As the end of the financial year draws near, taxpayers start preparing and worrying about income tax return filing for the particular assessment year. Though there is a large window of opportunity to file the returns, taxpayers wait until the last minute to make investment decisions and take tax saving measures. This further delays the income tax return filing process.
Among the many tax relief investments available to individual taxpayers, those under section 80C are among the most popular ones. However, the numbers, combinations and terms can be quite confusing when it comes to investments and tax relief under Section 80C. If you are thinking about getting maximum tax relief under Section 80C, these 5 important points about claiming tax deductions will definitely help you.
Before we begin, let us understand that tax saving measures shouldn’t be taken on an ad-hoc basis or at the last minute. More often than not tax saving investments are done at the last minute, especially when the accounts department gets impatient on submitting investment documents. Generally, when investments are done in a hurry, it leads to regret very soon and you are more than likely to discontinue the investment after a short period.
Amount of deductions under 80C
If you are claiming income tax deductions under section 80C of the Income Tax Act, the maximum amount of tax deductions that you can get is Rs. 1.5 lakh. If you have exhausted the limit of Rs. 1.5 lakh, you can get additional deductions by saving towards retirement under the National Pension System (NPS).
Tax-saving investments and expenses under section 80C
Some investments and expenses that provide tax relief under Section 80C include:
Tax saving instruments under Section 80C
Fixed-income or debt-linked |
Equity or market-linked |
Public Provident Fund (PPF) |
Unit Linked Insurance Plan (ULIP) |
National Saving Certificate (NSC) |
Equity Linked Saving Schemes (ELSS) |
Sukanya Samridhi Yojana |
National Pension Scheme |
5-year Bank Deposits |
|
Senior Citizen Savings Scheme (SCSS) |
|
Specified expenses for claiming tax deductions under section 80C
Children’s tuition fees |
Principal repayment of home loan |
Payment of life insurance premium |
Contribution to Employee Provident Fund |
Nature of tax saving instrument
While investing to obtain tax relief under Section 80C, you must understand that there are two types of investment instruments available under section 80C. While there are those that offer fixed and assured returns such as endowment plans, PPF, NSC, SCSS, etc., there are those that provide returns that are market-linked. Market-linked or equity-linked products include ELSS mutual funds, ULIPs and pension plans.
No deductions on capital gains
There is one catch with section 80c investments and expenditures. If your income comprises of only capital gains, you are not eligible for tax relief under section 80C.
Lock-in periods
All investments under section 80C have a minimum lock-in period. The lowest is 3-years for Equity Linked Saving Schemes (ELSS). Apart from these, there are also certain restraints on full liquidity in some investment instruments even after the expiry of the lock-in period.
If you have the appetite for risk and want to get better returns, ELSS is the right 80C investment for you. It has a low lock-in period of just 3 years and has historically generated good annualised returns. However, with ELSS you may be subject to long-term capital gain (LTCG) tax if returns are more than Rs. 1 lakh per annum.
ELSS Annualised Returns
Years |
Return (p.a) |
3-year |
10% |
5-year |
16% |
10-year |
16.3% |
Source: Business Standard
ULIPs are also a good choice while claiming tax deductions under section 80C. Unit-linked plans give you the combined benefit of life protection through insurance and wealth creation through a wide range of fund options. You also get triple tax benefits with ULIPs. The premium, interest and maturity amounts are entirely tax-free.
And if you want to play safe and are looking for assured returns, PPFs are your best choice. PPFs also provide you tax benefits as both interests earned and maturity amount are tax-free. However, the biggest drawback with using PPFs for tax relief under Section 80C is the long waiting period of 15 years, though partial withdrawals are allowed after the 7th year.
As mentioned earlier, the biggest mistakes occur while investing in tax-saving instruments when you only think about saving tax and act in the last minute. Therefore, proper planning and due diligence is crucial to make good investment decisions. Also, when you file your tax return this year, don’t wait until the last minute and avoid last minute rush and bad investment choices.
For individuals and Hindu undivided families (HUF), the last date for filing income tax returns is generally July 31 of every year. This year the government has given taxpayers a grace period of a month, so they can complete income tax return filing by August 31, 2019. It is advisable not to wait until the last minute; prepare to file your IT returns on time.
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