‘What you can do tomorrow, do it today’ is a common thought we practice every day. The same stands true for tax planning as well. It is better to plan your tax-saving investments, rather than take hurried decisions towards the end of the financial year, which is typically the deadline for declaring your tax plan.
A plethora of schemes are available in the market from which an individual can avail, from an investment perspective, under Section 80C of the Income-tax Act, 1961 (Act). As per the provisions of Section 80C, the taxable income of an individual gets reduced by the amount of eligible investment or savings or expenditure up to Rs 1.5 lakh. However, to claim a deduction for a particular financial year, the individual is required to invest or spend the deductible amount in that financial year itself. As per the new tax regime proposed under Union Budget 2020, this benefit will not be available in the tax year 2020-21, in case an individual opts for the new regime.
We have summarised below some such schemes that are primarily considered by the public at large, to claim benefits under Section 80C and to also consolidate their overall savings.
As a salaried individual, 12 per cent of compensation needs to be contributed to each by the employer and the employees. This is the most commonly availed avenue for optimising the taxes. Not only does this provide tax relief, but it also provides a decent return in the form of interest on PF so contributed, which is currently pegged at 8.5 per cent for the current tax year.
PPF is a government scheme that allows investments as low as Rs 500. The maturity period is 15 years with both the interest earned as well as the maturity amount being tax-free. THE current PPF interest rate is approx. 8.0 per cent which is subject to revision every quarter.
The premium for different types of insurance policies including ULIPs, term insurance, and endowment policies are tax-deductible. Thus, any amount paid by an individual towards life insurance premium for a taxpayer, his or her spouse or children, can also be included in Section 80C. If an individual is paying a premium for more than one insurance policy, all the premiums can be included but the deduction will be limited to Rs 1.5 lakh for the taxpayer.
These are specified mutual funds that are eligible for deduction under Section 80C of the Act, with a specified lock-in period.
The repayment of the principal amount on a home loan is also eligible for deduction under Section 80C. This is in addition to the interest deduction available under the Act while computing income from house property.
The parents of a girl child can make use of this option, subject to conditions. The account can be opened for a maximum of two girls. An individual can deposit for 15 years and the account remains operational till the girl’s age is 21. The interest earned on the same is tax-free.
NSC is a tax-saving instrument with a maturity period of five years. The interest earned is compounded annually and is taxable. However, each year's interest is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Section 80C. Only the final year's interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested but is paid back to the investor.
POTD is similar to bank fixed deposits. They are available for different time durations like one, two, three and five years but only five-year POTD qualifies for tax-saving under Section 80C. The interest in these is compounded quarterly but paid annually. The interest rate is reviewed by the government every quarter; however, the interest earned is entirely taxable.
Payment of tuition fees for children qualifies for the deduction and is often not considered by taxpayers for a deduction. Please note that the amount paid by an individual as tuition fees (excluding development fee or donation amount), whether at the time of admission or thereafter, is eligible as a deduction. The fees should be paid to a school, college, or university in India only.
While the above are some of the key avenues available for deduction under Section 80C, it is important that a taxpayer analyses his or her financial investments, keeping in mind the long term perspective that includes not only the returns but also future security, before making any investment. It is imperative that a taxpayer makes an approximation of his income tax for the tax year and plans his investment under Section 80 C accordingly to optimise his taxes.
The authors,
Divya Baweja is Partner at Deloitte India
Nitin Baijal is Director of Deloitte India
Kajal Gupta is Assistant Manager of Deloitte India