Demystifying Section 80C – Understanding the Options

Welcome to part B of the ‘Demystifying Section 80C’ series. In part A of the series, we discussed about the significance of Section 80C. In part B today we will try understand the versatility of Section 80C and the various options under it.

While section 80C does provide numerous options to invest the one lakh, they are limited to long term investment options. This is instituted to encourage the habit of saving among tax payers.

Let’s discuss the options in brief

1. Life Insurance Premium

Payment of premium for a life insurance policy for self or spouse or dependent kids can be included under section 80C. Have you been paying insurance premiums without utilizing the section 80C deductions? Time to start taking advantage of this provision. There’s an obvious reason why Insurance comes right on top of my list. It’s never enough stressing the importance of having life cover. More on this in the coming posts.

2. Equity Linked Saving Schemes (Mutual Funds)

You’re young and ready to take some risk, what better than a scheme that lets you invest in the stock market and gives you tax benefits as well. Equity linked saving schemes are nothing but mutual funds that invest in the stock market and give you the tax benefit under section 80C. Not all mutual funds fall under this scheme. The special feature of the ELSS is that it has a lock in period of three years. This means that you cannot withdraw your money for at least three years. While there is a lock in period, in comparison to other instruments covered under section 80C, ELSS has the lowest lock in period. In addition, an advantage that singles out ELSS as one of the best instruments under section 80C is the fact that under current laws long term capital gains and dividends received from ELSS are tax free!!

3. Public Provident Fund

A PPF account when opened runs for 15 years and provides a return of 8% per annum. Once opened investors must make contributions every year to keep their PPF accounts active. The minimum amount is Rs. 500 and the maximum is Rs. 70,000. Currently the income (interest) earned on a PPF account is tax free which makes it all the more attractive as an investment option.

Example: If you were to invest Rs. 10,000 every year in a PPF account, you would be investing Rs. 150,000 over a period of 15 years and the future value (Rs. 293,243) of this amount after 15 years at 8% interest is almost double of the present value.

Important note: The deduction made by your company towards ‘Provident Fund’ contribution can also be considered under section 80C.

4. Term Deposits

A Bank Term Deposit is similar to a fixed deposit except that it has a lock in period of five years. A bank term deposit cannot be encashed before the expiry of five years from the date of the deposit. Do note that while the lock in period is lesser than PPF or NSC, the interest earned is taxable unlike PPF or ELSS.

Let’s take an example:

Total Taxable Income - Rs. 300,000

Income tax without section 80C - Rs. 15,000

investments

Investments under 80C

PF Contribution - Rs. 21,600

Public Provident fund Contribution - Rs. 12,000

(At Rs. 1000 per month)

So far your total exemption under section 80C is Rs. 33,600. To take advantage of the maximum tax exemption available under section 80C you need to make investments of Rs. 66,400 more. If you decide to invest in ELSS using a SIP of Rs. 5600 per month, then

ELSS - Rs. 67,200

(SIP of Rs. 5600 per month)

Total investments - Rs. 100,800

Amount considered under - Rs. 100,000

Section 80C

Income tax with section 80C - Rs. 8,000

investments

While this might seem like a lot of hard work, remember that not only are you saving money in this process you are also forcing yourself to invest!

While there are other options such as National Savings Certificates, Pension Plans, Infrastructure Bonds, payment towards principal repayment in housing loans, etc. in my opinion the four listed above are the most attractive ones. They cater to both a risk-averse as well as a risk-taking investor.

With this we conclude the series on section 80C. Watch this space for more interesting articles in personal finance and how you can make your money work for you.