Earlier I have published Tax Planning for 2009 – Part 1. The previous post explains the basic stuff on tax savings using the home loans and the fixed deposit schemes. It doesn’t look into any specific section of the income tax act. This part of the article will be looking into section 80c of the income tax act. Section 80c is the important provisions and provide maximum of Rs.100000 savings under this section alone. So, it is better every one to understand the different options available under section 80c before you file taxes online. Total amount of Rs.100000 can be divided into many different investments based on your interest and the financial status. I will explore the various options inside this particular section 80c and suggest you the investment plans. I would like to answer all your queries, please post it in the comments section. You can subscribe to our future articles here.
What is Section 80c?
Let’s jump into the section 80c, and explore what are the different investment plans provided in this section. The section 80c is introduced from April, 2006 for increasing the tax benefits. Prior to this section, another section 88 provided some of the same benefits. To increase the tax benefits, section 80 has been added with many other investment options with tax provisions. In this section we will see what are the sub categories under the section 80c, later sections we will look into each category in details. The limit under this section is Rs 100,000. Also, there are no sub-limits under(except Rs.70000 limit for PPF) this overall Rs 100,000 amount.The following are the list of options available:
- Public Provident Fund(PPF)
- National Savings Certificate(NSC)
- Equity Linked Savings Schemes(ELSS)
- Principal payment of Home Loans
- Life insurance premium
Public Provident Fund(PPF)
PPF is one of the best investment schemes under section 80c. The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000. The only problem with the PPF is your investment will be locked in for 15 years. That means you can not close the PPF account before 15 years. But, you will get the option for loans and with drawls from your PPF account. The following are the key points to consider while opening the PPF account:
- You can apply for a loan from your PPF account starting third year to sixth year.
- The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year.
- You can make withdraw from the sixth year. Maximum limit for withdrawing is 50% of balance in end of forth financial year.
- For example, if the account was opened in 2000-01 and the first withdrawal was made during 2006-2007, the amount you can withdraw is limited to 50% of the balance as on March 31, 2003, or March 31, 2006, whichever is lower.
- If the account extended beyond 15 years, partial withdrawal of up to 60% of the balance you have at the end of the 15 year period is allowed.
- 8% p.a. interest will be given to the deposit in PPF. The real good thing is the interest income is fully tax exempt. Unlike other deposits FD,etc. interests are taxable.
- The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.
- It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits.
- One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.
- The Public Provident Fund Scheme is a statutory scheme of the Central Government of India.
- PPF account can be opened either in Post Office or in a Bank
- The account holder can retain the account after maturity for any period without making any further deposits. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
National Savings Certificate(NSC)
- National Savings Certificate(NSC) is popularly known as the post office savings scheme and it is suitable for the most people. The lock in period for the NSC is just six years. That means the investment will reach the maturity within six years. Where as PPF has the long lock in period of 15 years. It is one of the reason why many people choose the NSC.
- An adult in his own name or on behalf of a minor,A minor,A trust, Two adults jointly, Hindu Undivided Family can buy a NSC scheme.
- The minimum amount can be deposited in this scheme is Rs.100 and there is no maximum limit. You can buy this scheme in any of the post offices in your city.
- The interest rate is 8% and it will be compounded every six months.
- The drawback with NSC is the interest income from the deposited money is taxable. You have to declare the income in accrual basis every year. If you are not showing the interest income on accrual basis, then you will have to pay the entire tax amount on maturity time. That may cause loss for you.
Equity Linked Savings Schemes(ELSS)
ELSS is special kind of mutual funds where in the units of funds will be invested in equity shares. This is one of the most popular investment options because they yield the highest return compare to any other investment options like PPF,PF,FD,etc. If you can select the good ELSS scheme, then it will give you good return. Before selecting any ELSS scheme look into the track record of the ELSS products. There is numerous products available in the market, you can see many sales people try to convince us to select their product. Please don’t hurry and drop into any wrong ELSS scheme. It may cause loss for you. Because the ELSS returns are linked to shares, depends on the wise investment on the stock market only it will return good money. If the person who you selected as the ELSS doesn’t have good knowledge on the market, that will affect your earnings.
