Tax saving options : 80C,80CCC,80CCD,80D,80U,80E,24

The Income Tax Act, 1960 has provided Section 80C,80CCD, 80CCC, 80CCCE benefit to save tax by investing upto 1 lakh in different options, each suited to a different need. One can choose a combination of fixed income, life insurance and market-linked investments depending on one’s financial goals and investment horizon. If you are saving for your retirement, you can diversify among ELSS, EPF and PPF investments and avail deduction on home loan principal payment and children’s annual tuition fees,for those who are retired, they can choose among SCSS, PO MIS for regular income and safety of capital invested, but with an overall cap of rupees 1 lakh per annum.

In this article we shall cover the tax saving sections of Income Tax Act, various tax saving options under Section 80C, Section 80CCC, Section 80CCD, Section 80CCE, Other deductions available like Medical insurance (Section 80D), Education Loan (Section 80E), Interest on Housing Loan (Section 24), Disability and Disease (Section 80U). We compare the various options and also how ,since November 2011, Government has linked interest rates on small savings to market rates,pegged to the benchmark yield of government bonds.

Income Tax Act :Tax saving sections

Levy of income tax in India is governed by Income Tax Act of 1961 which came into force on 1st Apr 1962. It has 298 Sections and XIV Schedules. These undergo change every year with additions and deletions brought about by the budget, presented by  Finance Minister, which when passed by the Parliament becomes Finance Act. To encourage long term investments and savings, tax saving options are included in the Income Tax Act under sections 80C, 80CCC, 80CCD, 80CCE . These section states that qualifying investments, up to a maximum of Rs.1 Lakh, are deductible from your income.

  • Section 80C: savings for deduction under income tax and their limits. 80C became effective w.e.f. 1st April, 2006 replacing Section 88.
  • Section 80CCC: Deductions in respect of contribution to certain Pension Funds
  • Section 80CCD: Deduction in respect of contribution to new pension scheme
  • Section 80CCE: Limit of deduction under section. 80C, 80CCC and 80CCD

There are other tax saving options like:

  • Medical Insurance and Health Checkups under Section 80D
  • Interest on Housing Loan under Section 24
  • Education Loan under Section 80E
  • Disability and Disease under Section 80U

Tax saving expenses in 80C

Some expenses that qualify for deductions under section 80C.

Home Loan Principal Repayment: The Equated Monthly Installment (EMI) that you pay every month to repay your 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. Taxguru FAQ on Housing Loan and Income Tax Benefit covers it in detail.

Stamp Duty and Registration Charges for a home: The amount you pay as stamp duty when you buy a house, and the amount you 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 Education Expense :   Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education can be claimed under 80C, for maximum of two children.Payment towards Development fees, Donation and payment of similar nature does not qualify for deduction u/s 80C. No deduction will be available for tuition fee paid for studies of self or for studies of spouse. More details at Simple Tax India TUITION FEES PAID FOR CHILDREN U/S 80C-FAQ

Tax saving investing options in 80C

The options saving under section 80C are as follows:

Employee Provident Fund(EPF) & Voluntary Provident Fund (VPF) : Employee Provident Fund(EPF)  is automatically deducted from salary. Both you and your employer contribute to it.  Under the current norms, 12% of the employee’s salary is contributed towards EPF, which is exempt from income tax. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit per annum.  EPF, falls under the EEE tax regime wherein the interest received (on retirement from service or withdrawal after 5 years of service) is tax-free in the hands of the investor. The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO).  Our article Basics of Employee Provident Fund: EPF, EPS, EDLIS covers EPF in detail.

Public Provident Fund (PPF) : PPF offers an interest rate of around 8% (8.8% for FY 2012-13) compounded annually and mandatory investment tenure of 15 years. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. Only the amounts which are actually cleared on or before the 5th of the month are eligible for that month’s interest. Money cannot be withdrawn before the completion of 6 years. It falls under EEE (exempt-exempt-exempt) tax regime i.e not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax. The government of India decides the rate of interest for PPF account. The current interest rate effective from 1 April 2012 is 8.80% p.a(compounded annually). Our article Understanding Public Provident Fund, PPF covers PPF in detail.

National Savings Certificate (NSC) :  NSC also offers a return of around 8% on half yearly compounding basis. Interest accrued on NSC is also eligible for Section 80 C benefit. Interest received on NSC, at the time of maturity, is taxable in the hands of the investor.  Earlier only a 6 year National Savings Certificate was available for investors. Since 1 April 2012 two types of NSCs are on offer:

  • NSC VIII Issue : 5 year instrument with current interest rate as 8.6% . Maturity value  of  Rs 100 shall be 152.35 after 5 years.
  • NSC IX Issue:  10 year instrument with current interest rate as 8.9%. Maturity value  of  Rs 100 shall be  234.35 after 5 years.

