Tax-saving options Beware of conditions and limits

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It is now the time of the year when one should start the tax planning process. With some time in hand, taxpayers can properly plan out their needs. It makes sense to start now, rather than wait for the last-minute rush. Of particular relevance to tax payers are the different options provided under Section 80C of the Income Tax Act.

The section contains various instruments which can be invested in by the taxpayer to save on tax. To encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Under this section, one can invest a maximum of Rs l lakh. In case one is in the highest tax bracket of 30 percent, you save a tax of Rs 30,000.

1) Public Provident Fund (PPF)
A PPF account can be opened with a nationalized bank or Post office. The interest of 8 percent is taxfree and the maturity period is 15 years. The minimum contribution is Rs 500 and the maximum is Rs 70,000.

2) Provident Fund (PF) and Voluntary Provident Fund (VPF)
Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution.

While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards Section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5 percent per annum and interest earned is tax-free.

3) Life insurance
Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included.
Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction.

However, there are certain conditions and limits subject to which the investments can be made in these instruments. Further, the choice of the individual taxpayer would vary as income from these instruments may further be or not be taxable.

The following factors have to considered while investing in tax saving options -
Rate of return,
Lock in period
Taxability of the income earned on the instruments
Flexibility of withdrawal in case of need, tenure, inflation and so on.
In some cases, one may save on tax in present terms, but may erode capital in the long term given the rates of inflation.

So evaluate the various factors before taking a decision. Some options under this section include:

4) Five-year bank fixed deposit
Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.

5) National Savings Certificate
These are six-year smallsavings instrument, where the rate of interest is 8 percent and is compounded halfyearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for Section 80C deduction.

6) Equity-linked savings scheme
Mutual funds offer you specially-created tax saving funds called equity-linked savings schemes (ELSS).
These schemes invest your money in equities and hence, return is not guaranteed. Your investment is locked for a period of three years.

7) Home loan principal repayment
The principal portion of the EMI qualifies for deduction under Section 80C.

8) Stamp duty and registration charges
The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year of purchase of the house.

9) Children’s education expenses
These can be claimed as deductions under Section 80C. One would need to keep the receipts to claim the same.

10) Infrastructure bonds
In addition to the Rs 1 lakh limit above, one can also claim an additional deduction of Rs 20,000 by investing in infrastructure bonds issued by specified financial institutions. The interest earned on these bonds is subject to tax.