Now once we realized our tax liability after calculating the taxable income, Lets shift our focus to common interest point of everyone that how to minimize it. Government has given an equal opportunity to every tax payer to decrease their tax liabilities in a legal fashion through various options. We will learn not only the various ways but in the process will also evaluate different options against each other to formulate optimized portfolio. In this article we’ll try to analyze only different options which fall under section 80C, rest all we cover in other deductions article later.

Almost all salaried or non salaried tax-paying individuals I met are either doesn’t know about various instruments under section 80C or are confused about which one to chose. To my surprise, there are many tax consultants also who don’t know these instruments and you can forget about suggestion for the best one. For your surprise not only the investments are deductible under Section 80C but also some of our expenses are also eligible to be part of deduction. Let us start with listing all the investments recognized under section 80C:

  1. National Stock Certificate
  2. Public Provident Fund/ Employee Provident fund
  3. Pension Plans or Pension Schemes
  4. Life Insurance Premiums
  5. Tax Benefit Fixed Deposits
  6. Equity Linked Saving Schemes

Some of the expenses which are also eligible for deduction under this section 80C besides above investments are:

  1. Principal amount of your home loan
  2. Education fees for children

Any individual can avail a maximum deduction of up to INR 1 lac distributed among various investments options and expenses listed above. Investment in Infrastructure bonds will avail you extra deduction up to INR 20,000 over and above INR 1 lac. Hence people with higher tax liabilities are advised to invest on those bonds also.

Investment Options

National Savings Certificate (NSC) is a fixed deposit option eligible for section 80C tax benefit. Rate of interest on the investment is 8% which is compounded half-yearly, means the effective annual rate of interest is 8.16%. If you invest INR 10,000, it becomes INR 16,010 after six years. The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

Provident Fund or Employee Provident Fund investments are automatically deducted from your salary. Both We and our employer contribute to it. While employer’s contribution is exempt from tax, our contribution (i.e., employee’s contribution) is counted towards section 80C investments. We also have the option to contribute additional amounts in our EPF. Current rate of interest is 8% per annum (p.a.) and is tax-free. Your employer maintains this account and no cap on the investments maximum limit in this category.

Public Provident Fund (PPF) account can be opened with either the Post-Office or Nationalized banks. Current rate of interest is 8% tax-free and the normal maturity period is 15 years but we are allowed to make withdraws after year 6 to limited extent. Minimum amount which we have to contribute each year is INR 500 and maximum is INR 70,000. One can make the investments in one go or in maximum of 12 installments in a year. Point worth noting is that interest rate is assured as minimum but not fixed can be revised by Government.

Pension Funds – Section 80CCC stipulates that an investment in pension funds is eligible for deduction from your income. Pension is mainly associated with government employees only, but any individual can also open there pension account with any of the company offering pension fund schemes certified by government. There is no cap on the maximum limit of investment you can make in pension fund.

Life Insurance Premiums that we pay towards life insurance premium for ourselves, our spouse or our children can also be included in Section 80C deduction. All insurance policies offered by IRDA approved insurance companies are eligible to get tax deductions. There are no minimum and maximum limits to make this investment. Important point to note here is that life insurance premium paid by us for our parents (father / mother / both) or our in-laws is not eligible for deduction under section 80C.

5-Yr bank fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction with no maximum limit on investments and interest offered is 8% compounded annually.

Senior Citizen Savings Scheme 2004 (SCSS) is a recent addition to section 80C list but is meant only for senior citizens. Current rate of interest is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Hence, unclaimed interest on these deposits won’t earn any further interest and interest income is chargeable to tax.

5-Yr post office time deposit (POTD) schemes are similar to bank fixed deposits. 5-Yr post-office time deposit (POTD) – which currently offers 7.5 per cent rate of interest –qualifies for tax saving under section 80C. Effective rate works out to be 7.71% per annum (p.a.) as the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable and not reinvested automatically at the end of the year.

NABARD rural bonds are bonds issued by NABARD (National Bank for Agriculture and Rural Development) as NABARD Rural Bonds which qualify under section 80C. Interest on them varies from time to time and published in national news papers. Minimum investment in these bonds is INR 5000 then one can increase it to any multiplier of 1000. Interests are tax free and duration of the bond is 5 years.

Equity Linked Savings Schemes’ (ELSSs’) are mutual fund (MF) schemes specially created for offering us tax savings. These funds invest the amount in various equity investment options on our behalf. The investments that you make in ELSS are eligible for deduction under Sec 80C. There is no cap or limit on ELSS investments and investments can be made in one go or as systematic investment plan on monthly basis.

Deductions of Expenses

Home Loan Principal Repayment is also eligible to be deducted under section 80C.  Equated Monthly Installment (EMI) that we pay every month to repay our home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C. Even the interest component can save you significant income tax – but that would be under Section 24 of the Income Tax Act, which we’ll discuss later in series of deductions.

Stamp Duty and Registration Charges for a home which we pay as stamp duty when we buy a house, and the amount we pay for the registration of the documents of the house can be claimed as deduction under section 80C in the year of purchase of the house.

Children’s education expense (for which you need receipts) can also be claimed as deductions under Sec 80C. This includes payments towards tuition fees for children to any school or college or university or similar institution. (Only for 2 children) or towards coaching fee of various competitive exams.

Apart from these investments and deductions an extra INR 20,000 deduction can be availed by making investments in Infrastructure Bonds issued by large infrastructure financing companies or Non-banking financial corporations. Interest rate on these bonds varies from time to time and remains constant at which applicant bought the bond. The minimum lock in period for same is 5 years and interest rates are marginally less than what is offered by government bonds.

Timing of investment

I find many of individuals start looking for investment avenues only in February or March, just before the Financial Year is getting over. Hence we end up investing our money without putting proper thought to it and also we couldn’t earn any interest for the whole year. If we decide, where we want to make the investments, and start investing right from the beginning of the financial year we would not only make informed decisions, but would also earn the interest for the full year from April to March. And we’ll invest in small steps which will be less taxing on us.

The selection of investment option and deduction of expenses and their priority list is not universal. In next article we will understand the Pros and Cons of all options and decide the priority list for different segments based on their age groups. The article on Prioritize among different investments will be published on 9th Oct, 2010.

To clarify more doubts write to us@ or follow the future series.