Section 80C deduction come with restrictions, look before you leap

Section 80C of Income Tax Act, 1961 allows you deduction upto Rs. 1.50  lakhs in respect of certain items of investments and expenses.  These  deductions are subject to some restrictions with respect to the persons for whom you can claim these and the lock in period for which you need to hold the investments.  Let us discuss these now.

1. Section 80C deduction on Home loan repayment

Deduction for repayment of home can be claimed only if the loan has been taken from specified financial institutions like banks, housing finance companies. Even if you have availed home loan from your employer which is a public limited company or central government or state government or a board, a corporation, a university established by law, you can avail the benefit. Though in respect of loans taken from your relatives you can claim deduction under Section 24b for interest but  the deduction under Section 80 C for repayment is not available. It may be noted that the deduction is available for residential property only and is not for commercial property. This deduction can only be claimed after you have obtained possession of the house even though the repayment might have begun before completion of construction.

In case you sell the property within five years from the end of financial year in which possession of the property was taken, all the deductions allowed earlier shall be reversed and is treated as income of the year in which the property is transferred. Please note there is no such similar restriction on prepayment of home loan before five years from the year in which possession of the house was taken. It is interesting to note that there is no such provision for reversing the deductions allowed for interest even if you sell the house before five year.

2. Section 80C deduction on Life Insurance Premium

An individual can pay and claim deduction for life insurance premium for himself, spouse and children whether dependent you or not. So you as a parent can claim tax benefits for life insurance premium of your children but  your child can not claim tax benefits for life insurance premium paid for parents. The HUF can pay and claim deduction for premium for any of its members. There is also a lock-in period of two years till then you cannot  terminate or let the policy lapse failing which the deductions allowed in earlier are reversed and added to your income of the current year.

3. Section 80C deduction on Education Expenses

Your children’s tuition fee is eligible under Section 80 C but only for two children and that too for full time  course in an educational institution situated in India only. The deduction is available for tuition fee paid only. So any amount paid as donation or as development charges will not be eligible for this deduction. In case you have more than two children, the deduction in respect of other children can be claimed by your spouse if your spouse has taxable income.

4. Section 80C deduction on PPF Account contributions

You can claim deductions in respect of PPF contributions made for yourself, your spouse and your children whether dependent of not. Let me point out that only PPF contribution is the pure investment item where a you can claim deductions for deposits made in the PFF account of your child and spouse. As gift to your child is exempt and the clubbing provisions will not have impact as PPF interest is exempt, By contributing to PPF account of your child you can help him build a substantial corpus and save taxes at the same time.

Though you cannot open a PPF account in the name of HUF but as per the Income Tax Act  the HUF can still make contributions to PPF accounts of any of its member and avail the tax benefit.

5. Section 80C deduction on Deposits under Senior Citizen Scheme:

Senior Citizens can claim deduction under 80C for money deposited in “Senior Citizen Savings Scheme” which have to be maintained for five year. However if you withdraw the deposit before five years, the amount  withdrawn becomes taxable if deduction has been claimed earlier. However any money received by the nominee or legal heirs on closure of the account due to death of the account holder even before five years does not become taxable.

6. Section 80C deduction on ELSS contributions:

ELSS (Equity Linked Saving Schemes) of Mutual Funds have gained popularity since these have given good returns over the long period of time. The units allotted under ELSS schemes have a lock in period of three years. In case of investment made through Systematic Investment Plan, three years are calculated from the date of each SIP installment.

So now you are aware about the restrictions under Section 80 C as regards for whom you can claim it and the period for which you need to hold it.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com, @jainbalwant on twitter.

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