Your Questions Answered: Deductions allowed under Section 80C & tax benefits given to home loan borrowers

Q.1. What are the deductions allowed under Section 80C of Income-tax Act?

Section 80C of Income-tax Act allows deductions or exemptions up to a limit of ₹1,50,000. These are the various investments and expenses that qualify under this section.

Life Insurance

Any kind of life insurance premium is exempt under Section 80C. This includes term plans, whole life policies and unit-linked insurance plans (ULIPs). The money realised on maturity or surrender of insurance policies is exempt under a different section: Section 10(10D).

ELSS

Equity-linked savings schemes (ELSS), popularly known as tax saver funds, allow investments in mutual funds. ELSS have a lock-in period of three years.

EPF

Employee Provident Fund (EPF) is a savings scheme established by the government for employees of companies registered under the Employee Provident Fund and Miscellaneous Provisions Act, 1952. Both the employee and the employer can contribute 12% each of the basic salary plus dearness allowance. Contribution is tax-deductible while the maturity amount is exempted from tax only after five years. 

EPF can be transferred to the new employer when changing jobs or can be closed on quitting or on retirement. However, there is cap of Rs. 7.5L for the deductions in EPF + NPS + SA to be tax free. Any amount over and above Rs. 7.5L would become taxable.

READ MORE: Income Tax: Last few days to invest in tax-saving instruments; Here's a checklist

PPF

Public Provident Fund (PPF) is governed by the Public Provident Act, 1968. Any resident Indian may open a PPF account and invest a minimum of ₹500 or a maximum of ₹1,50,000 per year. In the case of a minor, the parent can contribute. Contributions and the maturity amount are tax-free. The maturity period of PPF is 15 years but it can be extended in 5-year blocks. Partial withdrawals are allowed after the sixth year.

Tax-saver FDs

Both banks and post offices offer fixed deposits (FD), popularly known as tax-saver FDs, with a minimum lock-in period of 5 years. Section 80C permits deductions for deposits up to ₹1,50,000 every year into this account. The interest earned on these FDs is taxable.

Senior Citizens’ Savings Scheme

Indian citizens who are more than 60 years of age or have superannuated at or after the age of 55 are eligible for Senior Citizens’ Savings Scheme (SCSS). The minimum tenure is 5 years, with the option of partial withdrawals. Individuals are eligible for tax deductions on investments up to ₹1,50,000 every year. Interest will be taxed if it exceeds ₹10,000 p.a.

Sukanya Samriddhi Yojana

Parents or legal guardians of a girl child, who is less than 10 years of age, can open a Sukanya Samriddhi Account under this plan to build up a fund for her education and to meet her marriage expenses. The minimum deposit allowed every financial year is ₹250 and the maximum is ₹1,50,000, in multiples of ₹100. Investments made into the scheme are eligible for deduction under Section 80C while the accruing interest and the proceeds on maturity or withdrawal are currently tax free.

Expenses

These are the expenses exempted from tax under Section 80C, subject to the annual limit of ₹1,50,000:

1. Principal component of home loan instalment.
2. Stamp duty and registration charges incurred on purchase of property.
3. Tuition fees and related expenses paid for up to two children.

Q. 2. My employer is already deducting TDS on my salary. My bank also deducts TDS on my fixed deposit interest. Do I still need to file my tax returns?

Tax may be deducted from your income obtained from various sources. Nevertheless, it is important to file your annual returns.

Remember that your employer or your bank has no information about your income from other sources (rental income, for example). Your tax on the combined total income might work out to more than the TDS. Depending on your tax bracket, you may need to pay the tax that is more than the total TDS. If the TDS exceeds your final tax liability, you can claim a refund, for which you must file your tax returns.

If you wish the TDS deducted by your employer to be closer to your actual tax liability, you must declare all your incomes and investments to your employer in the prescribed format within the time stipulated by the employer.

READ MORE: Income Tax Filing: Here's why you must file returns before July 31

Q. 3. I have taken a home loan in my name. I would like to know how much I can save under the Income-tax Act exemptions, on interest as well as principal repayment.

On principal

The principal portion of the repayment instalment of the home loan is deductible under Section 80C, subject to a limit of ₹1,50,000 per financial year. This can be claimed only after the construction of the property is complete. Remember that this benefit will be reversed if you sell your property within 5 years from the end of the financial year in which you obtained possession of the property.

On interest

Section 24(B) of the Income-tax Act, 1961 allows a deduction of ₹200,000 in a financial year, if and only if all the following conditions are met.

1. The home loan should have been availed of after April 1, 1999.
2. It must be for the purpose of either construction or purchase of a property. Repairs and renovations are not considered as construction.
3. The construction or purchase should have been completed within 5 years of the end of financial year when the loan was taken.
4. The person or body giving the loan must certify that the interest is payable on a loan for acquisition or construction of a property or for refinancing the outstanding principal amount of an earlier loan taken for purchase or construction.

If any of the above conditions is not satisfied, then the deduction allowed would be only ₹30,000 per year.

READ MORE: Income tax filing: These are the 5 items exempt from tax that can help you save money

Q. 4. I have received a certain amount as gift in the previous financial year. Do I need to pay tax on the same?

Two factors determine if a gift is taxable.

1. Who has given you the gift
2. The amount received as gift

The amount will not be taxable if the gift is received:

1. From a relative—spouse, brother, sister, brother or sister of spouse, parent, parent of spouse, children, any lineal ascendent or descendent of oneself or one’s spouse.
2. On one’s marriage.
3. Under will or inheritance.
4. In anticipation of the death of the giver.
5. From a local authority as defined under Section 10(20).
6. From any fund, trust, foundation, hospital, or institution registered under Section 12AA or as referred to in Section 10(23C).

The gift will be taxable under Section 56(2) if it is:

1. Received without consideration
2. More than ₹50,000 during the financial year.

Q. 5. I have a residential property in my name in Bengaluru. I stay in Mumbai with my family due to my profession. If I have not given it on rent, can the Bengaluru house be considered as self-occupied property under the Income-tax Act?

A property is considered self-occupied, if it has been occupied by the owner for self-use for the entire year. If it is not used or occupied by the owner, then it cannot be treated as a self-occupied property, unless the following conditions are met:

1. The taxpayer owns the property.
2. It is not occupied by the owner because of employment or profession at another location, where they reside in a place not owned by them.
3. The property is not rented out any time during the financial year.
4. The owner derives no benefit from the property.

So, if you own your Mumbai residence, then your Bengaluru property will not be considered as a self-occupied property, even if you have not rented it out.

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