80C Tax Saving Instruments

Tax Saving Instruments under section 80C

Section 80C of the Indian Income Tax Act, 1961 was introduced by the Finance Act 2005 and had become effective w.e.f 1st April 2006. It allows certain expenditures and investments to be tax exempted. Section 80C replaced Section 88 but unlike Section 88, there are no sub-limits and is applicable for everyone irrespective of the individual’s tax bracket.

Total deduction under Section 80C, 80CCC and 80 CCD(1) together cannot exceed Rs.150000 for the financial year 2015-16. The deduction under Section 80C is allowed from gross total income.

Expenditures that are tax exempted under Section 80C:

  • Payment of tuition fees for children to any school, college, university and educational institute.
  • Repayment of Principal of housing loan

Investments that are tax exempted under Section 80C

Section 80C of the Indian Income Tax Act, 1961 was introduced by the Finance Act 2005 and had become effective w.e.f 1st April 2006. It allows certain expenditures and investments to be tax exempted. Section 80C replaced Section 88 but unlike Section 88, there are no sub-limits and is applicable for everyone irrespective of the individual’s tax bracket.

Total deduction under Section 80C, 80CCC and 80 CCD(1) together cannot exceed Rs.150000 for the financial year 2015-16. The deduction under Section 80C is allowed from gross total income.

Expenditures that are tax exempted under Section 80C:

  • Payment of tuition fees for children to any school, college, university and educational institute.
  • Repayment of Principal of housing loan

Fixed Deposit (Tax Saving)

Fixed deposits placed with a Scheduled Bank for a minimum period of 5 years is eligible for tax benefit under section 80C of Indian Income Tax Act. Maximum deposit of Rs.1.5lac per financial year is eligible for this tax benefit.

  • Individuals (singly/ jointly) and HUF can invest in these fixed deposit schemes.
  • In case of joint holding, only the primary holder is eligible for tax deduction.
  • Deposit amount shall be between of RS. 100 and Rs. 1.5lac.
  • Minimum deposit period of 5 years and maximum deposit period of 10 years.
  • Only the principal amount invested in these deposits are eligible for tax the benefits.
  • Interest earned on these FDs is taxed according to the marginal rate of taxation of the investor.
  • Tax deducted at source (TDS) on interest will be applicable as per existing guidelines of the banks.
  • Interest is payable either monthly or quarterly or annually or on the date of maturity at the option of the depositor.
  • These Fixed Deposits cannot be liquidated within the first 5 years.
  • Pre mature withdrawals are allowed only after first 5 years.
  • If the deposit is encashed before 5 years, the amount held under these schemes does not qualify for tax deductions.
  • Loan is available against these FDs after the initial lock-in period of 5 years.
  • Nomination facility is available.

National Savings Certificate

National Savings Certificate, popularly known as NSC is an Indian Government Savings Bond issued by the Post Office. It is primarily used as small savings and income tax savings instruments (Deposit qualifies for tax rebate under sec 80c of IT Act.)

Features of National Savings Certificate:

  • Certificate can be purchased by an adult for himself or on behalf of a minor or by a minor.
  • Trust and HUF cannot invest in this scheme.
  • Minimum deposit of INR 100/-.
  • No maximum limit.
  • Available in denominations of INR 100/-, 500/-, 1000/-, 5000/- and 10000/-.
  • Only principal amount deposited in this scheme qualifies for tax rebate under Sec. 80C of IT Act.
  • Interest earned is taxed according to the marginal rate of taxation of the investor.
  • The interest accruing annually but deemed to be reinvested under Section 80C of IT Act.
  • In case of NSC VIII and IX issue, transfer of certificates from one person to another can be done only once from date of issue to date of maturity.
  • At the time of transfer of Certificates from one person to another, old certificates will not be discharged. Name of old holder shall be rounded and name of new holder shall be written on the old certificate and on the purchase application (in case of non CBS Post offices) under dated signatures of the authorized Postmaster along with his designation stamp and date stamp of Post office.

Interest Payable:

From 1.4.2014, interest rates are as follows:-

  • 5 Years National Savings Certificate (VIII Issue): 8.5% compounded six monthly but payable at maturity, that is, Rs. 100/- grows to Rs. 151.62 after 5 years.
  • 10 Years National Savings Certificate (IX Issue): 8.80% compounded six monthly but payable at maturity, that is, Rs. 100/- grows to Rs. 236.60 after 10 years.

