When it comes to income tax, you might only think about the money you owe. However, by understanding the different deductions available, you can reduce the taxable income, and in turn, the taxes paid. Most are aware of section 80C, a common deduction. There is more to the section than claiming tax benefits by purchasing life insurance. This understanding can help you reduce your tax burden and focus on growing your wealth.
In this article, we will explore the different deductions available under 80C and how to maximise them without solely focusing on insurance premiums.
Understanding Section 80C
According to section 80C of the Income Tax Act, individuals and Hindu Undivided Families are eligible for a deduction of up to ₹1.5 lakh annually from their gross total income during a financial year. However, these deductions are available only under the old tax regime and not the new one. The beauty of this particular section is that it includes a variety of investment options and qualified expenses. By making the most of it, you can also look for alternative investment options beyond insurance.
Here’s an example of how optimising your Section 80C deductions can reduce your tax liability. Let’s assume your gross income is ₹10 lakhs. Your contributions to ELSS, PPF, and home loan principal repayment are ₹40,000, ₹50,000, and ₹30,000, respectively. So, you can claim a total deduction of ₹1.2 lakhs under section 80C.
Non-Insurance Options for Deductions
Consider the following non-insurance options to optimise deductions under section 80C while meeting your financial goals.
Public Provident Fund
Public Provident Fund (PPF) is a government-backed long-term savings scheme that comes with a 15-year lock-in period. Any contribution, including the principal, interest, and the amount received on maturity, is free from taxation.
Equity-Linked Savings Scheme (ELSS)
ELSS is a tax-saving mutual fund scheme with a three-year lock-in period. It is amongst the shortest lock-in periods for all deductions available under 80C. The returns can be high as they primarily invest in equities, but this also comes with certain risks. It can be a suitable option for long-term wealth building and can be added to an investment portfolio to potentially beat inflation. However, long-term capital gains over ₹1 lakh are taxable.
National Savings Certificate
This is a post office investment scheme offering fixed returns with a minimum lock-in of five years. Any interest that’s reinvested as per the scheme qualifies for deduction under 80C.
Five-year bank fixed deposit
When you open and maintain a fixed deposit with any of the scheduled banks in India for a minimum of five years, it qualifies for tax deduction. However, the interest earned from it is taxable, while the principal amount stays tax-free.
Sukanya Samriddhi Yojana
If you are a parent of a girl child below the age of 10, you can subscribe to this government scheme, which offers tax benefits on the principal, interest, and maturity amounts. However, partial deductions are available only after the child turns 18, and the amount can be fully withdrawn when she is 21.
Senior Citizens’ Saving Scheme
This government-backed savings scheme can be a good option for you if you are over the age of 60 and looking for a steady income and tax benefits. However, the minimum lock-in period for the scheme is five years as well.
Principal repayment on the home loan
If you have a housing loan, your repayment of the principal portion can qualify for deductions under section 80C. However, the interest paid doesn’t qualify for this deduction.
Tuition fees
Educational expenses, especially the tuition fee component of school or college fees, for up to 2 children qualify for a tax deduction.
Optimising your deductions under section 80C is an effective way to reduce your tax burden and also focus on investments. By doing this, you can align your tax-saving investments with long-term financial goals, whether you are focused on wealth building, children’s education, or retirement planning, there is something for everyone. With proper planning, you may be able to achieve the above-mentioned goals. Reaching out to a financial advisor or consultant also helps.
