Section 80C of Income Tax Act for tax exemption- What are the limits, components, list of deductions and tax benefits under Section 80C in 2014-2015 budget?
The most popular Tax Savings instruments are listed under Section 80C of the Income Tax Act. Section 80C came into force from 1st April, 2006, replacing the earlier Section 88 of the Income Tax Act 1961 The Section 80CCC for Pension contribution is also merged with Section 80C.
Income Tax Rebate under Section 80C
There are many investments which qualify for deduction under Section 80C of the Act. Also, there are expenditures which come under Section 80C. The overall limit under Section 80C is capped at Rs. 1.5 Lakh. The limit has been increased from 1 Lakh to 1.5 Lakhs in FY budget 2014-2015.
If your Taxable income is Rs. 8 Lakh and if you invest Rs. 1.5 Lakh in various investments which qualifies under Section 80C, your taxable income will be reduced to Rs. 6.5 Lakh. This is the advantage of Section 80C.
Qualifying Investments under Section 80C
- Provident Fund (PF) and Voluntary Provident Fund (VPF): The amount deducted from your salary every month towards Employees’ Provident Fund will qualify for deduction under Section 80C. If you have opted for Voluntary Provident Fund (VPF), such contribution also will qualify for deduction under Section 80C.
- Public Provident Fund (PPF): It is the most popular retirement planning tool coming under Section 80C. This is a 15-year debt instrument with an option to extend the term after 15 years. This is a government scheme with tax-free status on all the 3 stages (EEE) The total amount accumulated along with interest is tax-free on withdrawal.
- National Savings Certificate (NSC): This is another debt instrument of the government with Section 80C tax benefits which is available for 5 and 10 years. The interest accrued every year is taxable but it will be deemed as reinvested and will qualify for Section 80C.
- Life Insurance Premium: The Life Insurance premium paid towards policies for your spouse and children will qualify for deduction under Section 80C. The policies of LIC and private companies are eligible for this. The premium for ULIP policies also will qualify for Section 80C deduction.
- Pension Fund: Your contribution towards a Pension Fund will also qualify for deduction under Section 80C. This can be in any pension policies from Life Insurance companies or the approved Mutual Fund schemes. At present, there are only 2 Mutual Fund schemes which qualify for deduction under Section 80C. They are UTI Retirement Benefit Pension Fund and Templeton India Pension Plan.
- Equity Linked Savings Scheme: Popularly called ELSS, this is the option for you to enjoy tax benefits with an equity investment. You can invest in select Mutual Fund schemes designated under ELSS where there is a lock-in period of 3 years. Such schemes offer much better returns, if you remain invested for a longer term.
Section 80C Deductions on Fixed Deposits
- 5-Year Bank Deposits: Scheduled banks offer 5-Year Fixed Deposits with Section 80C tax benefits where the interest is taxable.
- 5-Year Post Office Time Deposits: The 5-Year Post Office Time Deposit is offering tax benefits under Section 80C. Here the interest is taxable.
- Senior Citizens Savings Scheme (SCSS): This scheme offers Section 80C tax benefits to senior citizens. The interest is payable on a quarterly basis and is taxable.
Other expenses qualifying for Section 80C tax benefits
Other than the above mentioned investments, certain expenses also will qualify for Section 80C tax benefits. They are:
- Home Loan Principal Repayment: When you are repaying your Home Loan through EMI, it contains both Principal and Interest. Interest on Home Loan can give you tax deduction under Section 24. But the Principal repayment you are making will qualify for Section 80C tax benefits.
- Stamp Duty and Registration Charges: The amount you spend on Stamp Duty and Registration while buying a house will qualify for Section 80C tax benefits in the year of purchase.
- Child Education Expenses(Tution Fee): The amount spent on children’s education also will qualify for Section 80C tax benefits.
Where to invest for Section 80C tax benefits?
The investment for Section 80C tax benefit is limited to Rs. 1.5 Lakh in a year. The mandatory PF and the Children’s Education expense itself will be enough for many. If there is a shortage, the better option will be to go for ELSS under SIP mode to add equity to your portfolio.