CHARTERED ACCOUNTANTS

Deductions

Tax Deductions (Section 80C)

If it's a long-term investment (typically with a lock-in of 5 years), chances are high that it would qualify for the Section 80C deduction. Tax deductions are used by the government as tools to encourage you to:

  • Save for your retirement
  • Buy insurance and thus protect your loved ones.
  • Invest in Indian economy for longer periods
  • Buy a home

Why you should care?

  • Because it is the closest thing to free money you will ever get. Depending on your income tax slab, you might be saving up to about Rs. 30,000.

A few investment avenues for 80C are:

  • Employee Provident Fund (PF or EPF) - Most of you would be making contributions to your PF. You contribute 12% of your basic salary and your company would put in equal amount as their contribution. Not having a PF account means a serious disadvantage of losing this company contribution. You can withdraw the money at age 55 or retirement, by paying ZERO taxes. PF has a fixed rate of return. It has been 8.5% for last 5-6 years, but for 2010-11, a bonus 1% has been added to make it 9.5%.
  • Equity Linked Saving Schemes (ELSS) - In our opinion, this is the best avenue for 80C investments for those who do not abhor market based returns. It has only 3 years of lock-in while all other products have 5 years or more. And the returns are also tax-free. And equity means higher return potential. A lock-in period also allows the fund manager to execute his strategies with greater assuredness that people won't be pulling out money in between. Usually that results in better returns. This beautiful product might lose its shine if Direct Tax Code removes the 80C advantage attached to it.
  • Public Provident Fund (PPF) - PPF is not mandatory but anyone can open a PPF account. You might have to contribute a nominal amount of Rs. 500 every year to keep the account active. Like PF, PPF has a fixed rate of return which has been 8% for a while now. Annual contribution limit for PPF is Rs. 70,000. One good thing about PPF is that you'll be able to withdraw money after 15-16 years, again by paying ZERO taxes. Learn more about PPF here.
  • New Pension Scheme (NPS) - NPS has the best features of mutual funds and PF. You can withdraw money tax-free when you are 60. By choosing the option E in NPS, you can invest up to 50% of your money in equity. So, 50% of your money would be in safe, fixed options and 50% would be in equity with negligible management fees. To learn more about the benefits of low fees and NPS, visit our NPS section.
  • Life Insurance and ULIPs - We generally discourage investors to buy ULIPs and any sort of money-back life plans. Buying pure insurance (Term Insurance) and investing separately in equities or FDs would be much cheaper to you. Buying these insurance plans would only ensure Thailand trips for your insurance agent. Learn more about Insurance here.
  • Tax Saving FDs
    • 5 years lock in. Could be bought from banks.
    • Currently around 7-8% interest rate. Returns are taxed every year.
    • If the interest income is more than Rs. 10,000, tax will be deducted by the bank (TDS).
  • National Savings Certificate (NSC)
    • 6 years lock-in. Could be bought from post-offices.
    • Currently 8% interest rate.
    • Interest accrues and is deemed reinvested every year. That means you don't get the interest money every year. Instead it is assumed to have bought more NSCs for you.
    • Since the interest money is buying more NSCs for you, you could claim 80C deduction on the interest amount every year.
    • You could pay income tax on this interest every year. Or you could pay a lump-sum tax on maturity. It's usually wiser to spread out your interest income, as a lump-sum interest might push you in a higher tax-bracket.

Other than 80C

There are a couple of other deductions worth exploring.

  • House Loan Interest - If you have taken a home loan, you could apply for deduction (up to Rs. 1.5 lakhs) on the interest part of your EMI.
  • Infrastructure Bonds - You could claim a deduction of up to Rs. 20,000 if you buy these long-term Infra bonds. This deduction is more of a temporary nature and might go away next year.
Deductions From Gross Total Income

Gross total Income is the total of income under all heads for a particular previous year. Out of the said Gross total Income, deductions are allowed under various sections comprised in chapter VI-A. To claim the said deductions, certain conditions have to be fulfilled.

80CCC - Contribution to Pension Fund of LIC

80D - Medical Insurance premia

80DD - Maintenance including medical treatment of handicapped dependent

80DDB - Medical treatment, etc.

80-E - Repayment of loan taken for higher education

80G - Certain Donations to Charitable trusts of institutions for charitable purpose.

80GG - Rent Paid by an Assessee

80GGA - Donations for scientific research or rural or urban development

80-HH - Deduction in respect of profits and gains from newly established industrial undertakings or hotel in backward areas.

80-HHA - Deduction in respect of profits and gains from newly established small scale industrial undertakings in certain areas.

80-HHB - Deduction in respect of profits and gains from projects outside India.

80-HHBA - Deduction in respect of profits and gains from housing projects in certain areas.

80-HHC - Deduction in respect of profits and gains from export of goods outside India.

80-HHD - Deduction in respect of earning in foreign exchange

80-HHE - Deduction in respect of profit from export of computer software, etc.

80-HHF - Deduction in respect of profit from export or transfer of film software, etc.

80-IA - Deduction in respect of profit and gains of certain industrial undertakings or enterprises, etc.

80-IB - Deduction in respect of profit and gains of certain industrial undertakings other than infrastructure development undertakings, etc.

80-JJA - Profits and gains from business of collecting and processing biodegradable waste.

80-JJAA - Deduction in respect of employment of new workmen.

80-L - Interest on securities, dividends, etc.

80 O - Royalties, commissions, fees for professional services etc, earned in convertible foreign exchange

80-P - Certain income of Co-operative Societies

80-R, 80-RR and 80-RRA - Income from foreign sources.

80-U - Income of handicapped Assessee.