How to Save Income Tax using Section 80C Deductions

We are into the last month of the financial year 2018-19. Under Section 80 C all taxpayers can avail tax deductions of up to Rs. 1.50 lakh if they make certain eligible tax savings/ payments/ investments. This means that the taxpayer can reduce their taxable income for an amount of up to Rs. 1.50 lakhs by making certain payments/investments. The bouquet of such options include a deposit into PF account, PPF, life insurance premium, repayment of Housing Loan, ELSS, 5-year FD, NSCs etc.

Let us discuss the investment options to save income tax using Section 80 C deductions:

1. Deposit into Employer Provident Fund (EPF/GPF/SPF)

save income tax section 80 C

As a part of the social security benefits in the country, the employer, as well as the employee, need to contribute a minimum of 12% of salary (consisting of basic salary and dearness allowance) on monthly basis into the employee’s PF account. Such deposits into your PF account are eligible for tax deduction. The employee is also free to increase the amount of monthly contribution beyond 12% of their salary, and such increased contribution (VPF – Voluntary Provident Fund) will also be eligible for deduction under Section 80 C.

The interest on EPF/ GPF account is announced by the EPFO (Employees Provident Fund Organisation) every year, considering the returns made by them on the accumulated portfolio. The interest so earned under PF accounts is exempt up to 9.5% per annum, and any interest accrued over and above this limit of 9.5% will be taxable in the hands of the employee. For the current year 2018-19, EPFO has declared the interest rate to be 8.65%.

While withdrawal from PF Account is generally considered as tax-exempt, any voluntary withdrawal from such account before the completion of 5 continuous years of service is taxable for the employee.

2. Deposit into Public Provident Fund (PPF)

A taxpayer can open a PPF account with a scheduled bank/post office and avail tax deduction in respect of the amounts deposited into such accounts, which shall not exceed Rs. 1.50 lakh in a year. Such accounts have a lock-in period of 15 years from the date of account opening. This period can be extended for another 5 years. However, partial withdrawal is allowed from these accounts after 7 years for certain specific reasons. PPF account holders need to make a minimum deposit of Rs. 500 every year in their account to keep it active.

Interest is calculated on the basis of the lowest balance of the PPF account between 5th to the last day of every month at the rate notified by the Central Govt. on a quarterly basis. The interest rate currently applicable to PPF accounts for Jan-March 2019 quarter is 8.0%. The interest earned in PPF accounts is exempt in the hands of the account holders, and any amount received on the closure of PPF accounts is also tax-free.

3. Investment in 5-Year Fixed Deposit (FD)

save income tax section 80 C

A taxpayer can also invest in a 5-year fixed deposit with any scheduled bank to avail tax deduction in this regard. However, all such deposits are subject to a 5-year lock-in period from the date of investment and thereafter, redeemed by the bank. Further, on account of the restrictive conditions, such deposits cannot be pledged/ prematurely withdrawn. The rate of such fixed deposits is fixed by the respective scheduled banks and varies from bank to bank.

Interest from such FDs is taxed at the normal tax rate as applicable to the investor, whereas the principal amount received on maturity is exempt from tax.

4. Equity Linked Savings Scheme (ELSS)

ELSS is a specified category of mutual funds which invests more than 65% of the portfolio in equities and equity-related securities and carries a lock-in of 3 years from the date of investment. Unlike the other investment options under Section 80 C which provide guaranteed returns, ELSS funds equip the investor with a potential of higher returns. Historical data reflects that ELSS as a category of mutual funds has generated 13.51% annualised returns for its investors over the past 3 years.

The lock-in period with ELSS funds is also the lowest among all the investment options under Section 80 C. Further, the investors are free to stay invested with ELSS funds even after the expiry of the lock-in period and create wealth over time. The gains from investment in ELSS funds are taxed at a special rate of 10% (plus applicable surcharge and cess) with an exemption limit of Rs. 1 lakh per year in respect of long term capital gains.

5. National Savings Certificates (NSCs)

save income tax section 80 C

NSCs form part of the small savings schemes offered by the Govt. and are just another form of fixed tenure investments. An investment in NSCs can be made through the post office and comes with an investment period of 5 years. In line with the other small savings schemes like PPF etc., the interest on NSCs is notified by the Central Govt. on a quarterly basis, and such interest is applicable for all NSCs issued during the quarter. For the current quarter ending 31st March 2019, the interest rate applicable is 8.0%.

The interest on NSCs is taxable in the hands of the investor. However, being a cumulative investment product, wherein the interest is not repaid on periodical basis but only on maturity, such interest is also treated as reinvested into NSCs and qualifies for the deduction in the respective year, except for the last year in which the entire maturity amount including interest is received.

6. Sukanya Samriddhi Account (SSA)

This account is similar to a PPF account and can be opened with scheduled banks/post office. However, a peculiar feature of this account is that it can be opened only in the name of a minor daughter of less than 10 years of age.  The account matures in 21 years from the date of the account opening or the marriage of the girl child after the age of 18 years, whichever is earlier. As an incentive for the parents to open investment accounts in the name of their girl child, a higher interest as compared to that applicable to PPF account is announced by the Central Govt. on a quarterly basis. The interest rate currently applicable to Sukanya Samriddhi Accounts for Jan-March 2019 quarter is 8.5%. The interest earned in such accounts is exempt in the hands of the account holders, and any amount received on closure is also tax-free.

7. Senior Citizens Savings Scheme (SCSS)

save income tax section 80 C

This is another small savings scheme notified by the Central Govt. and as suggested by the name itself, this scheme is available for investment only by the senior citizens. An individual can invest a maximum of Rs. 15 lakhs in SCSS account and can earn interest at the rates notified by the Central Govt. on a quarterly basis. The interest received from such accounts is taxable in the hands of the investor, but the principal amount invested received back on maturity is tax-free. The investment period of SCSS is 5 years and the currently applicable interest rate on SCSS account is 8.7%.

Apart from investment options, there are certain eligible payments as well, for which the taxpayers can avail the tax deduction. Few eligible payments are being detailed below:

1. Payment of Life Insurance Premium

A taxpayer can also avail tax deduction in respect of any amount paid towards the purchase of a life insurance policy or for renewal of life insurance policy for himself, his spouse and his children. However, premium towards life insurance policy of parents is not eligible for tax deduction under Section 80 C. Further, it must be noted that premiums paid only up to 10% of the sum assured under the insurance policy is eligible for deduction. Amount received under insurance policies are also exempt if the premiums paid in all the years are less than 10% of the sum assured.

2. Payment towards Tuition Fees of Children

save income tax section 80 C

Parents can also avail of ax deduction in respect of tuition fees paid for their two children for full-time courses in any university, college, school or other educational institution situated within India.

3. Repayment of Housing Loan

An individual can avail of a tax deduction in respect of the repayment of housing loan taken by them towards a residential house property. Such loan may be taken from varied sources, including but not limited to a bank, a housing finance company, National Housing Bank etc. It may further be noted that the deduction under Section 80 C is limited only for the principal amount repaid during the year since the interest is already eligible for deduction under Section 24 of the Income Tax Act. 

4. Payment towards Stamp Duty and Registration Charges of a Residential House Property

save income tax section 80 C

An individual can also claim a deduction in respect of stamp duty, registration fee and other expenses in pursuance of transfer of a residential house property.

Considering the wide range of investment and other options available to save income tax under Section 80, you must make an informed choice, no matter even if it is the last month of the financial year. Further, make sure you start planning your tax saving investments from the next year onwards, right from the month of April, so that it does not squeeze your finances during the last few months.