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From Director’s Desk | Anirudh Dar

In the next few months, we will start receiving reminders from our CA’s and HR’s asking us to submit our tax declarations. In order to seamlessly navigate through the maze of various options, let us understand what is Section 80C and how we should use this to effectively reduce our tax burdens and make sensible investments at the same time.

For starters, Section 80C of the IT Act permits for various expenses and investments that are exempt from Income Tax. The maximum permissible deduction under this head is Rs. 150,000/- per annum. Interestingly, this provision is applicable only for individual taxpayers and those classified as HUFs. Anyone other than these do not qualify for deduction under Section 80C.

Since this is an extremely vast subject and has multiple investment options available, we will cover this in two separate editions of our newsletter. Here is the first part of options for you to consider:

Employee Provident Fund: The most common 80C deduction for those employed is EPF or Employee Provident Fund which is usually 12% of one’s basic salary. The biggest advantage of an EPF deduction is that while you contribute 12% of your basic salary, the employer matches your contribution. The fund thus accumulated accrues a defined rate of interest that is announced by the Government after consulting with the EPFO, which is the regulatory body for all EPF accounts. The interest one earns on an EPF account is tax-free and can be withdrawn without paying taxes. Individuals usually withdraw this corpus as a lump-sum amount on their retirement.

Equity Linked Savings Scheme (ELSS) Mutual Funds: The only permissible category of mutual funds which allow for a tax-break are ELSS Funds. It is worth noting that since the annual limit for Section 80C is Rs. 150,000/- per annum, the tax exemption for investing in an ELSS fund is also capped at this limit. This however does not mean that one cannot invest more than this limit. The returns, if any, are subject to taxes like any other equity mutual investment and taxes must be paid on it. The minimum lock-in period for an ELSS fund is 3 years and under no circumstances can this be withdrawn before the end of this period. Having said that, this is one of the most popular investments for the purpose of tax saving since it comes with in the least lock-in period of 3 years.

National Pension Scheme (NPS): This was initially launched in 2004 for Government employees and from 2009, any Indian citizen between the ages of 18-60 who could comply with the basic KYC norms could contribute. NPS allows its subscribers to contribute regularly in a pension account during their working life. On retirement, they can withdraw 1/3rd of the total corpus as a lumpsum and must necessarily use the remaining corpus to buy an annuity to get regular income after retirement. An employee’s own contribution is eligible for a tax deduction up to 10 per cent of the basic salary under Section 80CCD (1) of the IT Act within the overall ceiling of Rs. 150,000/- of Section 80C and Section 80CCE. However, the employer’s contribution to NPS is exempted under Section 80CCD (2). Individuals can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B). A self-employed person can also contribute 10 per cent of his gross income under Section 80CCD (1) in NPS. NPS offers two accounts: Tier-I and Tier-II accounts. Tier-I is a mandatory account and Tier-II is voluntary. The primary difference between the two is on withdrawal of money invested in them. You cannot withdraw the entire money from Tier-I account till your retirement. Even on retirement, there are restrictions on withdrawal on the Tier-I account. The subscriber is free to withdraw the entire money from the Tier-II account.

Public Provident Fund: This is a voluntary contribution scheme account that any individual can open and invest in. Of course, minors need to have a guardian appointed if the account is opened in their names. A PPF account has a minimum lock-in period of 15 years on investment, before the completion of which funds cannot be withdrawn completely. An investor can choose to extend this tenure by 5 years after lock-in period is over and can continue to make these extensions until they attain an age of 60. The returns in a PPF account while guaranteed are not defined and can fluctuate from time to time. While this remains an extremely popular choice amongst low risk investors, the maximum permissible investment in this is also Rs. 150,000/- per annum.

In the next edition, we will cover Section 80C investment options like SCSS, NSC, Insurance plans, 5-Year Tax Savings bank fixed deposits and the immensely popular Sukanya Samriddhi Scheme.