How to Save Income Tax? – Part I (Section 80C)

save income tax of sale of house featured image

Tax saving season is here.  In a few days, you will get an e-mail from Human Resources department to submit proofs for investments you had declared at the start of the year.

Most of us leave tax-saving investment to the last quarter of the financial year. You are no different and have not yet started. Non-submission of proofs will lead to significantly higher income tax outgo in the remaining three months.

What should you do now? How to save Income Tax?

You can make some investments that qualify for tax deductions.   In this series of posts on how to save income tax, I will discuss various investments or other expenditures that can get you income tax relief.

In this post, I will focus on certain tax-saving investments described in Section 80C of the Income Tax Act. This is not a holistic list but should cover most of the products you might consider investing in.

By investing in products in Section 80C investment basket, you can reduce your taxable income by up to Rs 1.5 lacs per financial year.  For a taxpayer in the highest tax bracket, this can lead to savings of Rs 46,350 per financial year.

Please note you can invest more than Rs 1.5 lacs in the 80C products per year. However, the tax benefits shall be limited to Rs 1.5 lacs only. For instance, you have invested Rs 50,000 in PPF, Rs 60,000 in EPF and Rs 1 lac in ELSS. Though the total investment is Rs 2.1 lacs, the tax benefit under Section 80C shall be limited to Rs 1.5 lacs

Typically, all Section 80C basket products come with a lock-in period.

Let’s look at the most popular products in Section 80C product basket.

1.      Public Provident Fund

You can invest in Public Provident Fund Account of self, spouse and children to avail benefits. Investment in PPF account of parents or siblings is not eligible for deduction.

The PPF account matures in 15 years from the end of financial year in which the first investment was made. So, investment in the first year will be locked for 15 years, investment in second year will be locked for 14 years and so on.

However, you can take loan against your PPF balance or make partial withdrawals from 3rd and 7th year respectively.

As per PPF Act, 1968, you cannot invest more than R 1.5 lacs combined per financial year in your PPF account and the PPF account of your children where you act as guardian.

Both interest earned and the maturity amount is exempt from tax.

The interest rate is notified every year by the Ministry of Finance. The balance in PPF account earns interest at the notified interest rate. The notified interest rate for FY2016 is 8.7% p.a.

Must read: All you need to read about Public Provident Fund (PPF) Account

2.      Employee Provident Fund/Voluntary Provident Fund

This is one Section 80C product that most salaried professionals are already investing in. The amount is automatically deducted from your salary and gets invested in EPF.  You can check in your salary slip to understand the amount you are investing in EPF per month. You can subsequently plan for remaining investments.

Please note only your contribution (and not your employer’s contribution) qualifies for deduction under Section 80C.  You can also contribute over and above your mandated EPF contribution. That contribution (VPF) also qualifies for deduction under Section 80C.

4.      Equity Linked Savings Scheme (ELSS)

Commonly known as Tax Saving Equity Mutual Funds. ELSS is suited for long term investments with investment horizon of at least 7-10 years. There is a lock-in of 3 years on each investment. Even if you are investing through SIP (Systematic Investment Plans), each installment of SIP shall be locked in for 3 years. If first installment goes on January 15, 2016, you cannot sell units purchased till January 15, 2019. For second installment (February 15, 2016), you cannot liquidate till February 15, 2019.

Long term capital gains (>1 year) on equity mutual funds are exempt from tax. Since you cannot exit ELSS before 3 years, capital gains from ELSS are exempt from tax.

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4.      Term Life Insurance

Best form of life insurance. Pure life cover.  There are no investment benefits. But with a term cover, you can purchase a reasonably higher cover at a low cost.  Annual premium for cover of Rs 1 crore for a healthy 30-year old male will be around Rs 7,000-10,000.  You must always have adequate life insurance.

Must read: How much life insurance do you need?

5.      Unit Linked Insurance Plans (ULIPs)

A variant of life insurance plans. This comes with investment benefits too. A part of the premium goes towards providing life cover while the remaining gets invested in fund of choice. The entire premium is eligible for deduction under Section 80C.  You can produce similar insurance, tax and investment benefit by purchasing term life plans and investing in tax-saving mutual funds

Must read: ULIPs < Term Insurance + Mutual Funds

Additional read: Variants of ULIPs you must be aware of

IRDA, the insurance regulator mandates a lock-in of five years for ULIPs. This means you cannot take out our money for five years from the date of commencement of policy. So, your first annual premium will be locked-in for 5 years, second for four years and so on. There is no lock-in for 6th installment onwards. You will not be able to get any money back till the end of 5th year even if you discontinue the plan.

