Paying taxes feels a lot like sharing that last piece of pizza. You don’t want to but you know you have to! So the government gives taxpayers a LEGAL tool i.e income tax deductions under Section 80 to ease our dilemma and reduce our tax burden. Section 80 of the Income Tax Act allows you to reduce your taxable income by making certain investments or expenses listed under this section. The section has certain subsections of which Section 80C is the most popular one for saving income tax. As per this section if you make certain investments or expenditures, then up to Rs. 1.5 lakh of your investment/expenditure amount can be deducted from your total income and only the remaining amount will be taxed.
For example, your total income is Rs. 5,50,000 and you fall under the 20% tax bracket. If you make investments of Rs. 1, 50,000 under section 80C, you can deduct this from your income (Rs. 5, 50,000-Rs. 1, 50,000 = Rs. 4, 00,000) and you’ll now fall under a lower tax bracket of 10% instead of the previous 20%.
Few tax saving investments/expenses under section 80C are:
1. The premiums paid for life insurance, ULIP or annuity plan-
Premiums: This is the fee you pay to buy an insurance policy. There are two ways by which you can pay the premium- A single premium policy lets you pay all at once and an annual premium policy means lets you pay every year for a fixed period of time.
- Life insurance policy serves as a monetary protection to a family in case of death of the insured.
- Unit Linked Insurance Plan i.e ULIP is a mix of life insurance and investing in different products. This means it provides life protection and along with returns made on stocks, bonds, mutual funds etc.
- Annuity plan is a long term investment scheme for your retirement protection when you outlive your income. Depending on which annuity scheme you opt for you get a steady stream of income either immediately or after your retirement.
2. Contribution to provident funds such as EPF, VPF or PPF-
Provident funds- These are retirement funds created by contributions from an employee and an employer, and when the employee retires or is unable to work he/she gets the returns accumulated in this account.
- Employee Provident Fund EPF: This is a provident fund set up only for salaried employees and it’s compulsory for organizations with more than 20 workers to contribute to it. Both employer and employee together compulsory have to contribute 12% each to this fund. The investment matures on resignation or retirement whichever is earlier.
- Voluntary Provident Fund VPF: If an employee wants to contribute more of his salary to EPF then he/she can do so through VPF account.
- Public Provident Fund PPF: This is a provident fund for the salaried, self-employed, non-salaried and unorganized sector. The minimum annual amount required to keep the account active is Rs 500, the maximum amount that can be deposited in a financial year is Rs 1.5 lakh and the period of investment is 15 years.
All these funds assure risk and tax-free retirement returns in the range of 8.7%-8.75%
3. Investments in NSC and 5-year bank fixed deposits-
- National Savings Certificate NSC: This is a 5-year government investment scheme where you lend money to the government and in return, you get 8.1% guaranteed interest per year. This interest is reinvested back and compounded annually and on maturity, you get all your returns back.
- 5 year bank fixed deposit: Similar to NSC, here you deposit a fixed sum in a bank for a period of 5 years and on maturity, you receive your principal amount along with interest compounded annually.
NSC is a much better investment option than FD due to higher interest rates that are tax free.
4. Investments in Equity Linked Saving Scheme (ELSS) of a mutual fund
These are mutual funds that majorly invest in equity or equity related products having a lock-in period of 3 years. It does not guarantee any fixed returns because they depend on the stock markets.
5. Loans repayments taken for buying a house or for construction of a house.
6. Payment made towards tuition fees for a maximum of two children
These were just a few popular investments/expenses under section 80C click here for the other investment options.
Few pointers before making these investments:
- If you’re a salaried employer and you’ve made these investments it’s better to inform your accounts department in the beginning itself so that they don’t end up deducting more tax. In case they do so you’ll have to wait for a refund form the IT department.
- You cannot claim these deductions from the income from capital gains.
- If a person’s income is already below the minimum exemption limit, currently at Rs. 2.5 lakh then making tax saving investments doesn’t make sense as he/she is already exempt from paying taxes.
Now that you know the different investment options under Section 80C, consider them before planning your investments so you don’t end have to part with most of your income on taxes.