ABC of section 80C

For people Section 80C has become synonym to tax saving. Everyone jumps on one of the products which are available there for investment. In India tax saving & investment go hand in hand – some time it shocks me, when I hear people saying that their investment is only what they are doing for tax savings.  Let me clarify in the starting of the article that if you are one of those who think that investing only for tax saving will be enough for you to achieve all your goals or a single goal like retirement – you are terribly wrong. And sooner you realize it is better as time cannot be substituted, in most of the financial products.

ABC of section 80C 1Always remember your tax saving should be result of your investment planning & not vice versa. This means first we make our goals, make a plan for it, then choose an investment strategy and after that we see that can any tax saving instrument can become part of overall strategy or not.

What is Section 80C

Section 80C provides you deduction upto Rs 1 lakh from once income. It is applicable for any individual or HUF and also for any income level. As this is a deduction this actually reduces your gross income for tax purpose. So if you have earned Rs 5 lakh in this year & you used 1 lakh limit of section 80 C – you have to calculate tax only on Rs 4 lakh.

Let’s understand it with example:

Mohan & his friend Sohan who joined IT company this year at same level & are going to earn Rs 10 Lakh. Mohan was enjoying his life at fullest & never thought that he has to invest any amount to save tax. So he actually planned to pay tax or we can say he was not having any choice but to pay tax. Sohan was a good saver & had some idea about tax saving – he kept aside some portion of his salary to invest in some tax saving instrument. Last week one of the insurance agents meets Sohan & told him about how he can save tax under section 80C by investing in their newly launched endowment policy. So Sohan invested Rs 1 Lakh in their policy & saved tax.

Let’s see how their finance looks:

ParticularsMohanSohan
Salary10000001000000
Interest Income00
Taxable Income10000001000000
Deduction U/S 80C0100000
Net Taxable Income1000000900000
Income Tax Liability
0-180000 @0%00
180001-500000 @10%3200032000
500001-800000 @20%6000060000
800001 Above @30%6000030000
Total Income Tax152000122000
Education Cess @3%45603720
Total Income Tax Payable156560125660

You must be thinking that how smart is Sohan he saved a tax of Rs 30900. But I think he was equally dumb because he forgot the basic principal “your tax saving should be result of your investment planning & not vice versa”.

Two Mistakes that Sohan did:

  1. Invested in Low yielding expensive insurance policy.
  2. Not considered his EPF contribution. This is deducted form you monthly salary @ 12% of your basic. Your employer also contributes the same amount. Your contribution qualifies the Sec 80C investment.

Various options available under section 80C & which one is suitable for you.

Instruments that don’t even need investment

  1. Children’s Tuition Fees. This deduction is available for 2 children with total limit of Rs 100000. So for this the fee receipt that you get from school is the document that you need to furnish.
  2. Home Loan Principal Payment: If you have taken a Housing loan and look at the payment schedule, it is bifurcated into two parts. One is you principal payment and second is your interest repayment. You can also contact the bank or the loan company for a certificate, which will describe your principal and interest payment outgo.

Instruments that need Investments. We can further divide into 2 parts

  • Debt Oriented: The instruments under this category are EPF, PPF, NSC, Bank term Deposit, Senior Citizen Savings Scheme and Post office Time deposit above 5 years. For complete details check table. Other than these there are Insurance policies which also come under these categories but we have not included them in table as our suggestion is don’t mix insurance with investment. There return varies from 4.5 to 6%.ABC of section 80C 2
  • Equity Oriented

i.      ULIP: Unit Linked Insurance Plans are the insurance plans where a portion of your premium goes as an investment, similar to mutual fund. The returns of these plans are market linked. These plans are very complex & also expensive.

ii.      ELSS: These are Diversified Equity mutual Fund schemes with lockin of 3 years. The returns are also linked to the performance of equity markets. (ReadELSS: best tax saving instrument undoubtedly)

You should think about the following criteria, before selecting your tax saving investments:

  • Liquidity: All these products have different lock-ins. Consider your requirement of funds before you invest.
  • Risk and Return: An ELSS can you give highest return but are volatile. So consider how much risk you can take.
  • Inflation protection: These product yield returns in wide range. So consider a product which at least beat inflation and suite you on risk parameter as well.

We can make this bit easy by suggesting instrument by age:

Young – maximum contribution in ELSS & with some portion in PPF.

