Mistakes to Avoid While Investing for Section 80C Deduction

Section 80C is one of the most popular tax-saving provisions used widely by taxpayers across the country to reduce their tax liability. It offers a wide gamut of investment options through which the taxpayer can claim tax deductions up to Rs.1.5 lakh from his gross taxable income.

Under Section 80C, taxpayers can choose from various tax-saving options like Equity-Linked Savings Scheme (ELSS), Unit Linked Savings Scheme (ULIP), LIC policies, Sukanya Smriddhi Yojana (SSY), Provident Fund (PF), National Pension Scheme (NPS), Senior Citizen Savings Scheme (SCSS), Kisan Vikas Patra (KVP), five years tax saving FD, tuition fees of children, etc. 

This provision is mainly beneficial for the individuals and HUF’s (Hindu United Families) and does not apply to companies or firms. However, this deduction is not available to those taxpayers who opt for the ‘new tax regime’ under Section 115BAC of the Finance Act 2020. Individuals who have opted for the old tax regime can claim the deduction through these tax-saving instruments.

While it is never advisable to wait till the end of the financial year to start your tax planning, we are here to bring your attention to some common mistakes you might make while tax-saving under Section 80C, which can disallow the deductions claimed by you.

Investment plans are brought under the family members name

In the case of individuals, certain deductions under Section 80C are allowed if in the name of the taxpayer itself. In contrast, some tax-saving deductions are permitted even if the expenditure is made for self, spouse or children. In the case of HUF, a deduction is available for the policies taken in the name of members of HUF. 

For instance, LIC policy premium paid for self, spouse, or children will be allowed under 80C; however, deduction under ELSS has to be under the taxpayer’s name only and not in the name of any family member. 

Threshold on the premium paid on LIC policies

The deduction for the premium paid towards LIC policies is restricted to 10% of the sum assured in case of policies issued on or after 1-4-2012, whereas 20% of the sum is assured in case of policies issued on or before 30-03-2012. Whereas if the policy is taken for any eligible person suffering from disability under section 80U or 80DDB, the threshold limit is 15% of the capital sum assured. Taxpayers must take the threshold limit into account before purchasing any policies.     

Endowment LIC policies

Endowment insurance policies are a combination of insurance along with a long term savings plan for the investors. Even though these plans offer tax deduction under this provision of the Income Tax Act, they are not a good investment option as they do not offer inflation-beating returns. Hence, investing a large proportion of the portfolio in these plans is not advisable. Instead, the investors can choose a combination of two instruments like term plans and ELSS investments, which will offer them life cover along with wealth creation. ELSS investments have offered inflation-beating returns and are an excellent instrument for long term wealth creation. 

Private home loan deduction for principal repayment 

Section 80C allows the deduction for home loan principal payment only offered by specified institutions like public or private banks, cooperative banks, non-banking financial companies, life insurance corporations, national housing banks, etc. 

Often taxpayers think they can claim the deduction for principal repayment even for the home loans availed from private sources like friends, family or relatives, which is not the case.  

Registration and stamp duty deduction for the purchase of house property

Sections 80C allows a deduction for registration, stamp duty, and other statutory charges directly linked to procurement of the house property. However, it should be noted that this deduction is available only for residential properties and not for commercial property. Also, these deductions are subject to the condition that the property purchased should not be sold within five years from the end of the financial year in which the purchase is made. Failure to comply with this will lead to a reversal of deduction claimed and shall be taxed in the transfer year. 

Understand the tax implications on the income earned from the investments

It is essential to know the tax implications on the income of the tax-saving investments. Let us see some examples of this

  • For instance, the maturity of LIC policy is exempt only if the threshold limit of premium criteria gets fulfilled; otherwise, it becomes taxable in the beneficiary’s hands.
  • The Provident Fund interest income was fully exempt before the 31st of March 2021. However, in Budget 2021, interest earned on the deposit of more than Rs.2.5 lakh in PF amount will be taxable starting from the 1st of April 2021.
  • Tax saving FD is allowed as deduction under Section 80C but its interest income is taxable under ‘other sources’.

Hence, it is vital to know the taxability of the income earned before investing in tax saving instruments. 

Deduction for tuition fees

Deduction for tuition fees is only allowed for deduction under 80C. Any other charges included in the children’s fees like books, extra-curricular activities fees, development fees, library fees, transport cost etc. is not allowed for deduction. This deduction is allowed for full-time education maximum for two children.   

These are some things that should be considered before you invest in any tax saving option under 80C. It would be best if you got clarity on tax implications on the income earned from such investment. Also, the post-tax returns offered by these investments should be evaluated and compared with other instruments, not necessarily tax-saving ones, to better understand the deployment of your funds akin to your future financial goals.  

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For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in

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