Avoid These Mistakes By Investing To Save Tax Under Section 80C | Photo credit: BCCL
Section 80C of the Income Tax Act, 1961 is a powerful weapon in the hands of taxpayers because it helps reduce taxable income. Subsections such as 80CCD, 80CCD (1), 80CCD (1b) and 80CCD (2) allow taxpayers to reduce their tax burden through eligible investments and expenses.
In order to use it wisely, taxpayers can plan their investments on a multitude of products such as the public provident fund (PPF), the national pension system (NPS), the national savings certificate (NSC), the repayment of the mortgage, etc. at Rs 1.5 lakh each year.
This is particularly beneficial for the middle class as these deductions are only available for Individuals and Hindu United Families (HUFs) and not for businesses, partnership companies and LLPs.
However, none of these deductions are available under article 115BAC of the recent 2020 finance law – or the new tax regime. Those who opted for the old tax regime for any fiscal year should take note of the following points as poor planning can make you ineligible for deductions.
Investment plans purchased under the name of which
The deduction is only available in respect of the policy taken out in the name of the taxpayer or in the name of his spouse or children. In the case of a HUF, the deduction is available for a policy taken out in the name of one of the members of the HUF. No deduction is available with respect to the premium paid under a policy written on behalf of any other person, including parents.
Blocking period: Certain schemes such as ELSS, PPF and term deposits, eligible for deduction under Article 80C, have a blocking period. For example, the lock-in period for the ELSS scheme is 3 years and the PPF is 15 years.
“If the taxpayer violates the blocking period restrictions, the income will be treated as the taxpayer’s income for that fiscal year and will be taxable. Now, taxpayers will have a similar situation with long-term investments like the PPF, which has a 15-year lock-in period to qualify under Section 80C. Thus, taxpayers are advised to choose investments that help them achieve their financial goals. In addition, the taxation of returns on investments and the taxation of the amount received at maturity are the two factors that every taxpayer should check before choosing an investment program, ”says Amit Gupta, MD, SAG Infotech.
Limit of the amount of the deduction from the insured capital
According to the Income Tax Department, the deduction is limited to 10% of the sum insured for policies issued after April 1, 2012.
“It is a common misconception that the full amount of the premium is deductible under section 80C. However, it should be noted that for policies taken out from 04/01/2012, only the premium paid up to 10% of the sum insured may be claimed as a deduction. In addition, the premium paid for yourself, your spouse or your children is only eligible as a deduction. The premium paid for the parents cannot be claimed. as a deduction under section 80C, ”explains Sundara Rajan TK, partner at DVS Advisors LLP.
Request for deduction for repayment of private loan
It has been observed that taxpayers try to claim a deduction on the repayment of any type of mortgage loan under section 80C, but it should be understood that the main component of private loans i.e. loans taken out from friends and relatives) are not covered by section 80C, Gupta added.
If a taxpayer wishes to claim a deduction for the main component of the home loan, he must ensure that the loan must be provided by the specified entities. Loans granted by a bank, a cooperative bank, the National Housing Bank, the Life Insurance Company, etc. fall under it.
Registration and stamp duty deduction
Gupta further adds that expenses such as stamp duty, registration fees and certain other expenses directly related to the transfer of ownership of a dwelling house are only allowed under section 80C. For commercial properties, these expenses cannot be deducted under section 80C. Thus, taxpayers should wisely choose the type of property to claim the Section 80C deduction. These deductions are subject to the condition that the property is held for 5 years from the end of the fiscal year in which possession is obtained. In the event that home ownership is transferred within 5 years, the deduction claimed earlier will be considered income in the year of the transfer, Rajan explained.
Error requesting tuition deduction
Only tuition fees for schools and colleges are allowed for deductions and not book fees, development fees, library fees etc.
“The deduction will be available for fees paid for full-time education in India for up to two children, and only the tuition portion of the full fees will be eligible for the deduction. So before you provide any data, be sure to do some math, ”Gupta said.
Endowment insurance plans
Savvy financial planners advise their clients to keep insurance and investment plans separate and endowment insurance. Group insurance plans essentially provide life coverage to buyers and provide a maturity payment in case the buyer outlives the term of the policy.
“Life insurance plans are life insurance plans that are good for saving taxes and essential investments. However, investing a large chunk of your hard earned money in it will not give you good returns. So if you want to save more, invest in a term plan, which also qualifies for a tax deduction under section 80C, ”Gupta explains.
It is equally important to know whether or not the investment you choose is suitable for your tax planning.
“When choosing investment options to claim a Section 80C deduction, it is equally important to understand the income tax implications of those investments. Specific income such as life insurance policies, provident funds, national pension scheme, Sukanya Samriddhi scheme, etc. are tax exempt, while income from term deposits, NABARD bonds, etc.