Last Updated: Dec 28, 2023 Value Broking 10 Mins 2.9K
  •  Understanding tax saving.
  •  Tax saving options u/s 80C.

Come tax saving season and everyone makes a beeline for section 80C. So, what is the big hue and cry about? Let’s find out:

You, as an investor, are looking to create wealth and save tax. To do the latter, you look at deductions, exemptions and rebates. These are found u/s 80 of the Income Tax Act of India—1961.

Section 80C allows you to avail a tax deduction, if you invest up to Rs. 1.5 lakh, per financial year. The most common investment avenues under this section are, traditional options like PPF, Life Insurance, Bank FDs, NSC and NPS. If you prefer more dynamic investments, ELSS mutual funds, will reduce your tax liability too.

Equity-Linked Savings Scheme (ELSS)

Considered the most lucrative investment option, it also gives you an exposure to equities. It is the only product in its asset-class (of equity mutual funds), which qualifies as one of the tax saving investments under 80C. People’s perception is, equity and tax saving can’t go hand-in-hand, but an ELSS offers just that.

With historic rates of returns up to 18 percent, you can also create and grow wealth. What’s more? It has the shortest lock-in period among all other investment options under the section.

Some might point out the associated risks, however, these risks are mitigated. That’s because, first, you’re protected from direct market participation; second, a longer investment holding period ensures, you can recover your losses from NAV fluctuation.

Finally, you can choose to invest in this type of fund, either in a lump-sum, or, through SIP. If you choose the latter, your risk is spread across intervals, reducing it.

Unit-Linked Insurance Plan (ULIP)

This is a type of mutual fund, giving you an added protection of insurance. The schemes can be wholly equity, wholly debt, or hybrid. Since you get exposure to debt- and/or equity-oriented underlying securities, you get good returns from equities (historically 12 to 14 percent). Additionally, your risk from market volatility, is mitigated by the stability of debt. You can add an investment in this plan, to your list of tax saving investments under 80C.

Life Insurance

Exorbitant premiums and ambiguous clauses, make many people wary of taking a life insurance policy. But did you know? Your life insurance premium can give you a tax break under Section 80C. This deduction must not be confused with health insurance. We will look at health insurance tax benefits later in the article.

Public Provident Fund (PPF)

It’s one of the oldest and most traditional tax saving investments in India. The popularity of PPF accounts declined after the introduction of more tax saving investment options. However, it is still an option you can explore. You can contribute as little Rs. 500 to your PPF account; the maximum investment and balance, in this account, is Rs. 1.5 lakh, in any financial year. It has a lock-in period of 15 years, which means you cannot close it before that. Part withdrawal is allowed (on a case-to-case basis), after regularly contributing for 6 years. Apart from the tax break, having a PPF account encourages savings. It can be a great source of financial security after retirement.

A PPF can be grouped with other Small Savings Schemes offered by the Central Government. The others are National Pension Scheme (NPS), Senior Citizens’ Savings Scheme (SCSS), NSC, and/or, Sukanya Samriddhi Yojana (SSY). All these are considered the safest, because they’re backed by the Central Government of India. Small savings require a lower, initial (and subsequent) contribution, of Rs. 500. They’re not aimed at providing instant returns, but financial security. All of them qualify for a tax deduction.

Employee Provident Fund (EPF)

This is available only for salaried individuals. If you’re a wage-earner, a part of your monthly pay (about 12%), goes toward an EPF account. This amount is eligible for benefits under 80C. Your employer also makes an equal contribution, but that doesn’t qualify for a tax benefit. Your EPF account is valid only up to the time you stop getting a regular salary.

So, when you change jobs, your new company will proceed to transfer your EPF account to their records (from your previous company). You have the option to take a loan on EPF, however, make sure to check the requirements and eligibility.

Tax Saving Bank Fixed Deposits (FD)

Some FDs are called tax saver FDs and the features are a bit different. Traditionally, these are considered the safest, and best way to save money. Maturity periods range from 6 months to 10 years. Tax saving FDs have a lock-in period of 5 years. This means, you can’t break them before maturity. You can open one with a minimal amount of Rs. 1000. An investment in this, can be added to your list of tax saving investments under 80C.

Home Loan Principal

When you apply for a loan and it is disbursed, you have to pay it off in Equated Monthly Installments (EMIs). This EMI has two components, a principal and an interest. You can claim a tax benefit on both these components. The principle component of a home loan qualifies for deduction under 80C. One important thing to note, you cannot claim any tax benefit if you sell your property. In fact, any sale within 5 years of taking the loan, makes you liable to pay tax on the principle amount paid during that period. This will be computed in the financial year of when the sale took place.

