Feb 6, 2009

The Other Side of Section 80C - Conditions & Restrictions

In my previous post “Section 80C Tax Saving Options & Investment Avenues” a brief overview of various expenses and investment instruments eligible for section 80C deductions is given.

However, many specific conditions & restrictions are applicable to those expenditure and investment options mentioned in section 80C. This post specifies those conditions & restrictions in detail:

Restriction & Conditions under section 80C

1. Tuition fees: Tuition fees paid for the full time education of your two children is allowed as deduction under section 80C. However, it is subject to following restrictions:

a. Allowed only for full time education, i.e., part time course and private coaching classes not allowed

b. Allowed only up to two children

c. Development fees, building fund, donations or any payment of similar nature not allowed.

d. Self or Spouse education not allowed.

e. Overseas education not allowed.
However, playschool, pre-nursery and nursery tuition fees are allowed. For a more detailed discussion, you can read http://simpletaxindia.blogspot.com/2008/02/tuition-fees-paid-for-children-us-80c.html.

2. Home loans: The principal component of the housing loan EMI, which is eligible for deduction under section 80C, is subject to following conditions:

a. If the loan is borrowed for the purpose of reconstruction/renewal/repair, then deduction under section 80C is not allowed.

b. The deduction for repayment of principal of a loan is not allowed in case of commercial property.

c. The property should not be sold before a period of 5 years. If you sell the house within a period of five years from the year in which you have started claiming home loan IT benefits, the entire deduction claimed under section 80C – for repayment of principal sum of the home loan – in earlier years will be deemed to be your income in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

d. If the house is in the name of your family member (spouse or your parents) and you make the repayment of loan yourself, the deduction u/s 80C won’t be allowed.

e. Unlike section 24(b), where you are allowed interest deduction irrespective of the source of borrowing (the borrowing may be even from your family and friends), the repayment of principal sum under section 80C is allowed only if the borrowing is from specified institutions mentioned therein.
3. House registration expenses: The following expenses relating to house property are not allowed under section 80C:
a.Stamp duty and registration charges paid for purchase of plot of land is not allowed under section 80C.

b. Property tax or municipal tax deduction is also not available under section 80C. It is available separately under section 23 while calculating net annual value of house property.

c. The admission fees, cost of share or initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming a member is also not allowed.

4. Life insurance: There are certain restrictions regarding the premium, lock-in period and the eligible persons:
a. If the amount of premium paid in any financial year exceeds 20% of the sum assured then deduction will be allowed only up to 20% of the sum assured.

b. While ULIPs can’t be sold or terminated before 5 years, other life insurance policies can’t be surrendered before the premium for 2 years have been paid.

c. Life insurance premium paid to insure the life of your parents (Father and Mother) is not eligible for the section 80C deduction.

5. Public provident fund (PPF): While PPF is considered as one of the best option among all the assured return schemes under section 80C, it is also subject to certain limitations:
a. The maximum limit is Rs 1 lakh, both under the IT Act and PPF Scheme (Upto Nov’ 2011, PPF limit was Rs 70,000). However, the difference is that under PPF scheme this limit is for your account (including the account of a minor of whom you’re a guardian) only; in other words, you can make additional contributions to the account of your spouse and major Children. But under IT Act, the total contribution by you to your account including the account of your minor child, major children and spouse should not exceed Rs 1 lakh..

b. A joint account is not permissible.

c. To keep the PPF account active, a minimum annual investment of Rs 500 is required in all subsequent years.

d. It is not possible to close & withdraw the entire amount before the maturity period of 15 years except in the case of death. However, partial withdrawals can be made from 7th year onwards.

6. Pension plans of insurance companies: The investment in pension plans of insurance companies is subject to following limitations:
a. If any investments have been made in pension plans of Insurance companies’ u/s 80CCC, then the qualifying amount u/s 80C stands reduced to that extent. In other words, combined overall limit u/s 80C and 80CCC is Rs 1 lakh.

b. On maturity, you can withdraw (or, commute) only one-third (33%) of the corpus which is tax-exempt; balance 2/3rd has to used to purchase an annuity (monthly pension) from any insurance company.

c. Pension is taxable.

7. 5-Yr Bank Fixed Deposits (FDs): While offering you same interest rates which are offered on plain vanilla FDs, tax-saving fixed deposits suffer from poor liquidity:
a. Tax Saving Bank FDs can’t be pledged for loan purpose.

b. Unlike other plain vanilla bank FDs, which you can encash before maturity by paying a penalty – usually one per cent – tax saving FDs doesn’t allow premature encashment.

c. Fixed deposits of non-scheduled banks are not covered.

8. Mutual Fund Pension Plan: Though lock-in period for tax purposes is only 3 years, premature exit before the vesting age of 58 years is subject to high exit loads. For instance, Templeton India Pension Plan (TIPP) charges 3% exit load for early redemptions.

9. Employee's Provident Fund (EPF): Basically, there are two kinds of EPF - first is Statutory Provident Fund (SPF) applicable to government and semi-government (including universities and other specified institutions) employees. And second is Recognised Provident Fund (RPF)under Employee's Provident Funds and Miscellaneous Provisions Act, 1952, applicable for private sector employees. While SPF is fully exempt from tax under section 10(11); RPF is subject to a lock-in period of 5 years. For more details, please read "10 Common Income Tax Misconceptions".

10. General or Common Restrictions: There are certain general limitations also:

1. The total limit under section 80C – combined with ‘pension plans of insurance companies under section 80CCC – is Rs 1 lakh. However, let me clarify that unlike section 88, there are no sub-limits under section 80C. The following sectoral caps which existed under section 88 have been omitted from section 80C:
a. Rs 12,000 per child for tuition fees
b. Rs 20,000 in respect of repayment of housing loan
c. Rs 10,000 in respect of equity linked saving schemes (ELSS)

2. Deductions permissible under section 80C to 80U are not allowed from short term capital gains chargeable under section (u/s) 111A and long term capital gains chargeable under section 112. It is because that these capital gains are already taxed at concessional rates. So, if your total taxable income includes any capital gains taxable under either section 111A or section 112, please exclude them from total income for the purpose of availing deduction u/s 80C.

3. Deductions under section 80C to 80U is also not available in case of winnings from lotteries, card games, races, gambling etc.

So, keep the above limitations in mind while doing your tax-planning to avail tax deduction under section 80C of IT Act.

1 comment:

  1. Dear fisher,
    thank you for all the effort you are putting in enabling smart tax savvy individuals.
    It would be nice if under the under the topic,alongside your name you could date the post as well.


You’re welcome to post a comment if you’d like to air your views, or if you’ve any further question to ask, but please stick to the topic and don’t forget to write your name.