The main advantage of ELSS is its short lock-in period. Whereas the lock-in period of ELSS is only 3 years. The main drawback for these schemes is that the risk component is much higher compared to the traditional tax saving products. Also, premature withdrawal from these schemes is not allowed whereas it is allowed in other instruments in some specific conditions. The main drawback for these schemes is that the risk component is much higher compared to the traditional tax, saving products.
Principal payment of Home Loans
Under the section 80c you can claim Rs.100000 as the principal repayment for your home loans. Not that this does not include your interest payment on the home loans. That provision is covered in the section 24b. I have written detailed article on Home Loans and Income Tax Benefits and Interest Payment. If you pay the principal of Rs.100000 every year, there is no further investment under section 80c.
Life insurance premium
It is most common investment plan amoung us. But, there is misconception about the investment and insurance. Insurance is for protect your life and can be invested small amount of money. Compare to other investments, investing on insurance is not much profitable. So, please don’t make the mistake of choosing insurance as the primeary investment option. Under section 80c you can claim the tax deduction for the insurance premium.
A lot of us confuse Investment and Insurance. Investment is something that we save up to use while we are alive. Insurance is something we save up for our family to use once we are gone. The goals of Investment and Insurance are totally different. A lot of us take Insurance policies as investments. This is the reason why there are a whole group of people running behind us telling us how great their new Insurance policies are.
Case Study for Section 80c
Let’s study some examples for how to invest on the section 80c. I will write the examples and provide the solution for how one can utilize the options available in section 80c.
case study – 1 :
Mr.Deepan is working for a software company in Bangalore and his salary is Rs.450000 per year. He is planning to avail the maximum tax benefits for his earnings and he is not much aware of the income tax rules and various sections. Think Plan Invest will suggest him ths suitable investment plans for Deepan.
The plans may varry for different persons depends on the financial status of a person and income. I would write the common way for reducing the tex. Before start, learn about the tax slab for the male candidate as per income tax law :
Income Range Tax
Upto Rs.150000 No Tax
Rs.150000 – Rs300000 10%
Rs.300000 – Rs.500000 20%
Above Rs.500000 30%
The above tax slab is for men. If you take our case study, the taxable income for Deepan is Rs.300000 (450000 – 150000). He falls under the second option of paying 10% tax for his Rs.300000 taxable income. If he opt for no tax planning, will end up paying Rs.30000 (300000 * (10/100)) for entire year.
Many people not understanding the tax savings properly. That is the main reason why they are not very successful in saving the tax money. Every person is liable to pay tax for their income. Normally the amount you have to pay tax is called taxable income. If the taxable income is more, the tax will be more. Income tax act provides certain exemptions where you can reduce the taxable income by implementing those exemption strategies.
For example, if you are investing Rs.20000 on Life insurance premium every year, then Rs.20000 will be deducted from your taxable income and pay the tax for remaining amount. In our case, Deepan will have to pay the tax for Rs.280000(300000-20000) which is Rs.28000. He saves Rs.2000 from the tax. When the income increase the tax liability also will increase.
Lets go back to our case study. Deepan’s taxable income is Rs.300000. Now he has to plan what are the ways to reduce the taxable income. In this article section 80c specifies Rs.100000 can be exempted from the tax. If he is paying any home loans, the principal repayment of the home loans up to Rs.100000 is tax exempt else he can invest Rs.100000 on the fixed deposit or insurance premium,etc. For the highest return you can choose ELSS . The investment options are individuals interest and if you need any personal guidance please post it in the comments section, I will answer all your queries or consult any tax experts. He reduced his taxable income to Rs.200000.
If he wants to reduce the taxable income further, he has to refer the other sections related to income tax exemptions. As this article intend to explain the section 80c, I will end up the case study. I will write the next part of this series with other sections where he can save more tax amount.
This article explains section 80c and various investment options available under this section. I have explained Public Provident Fund(PPF), National Savings Certificate(NSC), Equity Linked Savings Schemes(ELSS), Principal payment of Home Loans, Life insurance premium concepts in details. The case study which provides the details on how to reduce the tax liability. I hope this article helped you to understand taxable income and the section 80c. I would like to answer all your doubts, please post your feedbacks in the comments section. Thank you for reading this article!!!
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