Tax planning is a coherent part of any financial plan. Everybody, whether salaried or a businessman, is interested in minimising his tax liability. The Income Tax Act allows certain deductions while calculating taxable income.
Previously, there existed a system of rebate under Section 88.
According to this system, a taxpayer got a tax deduction of 20 per cent of the amount invested in specified categories, if the gross total income before Chapter VI A deduction was below Rs 150,000; and a deduction of 15 per cent income was above Rs 150,000. There was no rebate if the gross total income exceeded Rs 500,000.
This system has been done away with and the finance minister has introduced a new section, 80C, which covers the categories of investments previously covered by Section 88. The maximum amount of deduction available under this section is Rs 100,000.
What kind of investment is covered by this new Section 80C?
Employees' provident fund
The basic purpose of this is to build up a corpus for retirement. There is a statutory deduction of 12 per cent from an employee's salary. An employee can contribute more than 12 per cent of the salary. An employer too is bound to contribute 12 per cent of an employee's salary. The interest rate is declared every year. At present, the interest rate is 8.5 per cent. Both the contribution and the interest earned are exempt under the Income Tax Act. So, this is the best tool for retirement planning.
Public provident fund
Those who are not covered by EPF can contribute to PPF. Even those covered by EPF can, in addition, contribute to PPF. This is a self-driven retirement planning tool. PPF earns interest of 8 per cent. The interest earned is exempt from tax. The term of a PPF account is 15 years and, thereafter, it can be renewed for a period of 5 years after every maturity.
As per the Income Tax Act, there is no ceiling on investment in PPF under 80C. But, aas per the PPF Act, one can contribute a maximum of Rs 70,000 per account. Practically speaking, one can open PPF accounts in the names of family members and contribute the maximum of Rs 70,000 per account. But the overall limit for deduction under 80C is Rs 100,000.
Life insurance
Life insurance is a must in everybody's portfolio. The premium paid towards a life insurance contract - whether term insurance, endowment insurance or ULIP (unit-linked insurance plan) - is eligible for deduction under 80C. The only condition is that the premium amount should not exceed 20 per cent of the sum assured.
Even if the premium is paid towards spouse's or children's policies, it is eligible for deduction, irrespective of whether the children are dependent of not. The proceeds of an insurance policy are exempt under 10(10D). If you are opting for a ULIP, then it serves twin purposes, that is, insurance and investment.
Pension plans
These pension plans are actually covered under Sec. 80CCC, but they come under the overall limit of Rs 1 lakh under 80C. These plans are best suited for those who are not covered by EPS (Employees' Pension Scheme) or any other such schemes, and is a good retirement planning tool. There are various options for investment under such plans, suited for every risk profile. One has to contribute a minimum Rs 10,000; there is no limit for maximum investment.
New entrants to government service are also covered by a contributory pension scheme and their contribution is exempted under 80CCD. The Union government is in the process of introducing reforms to the pension sector and it is likely to set up a Pension Funds Regulatory and Development Authority (PFRDA).
Housing loans
Nowadays, most people opt for housing loans to fulfil their aspirations of owning dream homes. The government has introduced tax breaks to boost the housing sector. Interest on housing loans up to Rs 1.5 lakh is tax-deductible under loss from house property. The principal amount up to Rs 100,000 is now covered under Section 80C. This is a very good alternative for home buyers. If we take into account the tax breaks, then the effective interest rate on a housing loan will come down at least by 1 percentage point.
Children's fees
Children's education can be very costly. Parents can claim deduction of tuition fees of their children under 80C. The ceiling for this purpose is Rs 12,000 per annum per child for a maximum of two children. One should note here that any donation or capitation fee is not covered under this section. Another point to note is that it should be for full-time study at any university or college recognised by the government.
National savings certificate
This is one of the small savings schemes. Its tenure is 6 years and the interest rate is 8 per cent, compounded half-yearly. So, Rs 1,000 invested today will become Rs 1,601 after 8 years. But, one should note here that the interest is taxable, either on due basis or accrued basis. Interest is taxed under the head of 'income from other sources'. This is a safe investment, as it is backed by government security and best suited for risk-averse investors. The only thing is that you have to lock in money for 6 years.
Bank FDs
The government has covered bank FDs for deduction under 80C. The only condition is that it should be with a scheduled bank and for a minimum period of 5 years. This is a very good alternative for a risk-averse investsor. But interest earned on an FD is chargeable to tax under the head of 'income from other sources'. At present banks offer around 7.5 per cent interest for term deposits of 5 years and above. There is no upper limit for the amount to be invested.
Equity linked saving schemes
These are the schemes of mutual funds notified under Section 10(23D) of the Income Tax Act. These are the equity schemes of mutual funds with equity exposure of more than 50 per cent and there is a lock-in period of 3 years. One should note that if one is opting for an SIP, then the lock-in period applies to each instalment of the SIP.
The investment into such schemes is eligible for deduction under 80C. Dividend is also exempt in the hands of investors. This is a riskier investment than some of the alternatives, but one can expect 12 per cent annual return. The interesting thing here is a lower lock-in period. So, this is a good alternative for those who want to take equity exposure and also avail of tax breaks.
Infrastructure company IPO
To boost the infrastructure development of the country, the government has introduced this tax break. So, if one is subscribing to eligible issue capital of an infrastructure company or a company providing finance to infrastructure projects, such investment is eligible for deduction under 80C without an upper limit.
One should also note here that one must have purchased shares from initial public offering and there is a lock-in period of 3 years. If one purchases shares from the secondary market, one is not eligible for the deduction. Also, dividend is tax-free in the hands of investors. This is a good alternative for those with an appetite for some risk and willing to take equity exposure.
So, these are the various avenues available for investment and for getting deduction under Sec. 80C. You should take your investment decisions according to your needs, time horizon and risk profile. And no financial plan in complete without tax planning.
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