Tax planning under section 80C – Investment avenues

Kunal Singhal

 Introduction

In order to tax individuals on basis of their earnings (higher tax bracket for high income group and lower tax bracket for lower income group) income tax department levies income tax on individuals on basis of certain range. This range is known as “income tax slab rates” wherein the individual has to pay tax depending on his earning capacity. Current slab rate for Financial Year 2017-18 & 2018-19 for Individual Below the Age of 60 Years is mentioned below for reference:

Income Tax Slab	Tax rate Rate for Financial Year 2017-18 and 2018-19
Rs. 0 – Rs. 250,000	Nil
Rs. 250,000 – Rs. 500,000	5% of income above Rs. 2.5 lacs but less than Rs. 5 lacs
Rs. 500,000 – Rs. 10,00,000	20% of income above Rs. 5 lacs but less than Rs. 10 lacs
Above Rs. 10,00,000	30% of income above Rs. 10 Lacs.

 For Example:

A person has a gross income of INR 5.6 lacs during the year. His income tax can be computed as below:

Income range	Breakup of income earned	Tax on income
Rs. 0 – Rs. 250,000	Rs. 250,000	Nil
Rs. 250,000 – Rs. 500,000	Rs. 250,000	5% = Rs. 12,500
Rs. 500,000 – Rs. 10,00,000	Rs. 60,000	20% = Rs. 12,000
Above Rs. 10,00,000	Rs. 0________	30% = Rs. 0_____
	Rs. 5,60,000/-	Total tax = Rs. 24,500

 Now, as per above example tax liability of the assessee comes to Rs. 24,500/- on gross income of Rs. 5.6 lacs.

To further lower the tax burden and encourage savings amongst the individuals tax department offers individuals to do savings. If they do so, tax department further grants them an exemption of the amount of savings in a particular year from being taxed. That is to say, if an individual makes any savings in a particular year, he can avoid paying taxes on such income.

As per Section 80C of Income tax act, an individual can make use of this provision to the extent of INR 150,000 in a particular year. In other words, an individual can claim exemption from income to the extent of Rs. 150,000 or actual investment made, whichever is less.

To understand this better, lets continue with the example above. In this case suppose an individual makes his investments as mentioned under:

Gross Income (as mentioned above) = Rs. 5,60,000

Investments made u/s 80C = Rs. 70,000

Net taxable income = Rs. (5,60,000 – 70,000) 4,90,000

Tax liability as per above mentioned slab rates can be calculated as below:

Taxable income = Rs. 4,90,000

Taxable Income range	Income taxable	Tax@slab rates
Rs. 0 – Rs. 250,000	2,50,000	0
Rs. 250,000 – Rs. 500,000	2,40,000	5% of 2,40,000 = Rs. 12,000/-
Rs. 500,000 – Rs. 10,00,000	0	0
Above Rs. 10,00,000	0	0
	4,90,000	12,000

Thus, it is clear from the above example, tax burden of the individual has come down from Rs. 24,500/- (as calculated previously) to Rs. 12,000/- due to investment of Rs. 70,000.

The primary rationale of the provision can be seen as, although individual has to spend Rs. 70,000 at once out of his pocket to save tax of Rs. 12,500, yet this is beneficial as investment amount of Rs. 70,000 stays with the individual and on maturity he receives this money back with interest over 5 years. This can also be seen as forced investment.

Possible Investment options

After having discussed the rationale of investments for tax saving, next question which comes to mind is what are the investment options available where one can invest and which is more beneficial out of several options available.

Few Investment options at a glance

Life Insurance Premium

All premiums paid towards life insurance policies are eligible for income tax deduction u/s 80C I-T Act. Premiums paid for or on behalf of others like your parents/ in-laws is not eligible for deduction.

Unit linked insurance plans

ULIPS are combinations of Life Insurance and Equity Investments. All ULIPS qualify as life insurance policy and the premiums are exempted from income tax benefit.

Pension Fund

Under Section 80CCC, you can invest up to Rs. 1.5 lakh in a Pension Fund of LIC of India or any other private insurer. Any premium paid towards any annuity plan, whether deferred or immediate will give you tax relief in that financial year. Contribution towards pension funds is under a Sub Section of 80CCC which is also a part of the 80C Rs. 1.5 lakh limit.

ELSS (Equity Linked saving Scheme)

ELSS offers to youngsters the potential to earn high returns; albeit with higher risks. Lock in period for 80C purpose is 3 years and dividends and capital gains are tax exempt. Not all mutual funds can provide 80C deduction. Some common examples of ELSS are–SBI Magnum Tax Gain, HDFC Tax Saver, Fidelity Tax Advantage, Franklin India Index Tax Fund, etc. If you invest for long term then, ELSS has potential to give handsome return.

Provident Fund (PF)

For salaried employees PF is a default investment which qualifies for deduction u/s 80C. While employer’s contribution is exempt from tax, employee contribution (i.e., employee’s contribution) is counted towards section 80C investments.

Home Loan Benefit

Home loan benefit is available in two parts – principal and interest. Principal component is exempt and counted under section 80C investment. Interest component is exempt under section 24 of the income tax act depending whether the property bought with home loan is self occupied or let out. This can be a very effective tool to reduce the tax burden.

Tuition fees deduction u/s 80C

This is an avenue most people are not even aware of. Any amount paid as tuition fee for the education of the first two children of the employee / tax payer is eligible for deduction u/s 80C of I-T Act.

National Savings Certificate

NSC is a good medium term investment option. NSC can also be pledged as security against a loan to banks. NSC VIII Issue has maturity period is five years, while NSC IX Issue has tenure of 10 years. Trust and HUF cannot invest.

Bank Deposits

Investment in fixed deposits of scheduled bank with tenure of 5 year is entitle for section 80C deduction.

(Author can be reached atinfo@caksc.in)

(Updated on 22.06.2018)