Home Loan Interest

As mentioned earlier, a home loan EMI has 2 components, the principle and interest. While the principal qualifies for deduction under 80C, you can claim a rebate for the interest component. Section 24B allows a rebate up to Rs. 2 lakh in a financial year. You have to request for an income tax statement on your home loan. This statement gives you an annual break-up of your EMIs’ contribution to the principle and the interest.

There are several other tax benefits of taking a home loan, here is a table summary of all of them.

DeductionsSectionMaximum Deduction (Rs.)Conditions
Principle80C1.5 LakhHouse property should not be sold within 5 years of possession.
Interest24B2 LakhLoan must be taken for purchase/construction of a house and the construction must be completed within 5 years from the end of financial year in which loan was taken.
Interest80EE50,000Amount of loan taken should be INR 35 lakhs or less and the value of the property does not exceed INR 50 lakhs.
Stamp Duty**80C1.5 LakhCan be claimed only in the year in which these expenses are incurred.

*Benefits u/s 80EE is for first-time home loan buyers. Another pre-condition is, the loan must have been sanctioned between 1st April 2016 to 31st March 2017.

**Tax benefits on stamp-duty and registration charges on a home loan are applicable for the financial year in which the charges occurred.

Now you’ve seen how you can optimise section 80C, one important thing to note, all your investment options should not exceed Rs. 1.5 lakh. Let’s look at one of the important tax saving instruments other than 80C.

Health Insurance Premiums—80D

Your regular health insurance policy covers hospitalization, health check-ups, and/or medical expenses.

Tax benefits on these premiums are covered under section 80D of the Income Tax Act of India—1961. Here is a table summary of what to expect:

Medical Insurance CoverExemption Limit (Rs.)Health Check-Up Exemption (Rs.)
For self and family25,00025,000
For self and family including parents(25,000+25,000) =50,0005,000
For self and family including senior citizen parents(25,000+50,000) =75,0005,000
For self (senior citizen) and family including senior citizen parents(50,000+50,000) =100,0005,000
  •  If you’re paying health insurance premiums for immediate family—spouse and dependent children—your tax benefit is up to Rs. 25,000 in a financial year.
  •  An additional benefit of Rs. 25,000, is applicable if you’re also paying health insurance premiums for your parents.
  •  This benefit doubles to Rs. 50,000 (after 2018 Union Budget regulations), if your parents are senior citizens.
  •  If you and your parents are senior citizens, the maximum applicable benefit becomes Rs. 100,000.

Let’s understand this better with an example: 45-year-old Sameer, is paying an insurance premium of Rs. 35,000 on his policy. He is also paying Rs. 45,000 for his father’s policy. Sameer’s Dad is 65 years old, what will be Sameer’s tax benefit? For his policy premium, Sameer can claim a benefit up to Rs. 25,000. Since the premium amount, for his father’s policy, is less than the limit for senior citizens’ benefit (under 80D); the total deduction, he can claim for the financial year is Rs. 70,000.

Another important point to note, the exemption under 80D includes preventive health check-up of Rs. 5000. It is not an add-on to the premium. For example: Rajesh has paid a health insurance premium of Rs. 24,000 in this financial year. He also had a health check-up for Rs. 3,000 in the same financial year. From the maximum deduction limit, Rajesh can claim Rs. 25,000. Rs. 24,000 toward the premium paid, and Rs. 1,000 for the health check-up.

You can claim benefits on insurance premiums of your spouse or parents, even if they’re employed. Let’s look at when you cannot claim tax benefits:

80D Benefits Cannot Be Claimed

  •  If the premiums are paid in cash. Premiums paid via cheque, internet banking, debit or credit cards are acceptable.
  •  For premiums paid under group health insurance policies. These include any policy given by your employer.
  •  For premiums paid for policies of employed children. If your children are financially independent, but you’re paying the premium, you cannot claim a tax benefit.

There are more tax saving instruments other than 80C, like, Education Loans and/or Donations.

Interest on Education Loan—80E

If you’ve availed of an education loan for you, or your child/legal ward. The interest repayment is eligible for tax deduction, while filing income tax return. This is over and above 80C, and there is no cap on the interest amount.

Donations—Section 80G

Section 80G of the income tax law provides tax benefits on amount donated to NGOs, trusts, and/or religious buildings. The donations have to be made to government approved entities. The limit for cash donations is Rs. 2000, if you want to avail a tax benefit. Donations made via cheque, demand-draft, or online, have no restrictions, for a tax break. The deduction can be either 50 per cent or 100 per cent. You do need to quote your PAN, while making a donation. Also, during tax computation, the receipt/s need to be submitted. Along with your tax return. These are used as proof of authenticity.

This is a summary of all the important (and often overlooked) tax saving investments in India. You should be aware of these, so you can optimise them and reduce your income tax liability.