Oct 28, 2008

Making the Most of Section 80C Deductions: 10 Smart Tips

SECTION 80C of Income Tax Act, 1961, allows deduction from gross total income for various investments and expenditures. To avail maximum tax deduction under section (u/s) 80C of the I.T.Act, you must plan the savings and investments well.

Here is a list of ten smart tips for tax planning to maximize the tax break under section 80C:

1. Consider tax saving investments as part of overall investment plan
As per conventional wisdom, most of us look at investments as mere tools to save tax under section 80C rather than as a means to achieve our long term goals. It is not a correct approach.

You need to change your perspective and consider tax plan as an integral part of your financial plan.

2. Never postpone your tax planning till the end of the financial year
Make it a practice to do your tax planning at least thrice a year rather than making it an end of the financial year exercise (which is the general convention).

Prepare a tax savings plan at the very beginning of the financial year by making a rough estimate of your income and savings and revise it in the middle of the year and finally at the end of year. With a little practice, everybody can learn to do his or her tax calculations.

Besides, don’t leave your tax saving investments under Section 80C till the very end of financial year. Plan them in advance and spread the payments throughout the year to avoid any year-end cash flow problem.

Also ensure that you get TDS deducted from your salary -- based on your estimated income -- uniformly through out the year rather than during the last 3 months.

All the above steps will help you in planning your taxes and investments well in advance and smoothing out your cash flow so that you are not caught off guard at the end of the year.

3. Don’t exceed the limit of Rs 1 lakh under Section 80C
Most of us never keep in mind the ceiling of 1 lakh while making investments for the purpose of claiming tax deduction under section 80C of the I.T. Act. But any amount invested over and above the maximum limit under section 80C unnecessarily gets blocked without providing any tax benefits. That money could have been channeled into more productive investments.

Therefore, don’t overdo your tax saving investments under section 80C. Always keep in mind the maximum limit under section 80C while making investments for the purpose for claiming tax benefit.

Besides, don’t forget that limit of Rs 1 lakh includes both sections 80C and 80CCC.

4. Before making any further investments under Section 80C, know your existing commitments
Certain expenses and investments that are eligible for the section 80C tax benefit are unavoidable.

Therefore, from the maximum limit of Rs 1 lakh under section (u/s) 80C , first deduct your existing tax saving expenditure and investments such as PF contribution, life Insurance premium (existing policies), principal repayment of home loan (if any), tuition fees, accrued interest on NSCs and any other tax saving obligations.

Furthermore, you also need to take into account any other non-80C tax breaks or deductions from GTI (gross total income) such as education loan under section 80E and rent paid u/s 80GG. For a complete list, please read “Looking Beyond Section 80C”. The non-section 80C deductions wouldn’t reduce your section 80C limit but would go towards reducing your taxable income.

After deducting the above, probably there won’t be any elbow room left, but if there is still some scope, make further investments under section 80C.

5. Choose investments wisely
Just because making investments in eligible instruments save taxes under section 80C of the I.T. Act should not be a good enough reason to choose an investment.

There are many tax saving options available under section 80C such as PPF, NSC, 5 year Bank FDs, senior citizen saving scheme (SCSS), Mutual funds pension plans, Ulips, ELSS and 5-year post office time deposit scheme. A brief overview of all the tax saving instruments and investment avenues is given in the post "Section 80C Tax Saving Options & Investment Avenues".

While deciding on a tax saving and investment scheme, one has to keep in mind various considerations such as the time-horizon, the lock in period, risk and return factor, taxability of returns and cash flow needs.

And don’t neglect to consider your risk profile. For example, if you are a risk taker you can consider ELSS but if you are risk averse you should consider assured return schemes.

Furthermore, you should also be aware of section 80C limitations, which are mentioned in the post, "The Other Side of Section 80C - Conditions & Restrictions".

6. Compare investments on post-tax yield and not pre-tax yield
Most investors look at pre-tax returns but taxes can be a significant drag on returns. The impact of taxation is such that even a pre-tax return of 12% is no match for post-tax return of 8% (considering maximum marginal tax rate of 33.99%).

Therefore, don’t get carried away with gross/pre-tax returns. Take the tax angle into account and make your investment decisions based on post-tax returns. For instance, suppose that an investment u/s 80C provides you with a gross return of 10 per cent annually but if the same is taxable, the effective post tax return becomes 6.60 per cent based on maximum marginal tax rate of 33.99%.

7. Invest in ELSS
The best option available under section 80C is ELSS (these are similar to diversified equity funds but with additional benefit of tax break under section 80C) provided you are not risk averse, as already discussed.

Furthermore, among all the tax saving options under section 80C of the Income Tax Act,1961, ELSS has the minimum lock in period – just 3 years. For details, please see ELSS - The Best Tax Saving Option Under Section 80C.

8. Always invest in a PPF, even if you don’t want
PPF is a great investment option u/s 80C but you might not be interested as it doesn’t score too well on liquidity.

Nevertheless, remember to open a PPF account and invest at least the minimum amount of Rs 500 even if it is not on your investment radar. This will help you to take advantage of this account after 10-12 years because by that time the original lock in period of 15 years will get reduced to just 3-5 years.

A few salient features of Public Provident Fund (PPF) have been mentioned in the post, NSC or PPF - How to Decide?
and certain tips to followed while investing in PPF are discussed in the post How to Invest in PPF.

9. Never invest in an insurance plan
Sadly, most of us look at insurance as a tax planning tool rather than a risk management tool.

It is better to pay tax rather than investing in insurance to avail deduction under section 80C of Income Tax Act. The tax you save by investing in insurance (and getting deduction under 80C) gets more than offset by the long term costs you incur by investing in insurance plans.

Thus, remember never to mix your tax planning and insurance planning. Separate your insurance needs from your tax savings and investment needs.

Buy life insurance, but never invest in it. Ensure that you don’t buy any more life insurance for the purpose of tax saving under section 80C because it’s the worst form of investment or tax saving you will ever make.

If you want to buy insurance, go for pure term plans and forget ULIPS, money back, endowment or whole life plans.

10. Never invest in a pension plan
Don’t ever invest in a pension plan. Why? Because pension plans of insurance companies involve high costs, unfavourable tax treatment (although you receive tax benefit under section 80CCC) and lack of exit options. It is better to create one’s own retirement/pension plan rather than buying it from an insurance company.

In a nutshell, goal of tax planning is to reduce your tax liability. The smarter approach is to become proactive and integrate your tax and investment planning (but keep your insurance planning separate). Besides, while making the most of section 80C, don’t forget to look at the other side of the coin. Finally, don’t forget that tax planning and saving is a year-round rather than a year-end activity.

Related Articles:
1.HRA - Tips & FAQs
2.Best ULIPs Based on IRR & Expense Ratio's
3.10 Common Income Tax Misconceptions


  1. AnonymousJuly 10, 2009

    point 9 is relevant for my current dilemas, I tend to agree, however do not find reasoning behind avoiding say Whole life insurance plans ?

  2. Good article. However; I beg to differ with point no.9 as far as ULIPs are concerned. Today there are very low costs ULIP options available (post IRDA capping on charges).

    # 8080876050

  3. for someone new into researching such articles this one get a full 10/10...very helpful and u made it so easy to understand...thanks a lot!!!!!

  4. Gargi AkolkarOctober 19, 2011

    Thanks a lot sir. This article is very useful. Thanks again. I too agree not to invest in insurance plans....


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