Do you know, that there are limitations of Sec 80C that cannot be ignored.
Generally, income tax savings that can be claimed under Sec 80C are quite transparent.
But when we look into the fine prints, there are something that we must be aware of.
Most of us are conversant with tax saving benefits of sec 80C.
So I will not bore you with the details of savings possible under sec 80C.
In this article we will focus mainly on the few limitations of Sec 80C that we all must know before committing to one.
What is the objective of buying a Sec 80C linked investment?
The main purpose is to reduce our income tax liability.
If one is not aware of these limitations, it may happen that he/she may end up paying higher income tax.
This can happen due to our lack of awareness.
Why to allow the tax authorities to extract more tax out of our pocket?
Instead, we can utilise our money wisely elsewhere.
Lets understand this with a hypothetical example:
Suppose you are investing Rs.100 in Sec 80C with objective of claiming income tax deduction of Rs.10.
But as you did not knew about the limitations, you end up claiming a tax deduction of only Rs.8.
If you only had known about these limitation before, you could have planned your tax savings more wisely.
Sec 80C works like a saviour in March
Not planned your tax savings from the beginning of the year?
No worries Sec 80C can be your saviour.
March is that month of the financial year, where many tax payers look towards Sec 80C to reduce their tax liability.
Sec 80C can help people to claim income tax deduction of maximum Rs.1.5 lakhs.
I am not sure about the numbers, but I think 70-80% of the salaried people in age bracket of 28-35 years of age, rely completely on Sec 80C for income tax savings.
But the problem is, not many are aware of the limitations of Sec 80C linked investments.
Lets see the limitations of Sec 80C to be self prepared…
#1. Premium paid on Life Insurance Policies
Under Sec 80C a person can claim income tax deduction. We all know this.
There is nothing new I am saying here, right?
But there are some limitations here that we must know…
#1.1 Limitation One:
Do we know that the life insurance policy should cover only the below people?
- Spouse &
- Own/adopted child.
As a parent you can buy a life insurance policy for your child and claim income tax deduction.
Your child can be a dependent or independent child.
#1.2 Limitation Two:
But if you are thinking to claim income tax deduction for life insurance policy purchased by you for your parents, you cannot do it.
This is one very common miss that a lot of people make while claiming tax benefits under Sec 80C.
There is another twist here.
#1.3 Limitation Three:
In the world of income tax, one can claim income tax benefits as following:
- As an individual
- As a HUF (Hindu Undivided Family).
An individual cannot claim income tax deductions for premium paid on life insurance policies of parents.
But as a HUF one can claim the deductions for all of its members.
#1.4 Limitation Four:
This limitation is related to the time horizon for which you must keep the life insurance policy alive.
Suppose you bought the policy this year, and claimed the tax deduction under Sec 80C.
It is mandatory for you to pay the insurance premium for minimum 2 years.
Otherwise the deduction claimed for the first year will be revoked.
Revoking the benefit means?
The tax deduction claimed by you in the first year will be added to your income in the second year.
#2. Fees Paid for Child’s Education
You have paid school fee for your child?
You can claim this expenses as an income tax deduction (max allowable deduction is Rs.1.5 lakhs).
But there are several if’s and but’s here. They pose as a huge limitation…
[Note: Deduction can also be claimed for fees of play schools, pre nursery, nursery etc]
#2.1 Limitation One:
If you have taken loan to pay for the child’s eduction, you cannot claim income tax deduction for the interest portion under Sec 80C.
This income tax deduction can be separately claimed under Sec 80E.
#2.2 Limitation Two:
As we know that in income tax world, one can claim deductions as an individual or HUF.
An individual can claim this tax deductions.
But HUF is not allowed to claim this deduction.
#2.3 Limitation Three:
This is very interesting.
Suppose you have 4 child, and all 4 are studying in a school/college.
It means, fee is paid for all 4 child. Hence you would claim tax deduction for fee paid for all 4 children, right?
Not right. As per income tax rules, one can claim tax deduction for only 2 child.
But there is a way out.
Let the husband claim tax deduction for first 2 child, and wife for the balance 2 children.
This is allowed as per income tax rules.
What if one has 5 children?
Sorry, there are no ways one can claim income tax deduction for fee paid for all 5 children at a time.
#2.4 Limitation Four:
This limitation is particularly applicable for higher education (like college).
These days we have full time courses and part time courses available.
But income tax deduction can be claimed only for the full time courses.
There is one more restriction here.
The schools/college/institution must be located in India only.
#2.5 Limitation Five:
In case you have opted for higher education of self or of your spouse, you cannot claim the fee paid for this cause under Sec 80C.
The rule is only applicable for your children.
#2.6 Limitation Six:
You must be aware that, these days schools etc charge fees on many heads.
But all components of fee are not eligible for income tax deduction.
Only tuition fees paid can be claimed as deduction under Sec 80C.
Following components cannot be claimed as deduction:
- Development fee
- Building fee
- Fee paid to coaching centres
- Late fees
- Fees paid for transportation, hostel, mess & library.
#3. Principal Component of Home Loan
We are aware that the interest component of home loan can be claimed as deduction seperately under Sec 24 for residential property.
The principal component of home loan can be claimed as deduction under Sec 80C.
But there are few limitations here as well.
#3.1 Limitation One:
The deductions under Sec 80C can be claimed only after the possession (of the house) has been taken by the home loan account holder.
#3.2 Limitation Two:
Property must he held for a period of full five years from the date of possession.
Else, if the property is sold within five years, the deduction claimed in preceeding years under Sec80C can be revoked.
Revoking means, all tax deduction claimed by you in the first-years will be added to your income.
This can increase your net taxable income of that year.
#3.3 Limitation Three:
This is not really a limitation.
But I will include it here anyways, as I think less people are aware of this rule.
Hence, lack of awareness of this rule pose as a limitation.
In the year in which one buys the residential property, following charges can be claimed as deduction under Sec 80C:
- Stamp Duty charges
- Registration Charges
- Any other charges directly used for the purchase (transfer) of the property.
#4. Limitation of investing in ELSS
Equity Linked Savings Scheme (ELSS) is a new rage when it comes to claiming deductions under Sec 80C.
I also like ELSS linked investment as they not only give high returns (being equity linked), but also saves income tax.
There are few limitations here that one must be aware of:
- ELSS funds come with a holding period of minimum 3 years.
- If ELSS fund units are bought using monthly SIP, unit purchased each month will have a locking period of 3 years.
Minimum holding time of 36 months is calculated from the date of purchase of each unit (under SIP).
#5. Limitations of investing in PPF
Public Provident Fund (PPF) contributions is another avenue which people use to claim deductions under Sec 80C.
But here are few limitations that we must be aware of:
- Annual Contribution to PPF accounts of only self, spouse and child can be claimed.
- As a HUF, one cannot claim deduction under Sec 80C towards their PPF contribution.
But individuals under HUF can claim the deduction separately.
#6. Limitations of investing in SCSS
Seniors citizen savings/deposit schemes (SCSS) are eligible for deductions under Sec 80C.
But here again there are few limitations:
- Any retired person cannot claim the deduction. The persons must be above 60 years of age.
The holding period of the deposits must be five years or more.