A taxpayer has various investment options available to save taxes under Section 80C of the Income Tax Act. Here's how they are taxed.
A taxpayer has various investment options available to save taxes under Section 80C of the Income Tax Act. Investments are eligible for deduction up to a limit of Rs 1.5 lakh a year. All the investments are made with the aim of saving taxes and earning a return on the investment. While making investments, taxpayers also need to look at the taxability of the returns on investment and maturity. Most investments fall in exempt-exempt-exempt category, or exempt-taxed-exempt or exempt-exempt-taxed category. The investment made is exempt from taxation under each of the categories.
The exempt-exempt-exempt category consists of 3 kinds of exemptions. Investments made in investment accounts such as Public Provident Fund (PPF), Employer Provident Fund (EPF), Life insurance policy premiums, Sukanya Samriddhi Yojana qualify under this category.
1. A deduction is allowed for the investment made, thus exempting a part of the taxable income.
2. The income earned on the investment is exempt from tax, e.g., Interest on PPF, Bonus accrued on LIC policy.
3. The amount withdrawn upon maturity of the investment is exempt from tax.
The exempt-taxed-exempt category refers to availing of 2 exemptions and taxation of earnings. Investments made in a 5 year fixed deposit, National Savings Certificate (NSC) fall under this category.
1. The investment made qualifies for a tax deduction against taxable income.
2. The interest earned on the fixed deposit is taxable as income for the taxpayer. The interest earned in excess of Rs 40,000 per annum is also subject to a tax deduction at source.
3. The amount withdrawn on maturity is exempt from tax.
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The exempt-exempt-taxed category refers to availing of two exemptions and taxation of the maturity proceeds. Investments made in Equity-linked savings schemes (ELSS) of mutual fund fall under this category.
1. The investment made qualifies for a tax deduction and hence exempt.
2. The returns on investments such as dividend are also tax exempt.
3. The lump sum amount received at the time of withdrawal is taxable. ELSS has a lock-in period of 3 years. The maturity proceeds would be liable for a capital gains/loss taxation.
Other than the above investments, a taxpayer can also avail the benefit of deduction under Section 80C for payments made such as tuition fees paid for children, repayment of housing loan and stamp duty and registration charges paid for house property.
(The author is Founder & CEO, ClearTax)