Middle Age –  Equal Contribution in PPF & ELSS.

Retired – Senor Citizen Scheme & Fixed Deposit will be better. Still consider some contribution to ELSS if your asset allocation is tilted towards debt.

Let’s assume that one person who is 30 years now & want to invest in tax saving instruments till his retirement. How much corpus will be build if you invest Rs 30000 every year in Endowment Plan(6%), PPF(8% – before change) & ELSS(12%) for 25 years.

ABC of section 80C 3

Hidden Gem of Section 80C:

Term Insurance: Term Insurance is the cheapest policy available and hence hardly talked about by agents and even insurance companies never promote such cheap and low cost product. Term policy is insurance at its purest and simplest form. You pay premiums because there is a guarantee that if something happens to you, your family will be paid out the pre-decided amount, hence you have the peace of mind that even if you are not there, those loved ones you leave behind will not have to bear a financial loss. Term Insurance is protection against risk of life. You must buy it & also avail section 80C benefit on it.

Feel free to ask any question related to taxation or tax planning.

24 COMMENTS

  1. Hi Hemant
    Very useful. The best part is :
    Always remember your tax saving should be result of your investment planning & not vice versa. This means first we make our goals, make a plan for it, then choose an investment strategy and after that we see that can any tax saving instrument can become part of overall strategy or not.
    Unfortunately, most of us do it the other way. We first consider tax saving instruments and then think of investment if some money is left out. I have also done this mistake in the past.

    • Hi Anil,
      If someone is just investing without goals or doing things in isolation – is doing a big mistake.
      Fully agree with you “first we make our goals, make a plan for it, then choose an investment strategy and after that we see that can any tax saving instrument can become part of overall strategy or not.”

  2. Hi,

    Will investing in ELSS be a good option this year,this month or next.
    What should be ideal amount that I should start with as I am just one year old in work experience.

    • As markets remain volatile u cant find out the best time . Better u separate the amount u are goi to invest into three parts. put that on every 5 percent dip so that u can increase ur yields marginally

      • Thank you Vignesh.
        But Can I just start with Rs 6000 in HDFC tax saver for this year and keep it locked for 3-5 years.
        Should the investment me more or is it enough to start with this year

        • @Resh

          Its based on the risk appetite you have. if you are a conservative investor go for ppf and 5 yr tax saving deposits. surely ur money will not start growing form the day u put in the mutual funds. it will become red and then one fine day u will get good returns. But this is the best time to book the profits as markets are down.

          yes you can keep that after ur lock period also. no peoblem. But u cant take that within the lock in period.

          Amount of invesment u need to decide.

          1. Canara Robecco tax saver, Hdfc tax saver and Fidelity Tax advantage.

          Regards
          Vignesh

  3. after DTC comes into effect, probably by 2012 what wil happen to my ELSS investment done this year? If i pay Canara Robecco equal instalments (SIP) for next 5-6 months…whats the future? will there be a lock in after DTC also? will the fund (ELSS) perform as good as it is performing now? Whats the future of ELSS post DTC?

    • @yamini

      1. This year invesment till 2012 march will follow the original pattern of existing norms. After march this will not be in the section 80 c category .

      2.You need to stop ur sip within march. U can withdraw after the lock in of 3 yrs

      3. Fund performance u can see its ranking in different tenure. As markets are down Most of the funds will yield good returns when it bounces back .so no need to worry.
      4. it will not be under section 80c and we cant use it as a tax saving instrument.

      Regards
      Vignesh

  4. Hi,

    I need a clerification about the exact amount of tution fee of the children exempted under 80C. Is this ceiling of Rs. 12 thousand/ children is still valid for this FY. What will be the tax deduction criteria for the parents paying more tution fee for their children. I was planning as the actual amount paid by me to be exmpted from my tax tax calculations.