As per Section 80C, the tax benefits under Section 80C shall be reversed if you do not pay premium for 5 consecutive years.

6.      Traditional Life Insurance Plans/Money-Back Plans

To be strictly avoided.  A number of investors, both our generation and our parents’, have invested in these low return and low life cover plans just to save taxes.  Our parents can at least say they didn’t have too many options or much awareness. You don’t even have that excuse. Stay Away. Tax benefits will be reversed if you do not pay premium for two years.

Must read: Say no to Traditional Plans

Additional read: Stay away from Jeevan Anand

A point to note about life insurance policies: This covers all kinds of life insurance plans including term life plans, ULIPs and traditional plans.  The annual premium in excess of 10% of Sum Assured does not qualify for deduction under Section 80C of the Income Tax Act. This is for policies purchased after April 1, 2012.

For instance, if you life insurance plan has Sum Assured of Rs 2 lacs and annual premium of Rs 30,000, only Rs 20,000 (10% of Rs 2 lacs) will qualify for deduction under Section 80C of the Income Tax Act. Typically, term life insurance plans will not face much problem. Single Premium ULIPs or traditional plans may be at risk.

Additionally, only life insurance premium for self, spouse and children is eligible for deduction under Section 80C. Premium paid for life insurance for parents and siblings is not eligible for deduction.

Additional Read:  Not Entire Life Insurance Premium is tax deductible.

7.      5-year Bank Fixed Deposits

Commonly known as tax saving fixed deposits. You cannot liquidate the deposit for five years. Interest earned is taxed at your marginal income tax rate (income tax slab).

8.      Post Office 5-year Time Deposit

Same as 5-year bank fixed deposit.  Tax benefit will be reversed if the deposit is withdrawn (broken) within 5 years.  The interest rate for the post office time deposit is notified by Ministry of Finance every year. The interest rate for deposits opened in FY2016 is 8.5% p.a.

9.      National Savings Certificate (NSC)

It is a cumulative scheme and there is no payout before maturity (5 years or 10 years). Premature withdrawal is not allowed.

Interest is taxable. However, the accrued interest is deemed investment in NSC and is eligible for deduction under Section 80C i.e. each year’s interest is considered investment in NSC.

Interest rate notified every year by Ministry of Finance. For the NSCs opened in FY2016, the interest rate is 8.5% p.a.

Refer to section on NSC on India Post website for more details.

10. Senior Citizen Savings Scheme (SCSS)

Senior Citizens are eligible to invest in this scheme.  The account matures in 5 years. Partial withdrawal is not allowed. However, you can close the account prematurely (before 5 years) by paying penalty. In case of premature closure, tax benefits will be reversed.

There can be only one deposit in the account. You cannot make multiple deposits in the same account.  Any number of accounts can be opened but the total balance (investment) in all the accounts cannot exceed Rs 15 lacs at any time.

The interest rate is notified by Ministry of Finance every year. For FY2015-2016, the interest rate is 9.3% p.a.  Interest earned is taxable.

Must read: Senior Citizen Savings Scheme

11. Principal Repayment on a housing loan

Principal repayment on a home loan up to Rs 1.5 lacs per financial year is eligible for deduction under Section 80C. You cannot avail this deduction for an under-construction property.  You can avail the deduction only once the construction is complete or you get the possession.

Stamp duty and registration charges are also eligible for deduction under Section 80C. However, tax benefit for payment of such charges can be availed only in the year you make the payment.

Tax benefits on principal repayment shall be reversed if you sell the house within 5 years from the end of financial year in which you got the possession.

Must read: Tax Benefits on Home Loan Repayment

12. Tuition Fees for two children

You can avail deduction for tuition fees paid for up to two children. If you have more than two children, you can claim for any two. Fee should have been paid to university, college, school or other educational institution situated in India.

The deduction is also available for full-time education. Expenses towards private tuition, coaching classes or any part time course are not eligible.

Any payment towards development fees, donation or any payment of similar nature is also not eligible.

Expenditure for self education or education of spouse is not eligible.

13. Sukanya Samriddhi Scheme

You can open this account for your daughter if her age is less than 10 years. Once the account is opened, you can keep making contributions for 14 years. The account shall mature on the completion of 21 years from the date of opening of account or the marriage of the account holder (daughter), whichever is earlier.

Interest rate is specified by Ministry of Finance every year. Applicable interest rate for FY2016 is 9.2% p.a. Interest earned is not taxable. Maturity amount is also exempt from tax.

Must Read: All you need to know about Sukanya Samriddhi Scheme

14. Pension plans From Insurance Companies (Section 80CCC)

You can avail deduction up to Rs 1.5 lacs per financial year for investment in pension/annuity plans from insurance companies.