Public Provident Fund (PPF)

Public Provident Fund is a long term investment instrument introduced by the National Savings Institute of the Ministry of Finance, framed under the Public Provident Fund Act, 1968.

Features of Public Provident Fund:

  • An individual can open account with INR 100/- but has to deposit minimum of INR 500/- in a financial year and maximum INR 1,50,000/- (with effect from 23.08.2014)
  • Deposits can be made in lump-sum or in 12 monthly installments.
  • Joint account cannot be opened.
  • HUF and NRIs are not eligible to open PPF accounts.
  • Account can be opened by cash/cheque. In case of cheque; the date of realization of cheque in Govt. account shall be the date of opening of account.
  • Nomination facility is available at the time of opening and also after opening of account.
  • PPF account is transferable to and from permitted branches of nationalized or private sector banks or Post Offices by submitting a request letter by the PPF account Holder to the existing Accounts Office.
  • The subscriber can open another account in the name of minors but subject to maximum investment limit of INR 150000/- by adding balance in all accounts.
  • Maturity period is 15 years but the same can be extended for one or more blocks of 5 years on written request within one year of maturity.
  • Maturity value can be retained without extension and without further deposits also. The balance will continue to earn interest at the notified rates. The subscriber can make one withdrawal of any amount in each financial year.
  • PPF account continues to earn interest at the notified rate even after the death of the subscriber.
  • Premature closure is not allowed before 15 years except in case of death of the subscriber.
  • When subscribers fail to invest the minimum amount Rs 500/- in a financial year, the account will be treated as discontinued. The subscriber in such cases will not be entitled to obtain a loan or make a partial withdrawal unless the account is revived. The subscriber cannot open another PPF account.
  • A discontinued account may be revived by payment of Rs. 50/- as penalty for each year of default along with the arrear subscription of Rs. 500/- for each year.
  • Deposits qualify for deduction from income under Sec. 80C of IT Act.
  • Interest is completely tax-free.
  • Partial withdrawal is permissible every year from 7th financial year from the year of opening account.
  • Withdrawal from a minor’s account is also allowed on submission of declaration from the Guardian.
  • Loan facility can be availed between the 3rd and the 6th financial year of opening the account. Loan up to 25% of the balance at the end of the second year preceding the year in which the loan is applied. Loan is repayable in 36 months. The rate of interest on the loan shall be at 2% per annum above the PPF interest rate. The repayment of loan may be made either in one lump sum or in two or more monthly installments within the prescribed period of thirty six months. The repayment is credited to the subscriber’s account. After the principal of the loan is fully repaid, the subscriber shall pay interest thereon in not more than two monthly installments If the loan is not repaid within the prescribed period of thirty six months, interest on the amount of loan outstanding shall be charged at six per cent per annum instead of at two per cent per annum.
  • No attachment under court decree order.
  • The PPF account can be opened in a Post Office which is double handed and above.

Interest Payable:

From 1-04-2016, interest rate payable is 8.10% per annum compounded annually.

Equity Linked Savings Scheme (ELSS)

ELSS is a type of diversified equity mutual fund which is a very good option to use the Rs. 150000 limit offered under Section 80C of Income Tax Act, 1961 as the investor also gets the potential upside of investing in the equity markets.

Features of ELSS:

  • ELSS Funds are diversified equity funds (investing stocks) and carry the same risk like any other equity mutual fund.
  • However the average ELSS Fund has performed better than the average diversified equity fund in the past five years.
  • ELSS has the shortest lock-in period of 3 years.
  • One can exit the fund after 3 years from the date of investment.
  • No tax is levied on the capital gains (long term) from these funds.
  • Both Growth / Dividend Payout options are available.
  • In a dividend scheme, investors get a regular dividend income, whenever dividend is declared by the fund, even during the lock-in period.
  • Dividends are also tax fee.
  • One can also do SIP (Systematic Investment Planning) and be disciplined in his / her tax planning.
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Pension Plans

Features of Pension Plans:

  • These policies provide pension at the time of retirement of an individual and ensures that there is some element of regularity in the receipts from the insurance companies.
  • These policies in traditional form do not cover life.
  • Investor pays a single premium or regular premium to the insurance company for the purchase of the policy.
  • In the event of death of the insured during the term of the policy, the nominee has the option of taking a lump sum amount or receiving a regular pension for the remaining term of the policy.
  • Annuities currently are a bad investment choice because of low returns, tax disadvantage and lack of liquidity.
  • If one has taken a pension plan from an insurance company, he has to buy an annuity with at least 66% of the maturity proceeds from that particular insurer, even if the yields offered by that insurer are lower than its competitor.
  • Currently annuities available in the market are offering a yield of less than 8% (pre-tax) which makes it the worst choice among the financial instruments available for converting nest eggs into regular income.
  • Corporate bonds provide better yields in comparison to the “safe” government bonds. However, the dearth of such long term corporate bonds result in low returns from annuities. Government bonds may have tenures spanning 30 years, yet getting long term gilt is also not easy.
  • Besides the low returns, there is also lack of transparency in the annuity market. Insurance companies do not divulge their annuity rates.
  • Annuities are riddled with the tax factor when considered with other investment options. E.g.: The tax free income earned on the maturity of your Provident Fund and PPF immediately becomes taxable when reinvested in an annuity and earned as pension. Hence, annuities do not find much favour with investors in the higher tax brackets.
  • Annuities also do not provide any option for surrendering the policy. Those that do have the provision of return, makes it available to the heir of the investor in the event of the latter’s death. So, investors are advised caution before they choose to invest their lives' savings into an annuity.

Tax implication on the premium paid for Pension Plans:

The premiums that one pays for their life insurance policy can be claimed as part of deduction under section 80C of Income Tax Act (maximum of 1.5lac for FY 2015-16).

Tax liability on proceed from Pension Plans:

Case A: Death of Policyholder:

In case of death of the policy holder the Insurance policy proceeds thus received by the next of kin becomes completely tax exempt under section 10(10D) of Income Tax Act

Case B: Surrender of the policy prior to its maturity:

Surrendering a pension plan before its maturity attracts serious tax implications. To begin with, any premium which has been claimed as part of deduction under section 80C will be reversed and shall immediately become taxable. This is followed by the addition of the entire surrender value to the total annual income and taxed according to the applicable tax slab.

Case C: Upon maturity:

Up to 1/3rd of the maturity proceeds under pension plans are tax free while the remaining 2/3rd must be invested in the purchase of annuity plans as per directives of the IRDA. The annuity received will be added to the total income of the investor for the respective financial year and taxed according to his/ her marginal rate of taxation.

Life Insurance policies

Term Insurance

A term insurance (also called pure insurance) policy provides life insurance protection for a specific period of time. If an individual dies during the coverage period, the beneficiary named in the policy receives the policy death benefit. If he doesn’t die during the term, the beneficiary or the survivor receives nothing, that is, it has no maturity value in case of survival.

Features of Term Insurance:

  • Term insurance is available for different time periods ranging from one year to many years.
  • Term insurance policies are lowest in cost among life insurance plans as sum assured is payable only if the policy holder dies within the policy term and there is no element of savings or investment.
  • Term Insurance helps the customers in safeguarding their families from financial worries that arise due to unfortunate circumstances at a nominal cost. It also let you avail the benefit to cover your outstanding debts like mortgage, home loan etc. In case of something happens to you, the financial burden is borne by the insurance company and not your loved ones.
  • Term insurance is inappropriate, if one wish to save money for a specific need, because it doesn’t have a cash value attached to it.
  • Term insurance policies are generally of the following types-
    • Level term insurance: Under this plan, the sum assured remains same and uniform throughout the term of the policy and in case of death happening anytime during the term, the sum assured amount is payable. It is the most simple and ordinary policy.
    • Decreasing term insurance: Under this plan, the benefit payable decreases with time. Thus the benefit payable depends not on the initial sum assured but is based on the prevailing sum assured at the time of death. Not a common product in India.
    • Increasing term insurance: Under this plan, the benefit increases with time on an agreed basis. The increase could be a fixed percentage or linked to any index. This is an important policy which keeps pace with the inflation.

How to choose a Term Insurance Plan?

