80C Investment Guide: How to Save Your Salary from hefty Tax Deductions?

80C Investment Guide: How to Save Your Salary from hefty Tax Deductions?

Are you looking for ways to save some tax? If yes, your first avenue should be Section 80C of the Income Tax Act. 80C enables taxpayers to claim various deductions from his/her total income so that they can bright down their taxable income and reduce tax outgo. Though the various sections and their respective sub-sections branch into multiple clauses, various investments and deductions available can be used by nearly all taxpayers. This guide examines how to save tax through 80C – the most widely used section of Income Tax Act.

What is 80C in Income Tax?

Under Section 80C, you can claim a maximum deduction of Rs 1,50,000 through various investments and expenses from your total income for a particular financial year.

Investments eligible for Tax Deductions:

  • Life Insurance
  • Public Provident Fund (PPF)
  • Employee Provident Fund (EPF)
  • Unit Linked Insurance Plan (ULIP)
  • Tuition fees
  • National Savings Certificate (NSC)
  • Home loan
  • Sukanya Samriddhi Scheme
  • Donations
  • Equity Linked Savings Scheme (ELSS)
  • Senior Citizens Savings Scheme
  • Tax Saving Fixed Deposits
  • 5 Year Post Office Time Deposit

1. Life Insurance

Any amount for premiums paid toward life insurance policies is eligible for tax benefits. The deduction can be claimed for premiums paid for insuring self, spouse or children. If you are paying for the premiums of more than one insurance policy, all premiums can be included.

2. Public Provident Fund (PPF)

PPF are long term investments supported by the government of India. PPF can be opened by any resident Indian individuals, both salaried and non-salaried person, either in their own name or in the name of a minor child. The maturity period of a PPF account is 15 years, which can be further extended to 5 years. The current rate of interest is 7.9% p.a. (compounded yearly). Partial withdrawals are allowed only after 7 years and premature closure can be done after 5 years. Minimum investment limit is Rs 500 and maximum Rs. 1.5 Lakh. The deduction limit for PPF deposits is maximum Rs 1.5 Lakh.

3. Employee Provident Fund (EPF)

Salaried individuals are required to contribute a minimum of 12% of their basic salary to EPF account. The amount is deducted from their monthly payroll where an employer is required to make the equivalent contribution towards Employees’ retirement kitty. If an employee wish, s/he can contribute a higher sum through voluntary contributions (VPF). Employee’s share of contribution to provident fund qualifies for 80C deduction. If the basic salary of an employee exceeds Rs 15,000 per month, s/he has the option to join the scheme. Otherwise, s/he has to contribute to the provident fund compulsorily. A person can’t withdraw his/her PF balance as s/he continues to work except in exceptional circumstances, for example, construction, marriage/education of children. Also, a person can withdraw the amount if s/he quits the job and doesn’t take up employment within two months with an employer covered by the PF Act. The interest rate offered on EPF is 8.55%.

4. Unit Linked Insurance Plan (ULIP)

Unit Linked Insurance Plan (ULIP) is a life insurance product that is an attractive combination of investment and insurance. A portion of the amount invested in ULIPs is used to provide risk cover, and the balance amount is invested in the stock market. An investor can purchase a ULIP for self/spouse/children. Child can be minor or major, married or unmarried, dependent or independent. As ULIPs are market-linked, the rate of interest varies. A person can invest higher than 1.5 lakh but the maximum deduction allowed is up to 1.5 lakh. Investment, withdrawals and maturity amount are tax-exempted.

5. Tuition fees

A parent can claim a deduction on the amount paid as tuition fees of their children. However, it needs to be mentioned here that this fee doesn’t include other expenditures, like transport or development fees. The maximum deduction that can be claimed on payments made towards tuition fees is up to Rs. 1.5 lakh in addition to the deduction in respect to PF, pension, insurance premium, etc. in a financial year.

6. National Savings Certificate (NSC)

Esteemed to be one of the highly secured investments and one of the best tax saving schemes in India, NSC is a postal department’s saving scheme that comes with a lock-in period of 5 & 10 years. The interest rate for NSC Issue VIII is 8.5% p.a. while for NSC Issue IX is 8.8% p.a. Though the interest is calculated annually, it is paid only at the time of maturity. Minimum investment limit is Rs 100, and there is no bar to the maximum limit. Interest earned on the amount invested in NSC is taxable, but because it is counted as a fresh investment, it qualifies for 80C deduction. The maturity amount falls under tax benefits.