The government of India decides the rate of interest for new NSCs.  For NSCs bought the interest rate remains constant for the entire tenure i.e Unlike many other instruments where a change in the interest rate is applicable to an existing investment(EPF, PPF) here the rate is locked in at the time of making of the investment.  More details at IndiaPost  National Savings Certificates and MoneyControl ‘s NSC 

Tax saving Bank Fixed Deposits : These are like regular fixed deposits  with interest being compounded quarterly but with a lock-in period of five years.  Investment up to Rs 1 lakh in these special tax saving bank fixed deposits entails an investor tax deduction under Section 80C. Most public and private banks offer these tax saving FDs such HDFC Bank. The drawback is taxability of interest income upon maturity.It is important to note that there is no option for premature withdrawal even with penalty for tax savings FD and the interest is taxable.  The rates you can find at moneycontrol Best Rates for Fixed Income by selecting Deposits as Bank Deposits and Tax Status as Tax Saving as shown in picture below.

Finding Tax saving Fixed Deposit Rates

Finding Tax saving Fixed Deposit Rates at MoneyControl

Senior Citizens Saving Schemes (SCSS) : Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme. If offers  interest rate of 9.3% a year, payable on quarterly basis. Maximum investment is upto 15 lakh. It has lock in of 5 years which can be extended by 3 years. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor. Tax is deducted at Source (TDS) .The government of India decides the rate of interest for SCSS. Details at IndiaPost’s Senior Citizen Savings Scheme (SCSS) Account and RBI’s Senior Citizens Savings Scheme, 2004

Equity Linked Saving Schemes (ELSS) : These are Diversified Equity mutual Fund schemes, which invest in stock market, with lock in of 3 years. The returns are linked to the performance of equity markets, hence are volatile.If one invests in ELSS by means of SIP (Systematic Investment Plan)every monthly investment carries a lock in period of 3 years not the date of first investment. More details at ThinkRupee ELSS  You can track performance of ELSS at MoneyControl Performance Tracker or Valueresearchonline’s ELSS Comparison.

Life Insurance Premium:Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction.If you are paying premium for more than one insurance policy, all the premiums can be included. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry.   An insurance plan will be eligible for tax deduction and the income will be tax-free only if it covers the policyholder for 10 times the annual premium. Till 2011, policies were required to offer a cover of five times the annual premium for tax breaks.  Please note that life insurance premium paid by you for your parents (father / mother / both) or your in-laws is not eligible for deduction under section 80C. Our article Life Insurance covers different kinds of Life Insurance policies.

Unit Linked Insurance Plans (Ulips): Ulips, or market linked insurance schemes provide investors the benefit of both life cover and investment in equity and debt market. These are the insurance plans where a portion of premium is used for insurance, rest is invested in a mutual fund (equity ,debt) hence returns of these plans are market linked. These plans are complex & also expensive as they cover charges for insurance(mortality charges), fund management,Premium Allocation Charges. MoneyControl covers FAQ on ULIP’s HDFC ULIP covers it in detail along with comparison with Conventional Plans and Mutual Funds. MoneyControl ULIP shows NAV’s of ULIPs.

Section 80CCC

Section 80CCC of Income Tax Act deals with the deductions and income in respect of contributions to certain Pension funds by an individual assessee Payment of premium for annuity plan of LIC or any other insurer. Deduction is available upto a maximum of Rs. 100,000.  Please note that amounts received on surrender (whole/part) of annuity plan, amounts received as Pension is taxed as income. Note:The limit of deduction under Section 80CCC will be part of the overall limit prescribed under Section 80CCE.

Section 80CCD

The National Pension System (NPS)  is a defined contribution based pension system launched by Government of India with effect from 1 January 2004. Section 80CCD of income tax act provides deduction under the section 80CCD(1) in respect of contribution made by the employee, and a deduction under the section 80CCD(2)  in respect of contribution made by the employer to the New Pension System (NPS).  Contribution made  to the pension scheme under section 80CCD(2)(employer’s contribution) shall be excluded from the limit of one lakh rupees provided under section 80CCE.  The Finance Act, 2011 amended section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension National Pension System(NPS) to the extent it does not exceed ten per cent of the salary of the employee, shall be allowed as deduction in computing the income under the head “Profits and gains of business or profession”. Details on TaxguruFAQ:80CCD Deduction for Contribution to New Pension Scheme , Wikipedia’s National Pension Scheme.

Section 80CCE.

The aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not, in any case, exceed Rs. 1,00,000.