Before buying a term plan, one shall consider the following few things:

  • How much cover he needs? [Life insurance is meant to provide the dependants of the policyholder with enough money to replace his income in case he dies.]
  • Till when he needs the cover? [The tenure of the term plan and the amount of cover are equally important. The latter should provide coverage till the intended age that the beneficiary desires to remain in service. Hence, one must be discreet regarding flexibility of fixing the tenure while choosing a term plan.]
  • One should also factored in the inflation: [INR50 lac cover may look sufficient now, but the value of INR50 lac will only be INR28 lac after 10 years assuming an inflation of just 6%.]
  • It is advisable to go for an ordinary term insurance plan instead of the return of premium plan types, as even if these plans may return the buyer the total premiums he had paid at the maturity of the plan; however the inflation-adjusted value of this sum becomes quite meager. This often may tantamount to the beneficiary having to pay a higher premium for this benefit.
  • Likewise, buyers may not prefer the single premium option as it frontloads the entire cost of the cover. In case of early death, the premium for the rest of the term is of no avail. On the other hand, the buyer enjoys the same insurance benefit by paying far less in any regular plan.
  • One should choose a term plan that is affordable.
  • One should also check the claim settlement ratio of the life insurance company offering the term plan.
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Endowment Plans

Endowment policies combine risk cover with financial savings and are designed to pay a lump sum on maturity or death of the policy holder.

Features of Endowment Plans:

  • If the insured dies during the tenure of the policy, the insurance company pays the sum assured (in case of endowment policies without profit) to the beneficiary.
  • The sum assured is also payable even if the insured survives the policy term along with some other investment benefits.
  • A bonus is declared every year and is added to the sum assured. This bonus is not guaranteed and depends upon the profitability of the insurance company.
  • As these policies have an inbuilt savings component, the premium rates are higher as compared to term plans.
  • These policies are eligible for loans within the surrender value of the policy.
  • This plan can be used to meet expenditure like children’s education and marriage. The term can be selected to suit these contingencies.
  • Endowment policies can be of the following types:
    • Full term premium payment endowment policies
    • Limited term premium payment endowment policies
    • With bonus policy
    • Without bonus policy
  • Most of the Endowment plans available in India provides a yield between 5-6% and are not able to beat the inflation.
  • The tenure of Endowment policies are also very long (20years, 25 years or 30 years) and thus they are poor performers, especially considering their long tenure and is a waste of your money.
  • Endowment plans are also not very liquid. In order to receive money out of a life insurance policy, the beneficiary may either surrender the policy or borrow it from the policy. In case of the former it is considered unwise to surrender policies frequently as returns are nominal over the first decade or so. The latter is also not free from deficiencies. One is that the money borrowed is denied to the heirs as a part of the beneficiary’s death benefit. Secondly, borrowing too much entails that the beneficiary has to regularly keep on investing each year to keep the policy in force.

Money Back Policies

Money back policies also combine term insurance with savings. But unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, this scheme provides a portion of the sum assured at regular intervals. On survival the remainder of the sum assured is payable. The money received during the term of the policy is tax-free.

In case of death, full sum assured is payable to the insured. No deduction is made for any payment of the survival benefit already paid.

Features of Money Back Policies:

  • The premium is payable up to the term of the policy.
  • These policies can be of different terms like 12, 15, 20, 25 years and varies from insurer to insurer.
  • These policies can be useful to meet the anticipated expenses (marriage, education, etc) over a stipulated period of time.
  • Money back policies are probably one of the costliest traditional insurance products available in the market.
  • A study of 10 popular money back policies reveals that the sum total of premiums paid during the entire policy tenure are either higher than or equal to the total receivables from these schemes. This is despite the fact that most of these schemes promise guaranteed additions upon maturity. The proportion of variable pay-outs or bonuses which may be declared by the insurance companies from time to time were not considered- as the same are not guaranteed - even if the same are incorporated, they are not likely to make a significant difference to the probable pay-outs by insurance companies.

Tax implication on the premium paid for Life Insurance Policies:

The premiums that one pays for their life insurance policy can be claimed as part of deduction under section 80C of Income Tax Act (maximum of 1.5lac for FY 2015-16) if the premiums paid is less than 10% of the sum assured.

Tax liability on proceed from Life Insurance Policies:

There would be three cases wherein taxation comes into consideration for the proceeds from the life insurance plans –

Case 1: In course of death of the insured:

In case of death of the policy holder the Insurance policy proceeds thus received by the next of kin becomes completely tax exempt under section 10(10D) of Income Tax Act. On production of a valid death certificate along with other required documents supporting the insured’s demise, the claimant may directly receive the insurance amount.