7. Home loan

Home loans are eligible for tax benefits. Comprising of two components- the principal and the interest, you can get a tax benefit on both the elements, based on certain criteria. Under Section 24 of the Income Tax Act, you are qualified for a deduction on home loan interest repayment up to Rs. 2,00,000 (Rs. 3 lakh for senior citizens). You can also claim additional exemption of up to Rs. 50,000 on interest paid for loans upto Rs 35 lakh with the cost of home upto Rs. 50 lakh. However, you aren't eligible to make use of this exemption in case you opt to rent out your property. The tax benefit is also applicable to the loans taken from family and friends.

As discussed above, you can also claim a deduction on the principal amount under Section 80C up to a maximum of Rs. 1,50,000 (Rs 2 lakh for senior citizen). If two or more person avails the housing loan, each of them is eligible to claim a deduction on interest paid (up to Rs. 2 lakh each) as well as on the principal paid for an amount upto Rs. 1.5 lakh each. However, to avail this benefit, all applicants should be co-owners of the property.

8. Donations

If you have made any donations towards specified NGO, relief funds and charitable institutions, under section 80G of Income Tax Act, you are eligible for deduction up to either 100% or 50% (whichever is permitted for that specific entity) of the amount. However, from FY 2017-18 onwards, any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. The deduction can be claimed only when the contribution has been made via a cheque/draft/cash. Deduction is not allowed from donations made in cash exceeding Rs 10,000.

9. Sukanya Samriddhi Scheme

Sukanya Samriddhi Scheme is a good investment option and saving plan for girl child available at present. Parents/guardians of a girl child are eligible to invest in this scheme. They can open an account in the name of the child tills she attains the age of 10 years. Maximum two accounts can be opened by either the biological parent or legal guardian for two girl child. The account can be opened at post offices or public sector banks. Rate of interest currently being offered is 8.4%, compounded annually. Minimum investment limit is Rs. 1,000 and maximum 1.5 lakh p.a.

10. Equity Linked Savings Scheme (ELSS)

ELSS is an open-ended Equity Mutual Fund that allows taxpayers to save tax and grow their money at a comparatively faster rate. Whether you invest in one or multiple ELSS schemes, you can claim a maximum deduction on investment or Rs. 1.5 lakh in a financial year. The same rule applies to SIPs too. The minimum lock-in period for this investment scheme is 3 years. ELSS provides inflation-adjusted growth in the longer run, and so, the rate of interest varies according to the fund. The minimum investment limit is Rs 500; there is no upper limit.

11. Senior Citizens Savings Scheme

As the name suggests, this scheme is only for senior citizens. It allows persons, aged more than 60 (age 55 years but less than years, who has retired under VRS (voluntary retirement scheme), to open an account is s/he fulfills two conditions. First, the account should be opened within 1 month of receipt of retirement benefits; second, investment amount should not exceed the amount of retirement benefits. Maturity period is 5 years, and the account can be extended for 3 years after maturity. The interest rate offered is 8.4% p.a., paid on a quarterly basis. Minimum investment limit is Rs 1,000, and the maximum is 15 lakh. Maturity amount is exempted from tax, and a senior citizen can claim a deduction for a maximum up to Rs 50,000 in a single financial year.

12. Tax Saving Fixed Deposits

They are similar to any bank FDs except they come with a lock-in period of 5 years. All resident individuals along with senior citizens above the age of 60 years can open an FD account. Maturity period is 5 years. The rate of interest varies from time to time and different banks ranging from 5.5% to 7.75%. Minimum investment limit is Rs 1000 and interest earned is taxable.

13. 5 Year Post Office Time Deposit

5 Year Post Office Time Deposit can be opened by any individual in any branch of Indian Post Office. Maturity period is 5 years, and the rate of interest is 7.8% (interest rates from 1st January, 2019) calculated quarterly and payable annually. Minimum deposit limit is Rs. 200. There is no maximum limit under this scheme but the deposits made should be multiples of Rs 200 only. Though the investment is eligible for tax exemption under 80C, interest earned under this scheme is fully taxable. Depositors can claim a tax deduction of up to a maximum of Rs 1,50,000. Maturity amount is exempt from tax.

The key to saving maximum tax lines in matching your financial goals with various investment options available for claiming Rs. 1.5 lakh deduction under 80C.

(All care has been taken to maintain the accuracy of the information detailed in this blog. Aviva, however, assumes no responsibility about the accuracy of the blog or of the actions taken based on it. Please do refer to the Income Tax Department’s online tax filing site, https://www.incometaxindia.gov.in/Pages/tax-services/file-income-tax-return.aspx, for any further clarifications)
AN Feb 59/18
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