If you surrender pension plans before maturity, the entire surrender value shall be treated as income in the year of surrender.

Please note combined benefit under Section 80C and Section 80CCC cannot exceed Rs 1.5 lacs per financial year.

15. National Pension Scheme (NPS) (Section 80CCD)

Apart from Rs 1.5 lacs (as part of Section 80C), you can invest up to Rs 50,000 in NPS for additional tax benefit under Section 80CCD (1B). Deduction under Section 80CCD (1B) is exclusive to NPS.

Hence, the total tax benefit for investment can go up to Rs 2 lacs.

Rs 1.5 lacs in Section 80C products including NPS + Rs 50,000 in NPS under Section 80CCD (1B)

Do go through the post below for detailed information about tax benefits of NPS.

Must Read: NPS Tax Benefits and Tax Treatment on Maturity

Additional Read: Revised Withdrawal and Exit Rules for NPS

16. Additional Investments  under Section 80C

  1. Notified Bonds from NABARD
  2. Pension plans by Mutual funds
  3. Specified deposits by HUDCO

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Investment decisions shall never be driven solely by tax considerations. You must not invest solely to save income tax. Investment in 80C product basket is no different. Pick up a product that is suited to meet your financial goals.  Nothing like it if the product offers tax benefits too.

Image Credit: The original image and information about usage rights can be downloaded from Pixabay.

The post was first published on December 24, 2015.

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Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

16 Responses to How to Save Income Tax? – Part I (Section 80C)

  1. Rocky says:

    Thanks Deepesh … your explanation skills are good.

  2. Biju says:

    i dont have PPF account buy my spouse does so are we saying i can invest in the same & claim tax benefits ?

    what proof would i need to submit to company ?

    • Deepesh Raghaw says:

      Yes Biju. You can invest in your spouse’s PPF account and claim benefits under Section 80C.
      You can submit her PPF account statement or PPF passbook photocopy.
      Transfer money to her PPF account through NEFT or through a cheque.
      Please note, if your spouse is working, both of you should not claim benefit under Section 80C for the same investment.

    • Elly says:

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  3. Bju says:

    thanks for the response but how would company or IT dept know that money i am transferring to is my Spouse account?do i need to give any proof like marriage certificate etc.

    • Deepesh Raghaw says:

      That’s why I asked you to transfer money from your bank account.
      Don’t think they will go to such extent and ask you to prove your relationship. So, relax.
      Btw, for so many other matters, it is always good to have marriage certificate.

  4. luis says:

    we purchased flat in GULBARGA from builder on 20.7.2010 @ Rs 8.5 Lakhs and flat construction completed and occupied on 19.2.2012.We sale flat on 25.5.2015 @ Rs 14 Lakhs. Now how much tax will come ?

    • Vipul Shah says:

      Dear Luis,

      Taxation for property in India depends on the agreement date and not the possession date or occupied date.
      If i assume 20/07/2010 is your agreement date and 25/05/2015 as sold date then this transaction would come in Long Term Capital Gain tax, anything less than 3 years would be considered as short term. LTCG would be considered on indexation

  5. Kama says:

    I got married this year and after that I deposited premium for my wife’s insurance policy which actually has her parents address in it. Can I claim the tax exemption for the premium I paid. I don’t have marriage certificate.
    Thanks in advance

    • Deepesh Raghaw says:

      Claim it under Section 80C. There won’t be any problem.
      Marriage certificate is not an issue.
      Even if your case comes up for scrutiny, it is highly unlikely assessing officer will have with that.
      Even then you can counter in so many ways.
      Wish you a happy married life :)

  6. SURESH says:

    Can i get tax exemption for the repayment of housing loan in the name of
    my wife and me.The property owned and possessed by her name only

  7. Sunil says:

    Thank You for such precise and to the point articles on each topic.
    would also like to seek your advised help on following—
    Is VPF still a good investment option keeping in view the govt ruling of taxing a percent of corpus at the time of maturity (60%)?
    Also does the introduction of Direct Tax Code (not sure whether postponed or cancelled?) or the changes in income tax act that are to be introduced as per budget 2015-16 have any bearings on taxation of corpus at time of maturity?
    Thanks in advance.!!

    • Deepesh Raghaw says:

      Hi Sunil,
      VPF is not taxable. There was a proposal to tax EPF maturity amount. Was withdrawn after public outcry.
      No point speculating over how tax laws will shape up.
      I am not quite Government will not touch EPF/PPF taxation.

  8. Pradip says:

    My total investment under 80c and 80ccc are Rs.115000/- & Rs.51000/- respectively. Whereas my net income is Rs.253000/-. How much tax I have to pay sir?

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