 is allowed to be invested in one financial year, while the minimum investment required each year is Rs 500. Interest is compounded annually and is reset quarterly. Interest on PPF account is fully tax free. “The PPF account matures after 15 years. Receipts on maturity or withdrawals are tax free. You can also open a PPF account for your spouse or child and claim a tax deduction in your tax return for deposits made. For a HUF, it can be in the name of any member of the family,” says Archit Gupta, CEO & Founder, ClearTax.in.

2. National Savings Certificate: National Savings Certificates or NSCs are eligible for deduction in the year they are purchased. These can be bought from a designated Post Office. Their term is for 5 years and interest earned is compounded annually. Deposits qualify for tax rebate under Sec. 80C of the I-T Act. Interest is also eligible for deduction under Section 80C during the term of the NSCs (except the last year).

3. Sukanya Samridhi Account: A maximum of Rs 1,50,000 can be deposited in the Sukanya Samridhi Account for a girl child. Interest rate is compounded annually. This interest is fully exempt from tax. A minimum of Rs 1,000 must be deposited in a year. Receipts on maturity from the account are tax free.

4. ELSS: ELSS or Equity Linked Savings Scheme is a type of mutual fund investment. Investments made in ELSS funds during the financial year are eligible for deduction under Section 80C. These funds have a 3-year lock in period.

5. ULIPS or Unit Linked Insurance Plan: ULIPS sold with life insurance are also eligible for deduction under Section 80C. Includes contribution to Unit Linked Insurance Plan of LIC Mutual Fund, e.g. Dhanraksha 1989 and contribution to other Unit Linked Insurance Plan of UTI.

6. Five-Year Fixed Deposits: Most banks offer tax-saving fixed deposits that provide tax benefits on the amount deposited in them. These deposits come with a mandatory lock in period of 5 years and can have a maturity period ranging from 5 years to 10 years. The limit of investment in these deposits is determined by the bank and can range from Rs. 1 lakh to Rs. 1.5 lakh in a year. It needs to be noted that not all FD investments are eligible. Only the ones made in tax-saving FDs are.

7. EPF or Employee’s share of PF Contribution: Employee contribution to EPF is also eligible for deduction under Section 80C. 12% of your basic + DA is deducted by the employer and deposited as your contribution in Employee’s Provident Fund Scheme or Recognized Provident Fund.

8. Sum deposited in Five-Year Deposit Scheme in Post Office.

9. Amount deposited under Senior Citizens Saving Scheme.

10. Subscription to any notified securities/notified deposits scheme. e.g. NSS

11. Contribution to notified Pension Fund set up by Mutual Fund or UTI.

12. Sum paid as subscription to Home Loan Account Scheme of the National Housing Bank or contribution to any notified deposit scheme/pension fund set up by National Housing Bank.

13. Subscription to deposit scheme of a public sector, company engaged in providing housing finance (public deposit scheme of HUDCO).

14. Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara and Jeevan Akshay) or Units of UTI / notified Mutual Funds.

15. Subscription to equity shares/ debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions.

16. Subscription to any notified bonds of NABARD (National Bank for Agriculture and Rural Development).
How to Best Use of Section 80C Deduction of Income Tax

Eligible Expenses
1. Life Insurance Premium: All life insurance premium payments, include those paid for Unit Linked Insurance Plans, are also eligible for tax benefits under section 80C. Even if your policy covers other family members, you can claim the tax benefits for the premiums paid. The limit for claiming these benefits is Rs. 1.5 lakh. This means that if you make no other investments but pay Rs. 2 lakh towards a life insurance policy, then Rs. 1.5 lakh out of it will be eligible for tax benefits. This benefit will only apply if the premium is paid by you, not if your wife or husband or parents pay the premium.

2. Children’s Tuition Fee: Tuition fees paid to any school, college, university or other educational institution situated within India for the purpose of full time education of any two children (including payments for play school, pre nursery and nursery).

3. Principal Repayments on Loan for purchase of House Property: Principal repayment of loan taken for buying or constructing a residential house property is also eligible for tax benefits. “Deduction is also allowed for stamp duty, registration fees and other expenses of transfer of such property to the taxpayer. However, if the property is transferred or sold before the expiry of 5 years from the end of the financial year in which its possession was taken, the total deduction allowed for various years shall be taxed in that year,” says Gupta.

4. Sum paid for securing Deferred Annuity: Sum paid under non-commutable deferred annuity for an individual on the life of the taxpayer, spouse or any child is allowed for deduction. Also allowed on sum deducted from salary payable to Govt. servant for securing deferred annuity for self-spouse or child. Payment is limited to 20% of salary.

Making the best use of Section 80C
It is clear, thus, that there are various specified instruments available in the market today for 80C deductions and it is up to you to make the best use of it.

One of the best ways to save tax and make full use of the Rs. 1.5-lakh limit on Section 80C, however, is to own a home loan. You are allowed to claim tax deductions up to Rs. 1.5 lakh under 80C. Not just that, you’re allowed further deductions of Rs. 2 lakh under Section 24B. “Then, there’s an additional deduction up to Rs. 50,000 for first-time home owners who have a home loan under Rs. 35 lakh for a piece of property worth less than Rs. 50 lakh. Hence, in terms of the pure volume of tax that a home loan can save for you, there’s nothing like a home loan,” says Adhil Shetty, CEO of BankBazaar.

When we’re talking purely of investing for returns, the best small savings schemes available to us are PPF (8% per annum), National Savings Certificate (8%), Sukanya Samriddhi Scheme (8.5%) and Senior Citizen’s Saving Scheme (also 8.5%). Of these, PPF and SSS enjoy a triple-exempt tax status, implying that your investment is completely tax-free.
If you’re looking for market-linked returns, you should consider investing in ELSS and equity ULIPs, which invest your money in the stock market. Your ELSS investments and ULIP premiums are exempt under 80C. Since your money is being invested in equity, it is at risk. However, “long-term returns can be much higher than debt-oriented investment options. As per the CRISIL-AMFI ELSS Fund Performance Index for December 2016, the ELSS fund category has earned 3.35% in the last one year, 16.64% in three years, 17.71% in five years, and 10.61% in 10 years,” says Shetty.

You should also buy life insurance, especially if you have dependents. All premiums paid towards life insurance plans are tax exempt up to Rs. 1.5 lakh. It would be wise for investors to have life term plans and plan investments around 80C to earn higher returns than endowment insurance plans.

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