Before Claiming Section 80C Income Tax Deductions, Be Aware Of These Conditions

Almost all taxpayers are aware of the tax deduction under Section 80C of the Income Tax Act, 1961. However, do you know that these deductions are available with certain strings attached? Let’s understand these conditions before you consider making investments in Section 80C. 

ELSS contributions
As ELSS tax saving mutual funds fall under Section 80C investments, they are eligible for tax deduction of up to Rs 1.5 lac per annum. These mutual fund investments have a mandatory lock-in duration of three years. Just like any other types of mutual funds, you can make contribute to ELSS either through SIP (systematic investment plan) or lumpsum. If you choose to go forth with SIP investments, each SIP installments are mandated to complete a lock-in duration of three years. In essence, each installment is treated as a separate ELSS investment. 

Home loan repayment
Under section 80C an investor enjoys tax benefits on principal loan repayment of home loans. However, one can avail this deduction only against residential properties. Additionally, the home loan must taken from special entities such as housing finance companies and banks. 

Life insurance premium
An investor can claim tax deduction against life insurance policies for themselves or their partners and children. There is no cap for the number of children that are eligible for this tax deduction. As there is no additional condition against financial dependency of the children, retired parents can use this to their benefit and optimize their tax outgo by paying for the life insurance premiums of their child. This will also significantly help the earning child whose Section 80C investments might have already reached the cap of Rs 1.5 lac.

PPF contributions
A tax payer can avail tax deductions against their PPF accounts as well as for their spouse and (unlimited number of) children. Note that gifting your child or your spouse is exempt from any tax deduction as per Section 56(2). Additionally, there’s no point of clubbing provisions as since the interest of PPF investments are exempt from any tax, you can use this investment option to decrease your tax outgo and further transfer the assets to your partner. This is also beneficial for your child as it will aid in building a financial corpus for them. Be mindful that you cannot contribute more than Rs 1.5 lac against your and your minor child’s PPF account taken together. However, this restriction does not apply to your major children or partner. 

Educational expenses
An investor can claim tax deduction against tuition fees for a maximum of 2 child for their entire education in India. If you have more than 2 children, then your partner can claim the tax deduction against the tuition fee for other children, provided that your spouse is a tax payer as well.

Tax saving Fixed Deposit (FD) or Senior Citizens’ Savings Scheme (SCSS)
You might be aware of the fact that the investments made towards SCSS are eligible for tax deductions of up to Rs 1.5 lac per annum under Section 80C. However, what you might not know is that if you withdraw your investments before the lock-in period of five years, these investments become taxable. 

Now that you are aware of the strings attached to Section 80C investments, try to make a sound investment decision. As a word of advice, it is advised that you do not invest in tax-saving investments with the mere purpose of saving tax. You must ensure that your financial objectives are met through the type of investment that you decide to go forward with. Happy investing!