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Unit 11: Taxation Planning

avail maximum tax benefit. Unlike Section 88, there are no sub-limits and is irrespective of how Notes
much you earn and under which tax bracket you fall.
The total limit under this section is ` 1 lakh. Included under this heading are many small savings
schemes like NSC, PPF and other pension plans. Payment of life insurance premiums and investment
in specified government infrastructure bonds are also eligible for deduction under Section 80C.

Most of the Income Tax payee try to save tax by saving under Section 80C of the Income Tax Act.
However, it is important to know the Section in toto so that one can make best use of the options
available for exemption under income tax Act. One important point to note here is that one can
not only save tax by undertaking the specified investments, but some expenditure which you
normally incur can also give you the tax exemptions.
Besides these investments, the payments towards the principal amount of your home loan are
also eligible for an income deduction. Education expense of children is increasing by the day.
Under this section, there is provision that makes payments towards the education fees for
children eligible for an income deduction.

Sec 80C of the Income Tax Act is the section that deals with these tax breaks. It states that
qualifying investments, up to a maximum of ` 1 Lakh, are deductible from your income. This
means that your income gets reduced by this investment amount (up to ` 1 Lakh), and you end
up paying no tax on it at all!
This benefit is available to everyone, irrespective of their income levels. Thus, if you are in the
highest tax bracket of 30%, and you invest the full ` 1 Lakh, you save tax of ` 30,000. Isn’t this
great? So, let’s understand the qualifying investments first.

Qualifying Investments

Provident Fund (PF) & Voluntary Provident Fund (VPF): PF is automatically deducted from
your salary. Both you and your employer contribute to it. While employer’s contribution is
exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section
80C investments. You also have the option to contribute additional amounts through voluntary
contributions (VPF). Current rate of interest is 8.5% per annum (p.a.) and is tax-free.

Public Provident Fund (PPF): Among all the assured returns small saving schemes, Public
Provident Fund (PPF) is one of the best. Current rate of interest is 8% tax-free and the normal
maturity period is 15 years. Minimum amount of contribution is ` 500 and maximum is
` 70,000. A point worth noting is that interest rate is assured but not fixed. Interest on PPF is
proposed to increase to 8.60% and Investment Limit is also expected to increase to ` 1,00,000/-
very soon.
Life Insurance Premiums: Any amount that you pay towards life insurance premium for yourself,
your spouse or your children can also be included in Section 80C deduction. Please note that life
insurance premium paid by you for your parents (father/mother/both) or your in-laws is not
eligible for deduction under section 80C. If you are paying premium for more than one insurance
policy, all the premiums can be included. It is not necessary to have the insurance policy from
Life Insurance Corporation (LIC) – even insurance bought from private players can be considered
here.

Equity Linked Savings Scheme (ELSS): There are some mutual fund (MF) schemes specially
created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS.
The investments that you make in ELSS are eligible for deduction under Sec 80C.
Home Loan Principal Repayment: The Equated Monthly Installment (EMI) that you pay every
month to repay your home loan consists of two components – Principal and Interest. The principal

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