Have you fully utilised the income tax benefit available under Section 80C of the Income Tax Act? Considered one of the more popular income tax deduction among assessees by wealth planners, Section 80C provides for a reduction up to Rs 1.5 lakh in taxable individual income in a year under certain conditions. From premium paid towards subscription/activation of a life insurance policy to subscription to mutual funds (under ELSS or Equity-Linked Saving Scheme), Section 80C of the Income Tax Act provides for a range of benefits available to the income tax assessee. In other words, eligible income tax assessees can claim a tax benefit worth up to Rs. 1.5 lakh - in the form of deduction from gross income to arrive at taxable income - in a financial year.
Total tax benefit under Section 80C
Section 80C of the Income Tax Act offers a total deduction of Rs. 1.5 lakh in a year under certain conditions. A wide range of saving schemes such as Senior Citizens Savings Scheme (SCSS), provident fund, savings under Sukanya Samridhi and ELSS are also eligible for the tax benefit under Section 80C. (Also read: Interest rates paid by top banks on FD up to Rs 1 crore)
Here are key income tax benefits available to income tax assessees under Section 80C of the Income Tax Act:
Life insurance premium
As per current tax laws, premium paid towards subscription or activation of a life insurance policy is eligible for tax benefit under Section 80C. This includes premium paid towards life insurance for self, dependent children and parents under certain conditions. The amount of premium up to 10 per cent of the sum assured (in case of policies issued after April 1, 2012) is eligible for deduction, according to income tax laws.
Five-year tax-saving FD
Most commercial banks offer a special type of fixed deposit scheme. This scheme, often referred to as a five-year tax-saving FD, comes with a lock-in period of five years - which means premature withdrawals are not allowed. Investment in such FDs is eligible for tax benefit under Section 80C of the Income Tax Act.
Public Provident Fund (PPF)
Contributions made to a Public Provident Fund (PPF) account are eligible for tax benefit under Section 80C. Investment in PPF is subject to a lock-in period of 15 years and an upper limit of Rs 1.5 lakh in a year. (Also read: Key things to know about partial PPF withdrawal)
Equity-Linked Saving Scheme (ELSS)
Mutual funds under ELSS come with a lock-in period of three years. Not to be confused with a Systematic Investment Plan (SIP), an ELSS is a type of mutual fund eligible for tax exemption under Section 80C. (Also read: Know the difference between SIP and ELSS)
Small savings scheme Sukanya Samriddhi
Investment in the Sukanya Samriddhi scheme for up to two girl children is eligible for deduction under Section 80C. A Sukanya Samriddhi account can be opened in the name of a minor child. (Also read: All you need to know about Sukanya Samriddhi account)
Repayment of home loan principal
Section 80C also offers deduction against repayment of home loan under certain conditions. Individuals can claim a deduction against the repayment of the principal amount in a home loan for a house whose construction is complete. Also, the person should not have transferred the property before completion of five years from the date of possession to be able to avail the tax benefit.
How to prioritise investments for claiming income tax benefit under Section 80C
"A taxpayer gets full deduction of the amount invested in specified investments under Section 80C... The type of investment depends upon circumstances of each tax payer," says Ashok Shah, partner, NA Shah Associates LLP.
As a beginner, a person may prioritise his or her 80C investments in the following order, he adds:
- Employee contribution to a recognised provident fund/approved superannuation fund
- Life insurance premium paid for self and family members
- Repayment of loan taken from a specified person for purchase of property
- Tuition fees paid to a university, college, school etc. (for up to two children)
- Tax-saver mutual fund with a lock-in period of three years or more
- Term deposit (FD) of not less than five years with a scheduled bank
- Stamp duty, registration fee and other expenses incurred for purchase of property