    Regards,

    Ram

    • Dear Ram,

      Thanks for hinting that – please read complete details (I have made changes in the post):
      Deduction under this section is available for tuition fees paid on two children’s education. If Assessee have more then two children then he can claim tuition fees paid of only two children’s. The Deduction is available for any two children.
      Here we would like to mention that husband and wife both have a separate limit of two children each, so they can claim deduction for 2 children each.
      Expenditure paid for self education not allowable: – This is the only clause u/s 80 C where assessee can not claim tax benefit for expenditure incurred for self. In other words if assessee has paid tuition fees for his own studies, he will not be eligible for deduction.
      Fees paid for spouse: Deduction is not available for tuition fees paid for studies of spouse.
      Maximum Limit: Deduction for tuition Fees is available up to Rs.100000. Please Note that aggregate amount of deduction under section 80C , 80CCC and 80CCD shall not exceed Rs. 1,00,000/-

  5. Hi
    I am 21. I need to invest 87500 under section 80 c.

    PPF- 27500
    ELSS

    As markets are down i thought of investing in ELSS more . Any how markets will return back in the next three yrs.

    This is my split up.

    canara Robecco Tax saving – 25000
    Fidelity tax advantage ——–25000
    Hdfc tax saver —————-10000

    Till now i invested 225000 . yet to invest the remaining amount. I am investing for every 500 dip in the sensex. Am i goi in the right way? or should i need to change my startegy. I know for each invesment i have a lock in off three years.
    how about my fund selection ? Any modification required?

    pls provide ur suggestions.

    regards
    Vignesh

    • Dear Vignesh,
      Fund selection is OK but I don’t think there is any advantage in your strategy “I am investing for every 500 dip in the sensex.”
      Make your investments dull – invest it through STP route.

  6. Hi Hemant
    It is good that you have interlinked TFL Guide and TFL Hindi. I was wondering why you had put your your services on TFL Hindi without providing a link on TFL Guide.

  7. Dear sir,
    can you please put some light on NPS. I have searched your articles but could’t foung discussion regarding NPS. how to go for it
    Thanks

  8. Hi Hemant,

    Your articles are very informative and to the point. I agree with every financial consultant who says that the term insurance is the best life insurance policy. Theoretically it is very true. But, as a LIC and Mutual fund advisor, my experience is that the clients whom I sold Term and SIP three years back, they are now neither interested in term insurance nor in SIP. They say that they are not getting any return on term and it is waist of money as they have not died. Also they intend to close the cover by LIC as cheaper cover is available elsewhere and I also see the reducing trend in cost of term insurance. Similarly SIP does not last long. Industry average is said to be 18 months. Hence people are not using it for long term wealth creation.
    But, on the contrary, 26 crore policy holders of LIC are happy. They are not complaining. They are creating wealth with whatever positive rate of return they are getting. Should we not go with the psychology of people and their buying pattern. Karela ya lauki ka juice achha hota hai lekin koi pita nahi. Non spicy, non fried and non junk food is best for health, but who cares. I believe that transition will take some time to gain maturity and mean while we need to go for combinations of Endowment, Term, PPF, NSC and ELSS SIP as tax planning tools to old generation and new concepts of financial planning to newer generation.
    Pradeep Jain, Ranchi
    9431100000

    • Dear Pradeep,
      Thanks for sharing your views & I know most of the clients think like this only. But my point is being an advisor our role is doing best for clients which will help them in achieving goals, rather than saying yes to every point. Think of our profession as a doctor…
      I fully agree with you that “transition will take some time”.

  9. Hi Hemanth,

    Your’s articles and information is very useful. I need your advise regarding tax savings and mutual funds.

    I have been working an IT firm. I am looking for tax savings. I have LIC endowment policy which i have been paying 12000 per year. I am planning to take term policy and some investment mutual funds which i can available for tax exempts. I want to invest in mutual funds upto 5000 per month.Please suggest me the best ways to get tax benifits as well investment.

    Thanks,
    Shiva

  10. Hi Hemant,

    If i am paying fees monthly 12000 against tution/coaching- education fees for my brother & sister ( not childrens ), can i claim it as deduction under section 80C.
    If not pls suggest how can i claim for above amount as deduction under any Section.

    Thanks & Regards,
    Ramesh

  11. Hi, i am 27 year young, firstly i would like to thank you for writing every article so well…it makes newbees like me to understand terminology better…now my querry is…i get 47000 in hand, i want to invest 20k per month .I have three goals (FULFILLEMENT IN DECREASING ORDER), my retirement(2047),kids education +marriage and buying my own home in mumbai,i am saving 5k in ppf apart from EPF that the company cuts as part of my retirement plan, i now need advice over 15k investment planning a month, 180000 a year.How do i plan this investment?

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