Claiming deductions under Section 80C? Avoid these mistakes

Taxpayers usually make certain mistakes while claiming deductions under Section 80C of the Income Tax Act. Here’s how you can avoid them.

Certain deductions under Section 80C are subject to a lock-in period.

There is a common question on everyone’s mind: How can I save tax on salary? And if you want an answer to the question, then there are many legitimate ways to save tax under the Income Tax Act, 1961. Section 80C belongs to the same. It is probably the most popular and preferred section among taxpayers, as it allows to reduce taxable income by making tax-saving investments or eligible expenses. Section 80C also has sub-sections – 80CCC, 80CCD (1) , 80CCD (1b) and 80CCD (2).

Section 80C of the Income Tax Act came into force on April 1, 2006. It basically allows certain expenses and investments to be exempt from tax. If you plan your investments well and spread them wisely across various investments like Public Provident Fund (PPF), National Pension System (NPS), National Saving Certificate (NSC), Home Loan Repayment etc, you can claim a deduction of up to Rs 1.5 lakh every year, which will reduce your tax liability.

However, there are two important points you need to know about. The first one is that only individuals and HUFs can avail the benefits of this deduction, and companies, partnership firms, and LLPs can’t.

And the second one is that taxpayers are not allowed deduction as per Section 115BAC of the recent Finance Act 2020. We observed that if the taxpayer opts for 115BAC under the new tax scheme, he will not be eligible for any claim under section 80C, but if the taxpayer opts for the old tax scheme for any financial year, he can still avail deductions under Section 80C.

If you are not into taxation then it will be a bit difficult to understand every part of it and maximize savings. But still, we can make you more aware of the risks and mistakes that taxpayers usually make because of their poor planning, so that you can make the most of it.

1. Not paying attention to lock-in period

Certain deductions under Section 80C are subject to a lock-in period. For example, fixed deposits have a lock-in period of 5 years. Similarly, Equity Linked Savings Schemes (ELSS) have a lock-in period of 3 years. If the taxpayer violates the restrictions of the lock-in period, the income will be treated as income of the taxpayer for that financial year and will be liable to tax.

Now, taxpayers will have a similar situation with long-term investments like PPF, which has a lock-in period of 15 years to qualify under Section 80C. Thus, it is advised that taxpayers will have to choose investments that help them to achieve their financial goals. Additionally, taxability of returns on investments and taxability of the sum received on maturity are the two factors that every taxpayer needs to check before choosing an investment scheme.

2. Claiming deduction for private loan repayment

It has been observed that taxpayers try to claim deduction on repayment of any type of house loan under Section 80C, but it needs to be understood that the principal component of private loans (loans taken from friends and relatives) are not covered under Section 80C.

If a taxpayer wants to claim deduction for the principal component of the home loan, he/she needs to make sure that the loan must be provided by the specified entities/ persons u/s 80C(2)(xviii)(c). Loans provided by a bank, co-operative bank, National Housing Bank, Life Insurance Corporation, etc. come under it.

3. Deduction on registration and stamp duty

Expenses like stamp duty, enrollment fee and some other expenses which are directly related to transfer of residential house property (only) are allowed under section 80C. For commercial properties these expenses can’t be claimed for deduction under Section 80C. So, taxpayers should wisely choose the property type for claiming deduction under Section 80C.

4. Mistake while claiming Deduction for tuition fee

If a taxpayer is trying to claim a deduction for school or tuition fee, the taxpayer has to look at certain provisions before making any claim. The deduction will be available for fees paid for full-time education in India for a maximum of two children, and only the tuition fee portion of the complete fee will be eligible for the deduction. So, before providing any data, make sure to do some calculation.

5. Too much investment in endowment insurance plans

Endowment insurance plans are life insurance plans that are good for tax-saving and essential investments. However, investing a large part of your hard-earned money in this will not give you good returns. So, if you want to save more, invest in a term plan, which is also eligible for tax deduction under Section 80C.

In conclusion, I would like to advise all taxpayers to neither invest in haste nor wait for last-minute filing. This is because the chances of making a wrong investment decision are high if you are in a hurry to save tax. Treat these tax benefits as a fringe benefit and never invest just to save tax.

(By Amit Gupta, Co-Founder and MD, SAG Infotech)

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