Tax Saving under Section 80C

Tax Saving under Section 80C

The Drawing and Disbursing Officers are responsible to deduct accurate amount of Tax Deduction at Source (TDS) from the salaries of the employees. Most of the employees ask DDOs to advise upon tax savings and each DDO before giving advice, should be clear the instruments, investments, payments associated with the section 80C. The ‘Professional Guidance’ webpage is providing full detail in simplest way for complete understanding of section 80C. The major deduction which attracts taxpayers is still under section 80C of Income Tax Act, however it is still restricted up to Rs. 1,50,000. The taxpayers invest a certain amount to claim this deduction and all insurance companies, financial companies, banking companies targets the taxpayers (individuals and Hindu Undivided Family – HUF) to attract them for their plans to claim deduction under section 80C. Which of the option is good for the taxpayers and why; that is still a matter of concern and every individual considers the pros and cons of each investment before making investment.

Tax Deduction under Section 80C

Options to select for claiming Deduction under Section 80C:

For claiming deduction under section 80C, the individual and HUF can consider various options and payments should be made up to 31^st March of the financial year.

An individual / HUF can take a life insurance policy (for self, spouse and children including annual plans, deferred annuity plans, and Unit Linked Insurance Plans - ULIP) and claim deduction on payment of its premium during the financial year. He can deposit amount in Provident Fund (Public Provident Fund, Recognized Provident Fund, Superannuation Fund), National Saving Certificate / Kisan Vikas Patra, Mutual Funds (Equity Linked Saving Schemes or Notified Pension Funds), UTI funds, specific Bank Fixed Deposits or bonds (infrastructure bonds, notified bonds of NABARD, Senior Citizen Saving Scheme, Five Years-Time Deposit with Post Office etc.) and other investments entitled to claim deduction under section 80C. Apart from it, the deduction can be claimed for payments of tuition fees of two children, repayment of housing loan (only principal component), stamp duty or registration charges paid for purchase or construction of residential house etc.

(a) Life Insurance Premium under Section 80C for Individuals and HUF:

If amount is paid for annuity plan of Life Insurance Policy, that can be claimed as a deduction under section 80C. Such premiums paid for self, spouse and children can be claimed under section 80C and the premium paid for policy of father, mother, or others cannot be claimed as deduction under section 80C.

Here the point is whether the amount received on maturity of the ULIP will be taxable in the year of receipt or not?

It depends upon the amount of premium and sum assured value of the policy. In case, the premium paid is less than 10% of the sum assured value of the policy then amount received on maturity of the policy will be exempt under section 10 (10D), otherwise it will be taxable.

(b) Employee’s Provident Fund Investments under Section 80C for Individuals and HUF:

The salaried people usually pay a part of their monthly salary as a contribution to Employee’s Provident Fund. Such contributions in Provident Fund Investments are eligible to claim deduction under section 80C. The employers also deposit equal amount of contribution in the account of employee’s provident fund.

Here the point is, whether the contribution of employer and interest earned on provident fund during the year is taxable in the hands of employee or not?

The employee and employer’s contribution to provident fund accumulate a corpus and interest is earned upon the same. Such interest earned up to 9.5% is not taxable in the hands of the employee. The interest earned above the limit of 9.5% per annum will be taxable. Further, if the employer contributes more than 12% of employee’s salary in employee’s Provident Fund Account, then the excess will be taxable in the hands of employee.

What will happen if an employee decides to contribute more than 12% in his provident fund?

If an employee contributes more than 12% of his salary in provident fund, then such contribution is known as Voluntary Provident Fund (VPF) and such contribution is also eligible for deduction under section 80C.

Whether the interest earned on maturity of provident fund is taxable or not?

The interest earned and maturity amount is exempt.

(c) Public Provident Fund Investment under Section 80C for Individuals and HUF:

An individual or HUF can open a Public Provident Fund (PPF) Account in post office or bank and the PPF account has a lock-in period of 15 years however, partial withdrawals can be made after 7 years of opening the account. The minimum amount required to be deposited in PPF account is Rs. 500 per year and the maximum amount can be deposited up to Rs. 1,50,000.

Here the point is whether the interest earned on PPF account is taxable or not?

The banks and post office provide interest on PPF account on annual basis means it is compounded yearly. It is exempt in the hands of recipient.

(d) Sukanya Samriddhi Yojana (SSY) investment under Section 80C:

An individual only if he / she is one of the parents or legal guardian of one or two girl children with age up to 10 years, can open Sukanya Samriddhi Yojana Account in post office or bank and contribution in this account can be made up to Rs. 1,50,000 per year. The lock-in period of the account is up to the age of 21 years of the girl child and the amount to be deposited in this account is for 15 years thereafter amount is not deposited in this account. Such contribution can be claimed as deduction under section 80C.

Here the point is whether the interest earned on SSY account is taxable or not?

The interest earned on SSY account is compounded annually and it is exempt in the hands of recipient. The interest rate on SSY account is usually declared higher than the PPF account’s interest rate. Both the interest rates are revised every year by the Government.

To continue the understanding, please go through the next part: Tax Deduction under Section80C.

 *Copyright © 2018 Dr. Lalit Kumar. All rights reserved.

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