There is a common question for everyone: How can I save payroll tax? And if you want an answer to the question, there are many legitimate ways to save tax under the Income Tax Act of 1961. Section 80C belongs to the same. This is probably the most popular and preferred section for taxpayers, as it helps reduce taxable income by making eligible investments or expenses that result in tax savings. Section 80C also has subsections – 80CCC, 80CCD (1), 80CCD (1b) and 80CCD (2).
Section 80C of the Income Tax Act came into force on April 1, 2006. It essentially allows certain expenses and investments to be exempted from tax. If you plan your investments well and distribute them wisely among various investments such as Public Provident Fund (PPF), National Pension System (NPS), National Savings Certificate (NSC), mortgage repayment, etc. ., you can claim a deduction of up to Rs 1.5. lakh every year, which will reduce your tax liability.
However, there are two important points you should know. The first is that only individuals and HUFs can benefit from this deduction, and not businesses, partnership companies and LLPs.
And the second is that taxpayers are not allowed to deduct in accordance with article 115BAC of the recent 2020 finance law. We have observed that if the taxpayer opts for 115BAC under the new tax regime, he will not be able to claim no claim under Article 80C, but if the taxpayer opts for the old tax regime for any fiscal year, he can still benefit from the deductions provided for in Article 80C.
If you are not into taxation, it will be a little difficult to understand every part of it and to maximize the savings. Nonetheless, we can make you more aware of the risks and mistakes that taxpayers usually make due to poor planning, so that you can get the most out of them.
1. Do not pay attention to the lockout period
Certain section 80C deductions are subject to a lock-in period. For example, term deposits have a 5 year blocking period. Likewise, the Stock Savings Plans (ELSS) have a blocking period of 3 years. If the taxpayer violates the blocking period restrictions, the income will be treated as the taxpayer’s income for that year and will be taxable.
Now, taxpayers will have a similar situation with long-term investments like the PPF, which has a 15-year lock-in period to qualify under Section 80C. Thus, taxpayers are advised to choose investments that help them achieve their financial goals. In addition, the taxation of returns on investments and the taxation of the amount received at maturity are the two factors that any taxpayer must check before choosing an investment plan.
2. Request for deduction for repayment of private loan
It has been observed that taxpayers try to claim a deduction on the repayment of any type of mortgage loan under section 80C, but it should be understood that the main component of private loans (loans taken out from friends and relatives) is not covered by section 80C.
If a taxpayer wishes to claim a deduction for the main component of the home loan, he must ensure that the loan must be provided by the specified entities / persons u / s 80C (2) (xviii) (c). Loans granted by a bank, a cooperative bank, the National Housing Bank, the Life Insurance Company, etc. fall under it.
3. Deduction on registration and stamp duties
Expenses such as stamp duties, registration fees and certain other expenses directly related to the transfer of ownership of a dwelling house (only) are permitted under section 80C. For commercial properties, these expenses cannot be deducted under section 80C. Thus, taxpayers should wisely choose the type of property to claim the Section 80C deduction.
4. Error when requesting the deduction of tuition fees
If a taxpayer tries to claim a tuition or tuition deduction, the taxpayer should consider certain provisions before making a claim. The deduction will be available for fees paid for full-time education in India for up to two children, and only the tuition portion of the full fees will be eligible for the deduction. So before you provide any data, be sure to do some math.
5. Too much investment in group insurance plans
Life insurance plans are life insurance plans that are good for saving tax and essential investments. However, investing a large chunk of your hard earned money in it will not give you good returns. So if you want to save more, invest in a term plan, which is also eligible for a tax deduction under section 80C.
In conclusion, I would like to advise all taxpayers not to invest in haste or to wait for last minute declarations. This is because the chances of making the wrong investment decision are high if you are in a hurry to save taxes. Think of these tax benefits as employee benefits and never invest just to save taxes.
(By Amit Gupta, Co-Founder and CEO, SAG Infotech)