Case 2: Surrender of policy before its maturity:

Taxability of a policy that has been surrendered before its maturity period depends upon whether the beneficiary has paid the minimum 5 premiums of the policy or not. If paid, applicable tax becomes nullified. If not, the surrender value is added to the total annual income of the beneficiary and taxed according to the applicable tax slab.

Case 3: Upon maturity:

If continued normally till its maturity, the proceeds become completely tax free.

Our Observation:

We believe that life insurance policies should be considered only as a risk management tool to protect against financial loss resulting from insured individual’s death and not as an instrument to build assets, that is, one should keep his insurance and investment needs separate.

Thus, we feel that pure term plans are the best life insurance instruments as they provide the maximum cover at the lowest premium. The premium to be paid for a term plan is nominal when compared to the amount generally invested during purchase of an endowment plan or a money-back policy with the same coverage.

There are no investment benefits attached to it and so one can create his own personalised investment portfolio as per his risk profile and time frame.

If one desires to discontinue the policy, except for the insurance cover there is little to lose.

Death benefit coverage is provided only for a specific time period by term policies and is liable to expire with the expiry of the policy itself. In such policies the premium increases as the age increases. The beneficiary is therefore advised to choose as per his/ her requirement also keeping in mind the interest of the dependants who need to be covered until they can provide for themselves or the loan on a mortgage is repaid. Starting investment in such polices at a young age provides double benefit: that of a low premium and long term coverage to go with it.

Unit linked insurance plans (ULIP)

Unit linked insurance plans (ULIP)

ULIP is a product offered by Insurance Companies that allow the coverage of an insurance policy, and also provide the option to invest in any number of qualified investments, such as stock, bonds or money market instruments under a single integrated plan.

Features of ULIP:

  • The policy owner decides on the financial instruments to be invested with his paid premium.
  • After deducting some upfront amount, known as premium allocation charges which vary from product to product, rest of the fund is invested in the chosen assets in the form of units.
  • The policy holder is allocated the units at their net asset values.
  • Mortality and administration charges are deducted, thereafter, on a periodic basis (mostly monthly) by cancellation of units, whereas fund management charges are adjusted from NAV on a daily basis.
  • Usually there is no minimum guarantee of return under these policies and the return is linked to the performance of the invested assets.
  • ULIPs also provide the flexibility of switching from one asset class to another in the course of investments.
  • In these policies the death or survival benefit and surrender benefit are payable on the basis of sum assured and/ or the value of units, which is dependent on the performance of the portfolio.
  • Unit linked policies provide considerable flexibility when compared to traditional form of insurance which include-
    • Frequency of premium payment.
    • Alteration of death benefit without changing the premium amount.
    • Options to pay top up to increase the fund corpus.
    • Withdrawals are based on unit value rather than surrender value index
  • Unit linked policies in India have two variants:
    • In some policies in case of death, sum assured or unit value, whichever is higher are paid.
    • In some policies in case of death, sum assured + unit value is paid.
  • ULIPs also provide the benefit of Riders (additional or supplementary benefits) that can be bought along with the main policy. Some of the commonly offered riders are critical illness benefit rider, accident & disability rider, waiver of premium rider, etc.
  • ULIPs generally have a lock in period of 5 years and premature partial or full encashment may attract significant surrender charges.

Tax implication on the premium paid for ULIPS:

The premiums that one pays for their life insurance policy can be claimed as part of deduction under section 80C of Income Tax Act (maximum of 1.5lac for FY 2015-16) if the premiums paid is less than 10% of the sum assured.

Tax liability on proceed from ULIPs:

There would be three cases wherein taxation comes into consideration for the proceeds from the life insurance plans –

Case 1: In course of death of the insured:

In case of death of the policy holder the Insurance policy proceeds thus received by the next of kin becomes completely tax exempt under section 10(10D) of Income Tax Act. On production of a valid death certificate along with other required documents supporting the insured’s demise, the claimant may directly receive the insurance amount.

Case 2: Surrender of policy before its maturity:

Taxability of a policy that has been surrendered before its maturity period depends upon whether the beneficiary has paid the minimum 5 premiums of the policy or not. If paid, applicable tax becomes nullified. If not, the surrender value is added to the total annual income of the beneficiary and taxed according to the applicable tax slab.

Case 3: Upon maturity:

If continued normally till its maturity, the proceeds become completely tax free.

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