Other Tax Saving Deductions

Medical Insurance and Health Checkups under Section 80D  :

  • The investment in health or medical insurance of self or family members(spouse and dependent children) is exempted under Section 80D upto Rs. 20,000 for senior citizens and upto Rs. 15,000 for others, is available with effect from (w.e.f) Assessment Year 2009-10.
  • From FY 2012-13 you can claim deduction upto Rs 5,000 spent on health checkup of self or family or parents.However, this Rs 5,000 is a part of the overall Rs 15,000((or 20,000 for senior citizen) deduction that you are entitled to under section 80D. So if you have spent say Rs 8,000 in medical check-up and Rs 11,000 as health insurance premiums, you can claim only up to Rs 5,000 of medical check-up bill and Rs 10,000 of health insurance premiums under section 80D.
  • This relief is in addition to the maximum relief of Rs. 100,000 available for investments under section 80C, 80CCC and 80CCD.
  • Medical insurance can be taken from the General Insurance Corporation of India or any other insurer  pproved by the Insurance Regulatory and Development Authority.

Ref:Taxguru’s Section 80D Deduction – For health insurance premia paid, etc.

Interest on Housing Loan under Section 24: Deduction on accrued interest upto Rs. 1,50,000 per annum from the total income is available under Section 24 of the Income Tax Act. Taxguru FAQ on Housing Loan & Income tax benefit covers commonly asked questions related to Housing Loan.

Education Loan under Section 80E : The interest paid on education loan taken for higher education by a person for himself, his spouse or children is fully tax-deductible under section 80E. The main points of Education Loan are:

  • Higher education has been defined to mean full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate courses in applied sciences or pure sciences, including mathematics and statistics. Also, it has been specifically clarified that architecture will fall under the engineering category.
  • The studies can be anywhere in the world and not necessarily in India.
  • The education loan taken can cover not only tuition or college fees alone, but also other incidental expenses like hostel charges, book costs, etc.
  • The deduction is available only for loan taken from financial institutes (ie, Indian banking companies and other notified institutes like HDFC) and approved charitable institutes. Thus loans from family, relatives and employers are not covered.
  • However the deduction is available only for the first 8 years after the first deduction.
  • Loans taken for siblings and other relatives do not qualify

Disability and Disease under Section 80U : You can claim deduction if you or any of your dependents suffer from a specified ailment or physical disability. The deduction is Rs 50,000 in normal disability case and Rs 1,00,000 in severe disability. Every individual claiming a deduction under this section shall furnish a copy of the certificate issued by the medical authority in the form and manner, as may be prescribed. These deductions under section 80U, 80DD and 80 DDB are not subject to actual expenses incurred. TaxWorry Deduction under section 80U in 6 steps.

Comparing Tax saving Options

Comparing all the options for tax saving in terms of returns, safety, flexibility, liquidity.  Your choice of tax saving options should be defined by how soon you need the money, your expectations of returns and the risk you are willing to take. Our article Choosing Tax Saving options : 80C and Others covers how to choose tax saving options

Investing options for 80C

 Interest Rate on Small Saving Schemes

Government has linked interest rates on small savings to market rates,pegged to the benchmark yield of government bonds, since November 2011 . The interest rate of small savings schemes is calculated on the basis of the average yield during the year. For instance, your PPF balance earns 25 basis points above the 10-year benchmark yield. Though the PPF rate changes every year, the SCSS and NSCs will have a uniform rate (fixed at time of buying) till maturity. Government notifies interest rates afresh at the beginning of every financial year. Rates for 2012 from ET Interest rates on small savings schemes like NSC, PPF hiked by up to 0.5%

Interest Rates for FY 2012-13

Interest Rates for FY 2012-13

On Returns on small saving scheme in future  Quoting from Economic Times How to Save Tax in 2013 ( Jan 2012)

Bond yields have come down in the past one month and are likely to recede even further on expectations of a rate cut. This could translate into lower rates for small savings schemes, such as the PPF, NSC and the Senior Citizens’ Saving Scheme (SCSS). The consensus estimate by Bloomberg is that the 10-year bond yield will fall to around 7.95 per cent by March, and slip to 7.77 per cent by December 2013, before recovering to about 8.01 per cent in March 2014. dropping to 8.25 per cent, the PPF interest rate could be lower at 8.5 per cent in 2013-14. It could fall further in the following years.

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Each tax-planning instrument has a different underlying objective, which needs to be understood by the taxpayer before making an investment,  Choose an option that fits into your overall financial plan, not because it offers good returns or your neighbour or bank is selling it. Your choice should be defined by how soon you need the money, your expectations of returns and the risk you are willing to take.

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