With progression in the economy and an increasingly educated and well-informed populace, long term investment schemes have seen an upsurge. This is because the premia paid towards many policies and subscription to certain equity linked mutual funds, for example is not subject to tax, by and large. Simply put, an investor can save tax by increasing his investment and thereby multiply savings gradually over a period of time.
Section 80C of the Income Tax Act, 1961, allows some investment and expenditure for tax benefits. Life insurance premia, deferred annuity, contribution to PF, subscription to certain mutual funds, debentures etc. are exempt to the extent of Rs 1,50,000.
So, how is this tax benefit achieved? Let’s take an example, assuming you earn an annual income of Rs 6,00,000 and your age is 25. So if you make the specified investments (given below), you can get a deduction of upto Rs 1,50,000 from your total income. Therefore, your income will be reduced to Rs 4.50,000 (Rs 6,00,000 less Rs 1,50,000). Now you can take your slab benefit (Rs 2,50,000) and calculate tax after taking into account remaining deductions (if any).
You can choose any of the following investments or a combination to suit your needs, against which deductions can be claimed under section 80C:
- Payments made to keep in force a life insurance of an individual, spouse or children of that individual and any member of an HUF, can be claimed as deduction
- Deferred annuity payments not being an annuity plan of life insurance. Such an annuity should not give option of cash payment to the investor.
- Payments received from government by an individual with conditions of his service, for the purpose of securing to him a deferred annuity or making such provision for his spouse or children. This amount can be claimed up to a maximum of one-fifth of the salary.
- Contribution to any provident fund to which the Provident Fund Act, 1925 applies.
- Contribution to a provident fund notified by the Central government in the official gazette, made in the name of either self, spouse or children or member of HUF.
- Contribution by an employee to a recognised Provident Fund or to an approved superannuation fund.
- Subscriptions by an individual, his spouse or children and by any member in case of HUF, to any security of the central government.
- Subscriptions to any savings certificates under the Government Saving Certificates Act, 1959.
- Any contribution to a Unit Linked Insurance Plan of the LIC mutual fund as referred in clause 23D of section 10 of the Act.
- Any contribution to a Unit Linked Insurance Plan of the Unit Trust of India Act, 2002.
- Any payments made to keep in force an annuity plan of the Life Insurance Corporation or any other insurer notified by the Government.
- Subscriptions to any units of any Mutual Fund or any other plan formulated under such a scheme by the Central government.
- Any contribution by an individual to any pension fund set up by any Mutual Fund as mentioned above.
- Any subscription to a deposit scheme of a public sector company engaged in providing long term finance for construction of houses in India, or to any authority constituted by Law for the purpose of dealing with the need of housing accommodation in cities, towns and villages.
- Any tuition fees (excluding development fees or donation) at the time of admission or thereafter, to any university, college, school or educational institution situated within India, or paid for the full time education of a spouse or child of an individual.
- Subscriptions to equity shares or debentures forming part of any eligible issue of capital approved by the CBDT made by a public company, or public financial institution.
- Term deposit for a fixed period of not less than 5 years with a scheduled bank, which is in accordance with a scheme notified by the Central government or in an account under the Post Office Time Deposit Rules, 1981
- Subscriptions to bonds issued by National Bank for Agriculture and Rural Development.
- Sukanya Samriddhi Account: This account can be opened at any time from the birth of a girl child till she attains the age of 10 years with a minimum deposit of Rs 1000. Interest on this account is fully exempt in the year of receipt as well as accrual.
- Any investment in an account under the Senior Citizens Savings Scheme Rules, 2004
- Deduction for home loan repayment: You can also claim deduction for principal repayment, stamp duty and registration charges or any other expenses in connection with the transfer of such house to you.
In order to gain maximum benefit of taxation, one must plan investments well. Also, investments should be availed at the beginning of the financial year so that interest is not lost. In order to make informed decisions, one must study through the various options available and choose the best as per the suitability (in terms of risk, amount and period of investment) and thereby attain tax benefits.
In addition to the above, you can also invest under the following sections for getting tax benefit:
If an individual makes a contribution to a pension fund of the LIC or any other insurer, he becomes entitled to deduction under this section. Investments under this section is limited upto Rs 1,50,000 and also your investment under section 80C will be taken into account for calculating Rs 1,50,000
Note: Any amount received as pension or at the time of surrender of such a plan shall be taxable as and when received. Thus, this section works on the ETT (Exempt-Taxable-Taxable) principle, wherein amount invested is exempt, while any receipt of income or principal at the time of surrender is taxable.
Section 80CCD: An individual whether under employment or not can invest in a pension scheme of the Central Government and avail deduction under this section to the extent of 10% of salary/ gross total income in the previous year. This section also runs on ETT principle. You can invest upto Rs 2,00,000 under this section but do note that investment under section 80C and 80CCC (discussed above) will be taken into account for calculating this limit.
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