Investing in section 80C to save tax? Avoid these common mistakes

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If a taxpayer is following the new tax regime, his first mistake would be thinking that he is eligible to claim deductions under 80C. The deduction under 80C can be claimed only if a taxpayer opts for the old tax regime in a financial year.

Section 80C of the Income Tax Act 1961 allows for a deduction of up to Rs 1,50,000 on specific investments, reducing the taxpayer’s tax liability. However, it is critical to remember that certain investment possibilities available under section 80C are subject to certain conditions. A taxpayer should not overlook conditions or nuances since this could result in incorrect tax planning.

While investing in the instruments available under section 80C, a taxpayer should be aware of the following:

Lock-in period: Certain deductions u/s 80C are subject to a lock-in period. For instance, investment in fixed deposits is subject to a lock-in of five years, whereas Equity Linked Savings Scheme (ELSS) has a lock-in period of three years. The taxpayer would not be able to withdraw the same till the expiry of the lock-in period.

“If any taxpayer violates the lock-in period restrictions, the deduction which was allowed (in case of ELSS) or the amount so withdrawn (in case of FD) to the taxpayer u/s 80C shall be deemed to be the income of the assessee of such financial year and shall be liable to tax,” explained Suresh Surana, Founder, RSM India in blue.

Further, long-term investments like PPF come with a 15-year lock-in period to qualify under section 80C. “Always choose investments that achieve your financial goals also. Further, one should always consider the taxability of returns on investments and also, taxability of the sum received at the time of maturity of the investment made,” pointed out Abhishek Soni, Co-founder, and CEO, Tax2win.in.

Loan repayments: It is notable that section 80C does not cover repayment of the principal component of loans taken from friends and relatives. That said, interest repayment on loans taken from friends and relatives (i.e., private loans) to purchase house property can be claimed as a deduction u/s 24 of the IT Act.

“To claim a deduction for the principal component of home loan, the loan must be provided by the specified entities/ persons u/s 80C(2)(xviii)(c) such as a bank, including a co-operative bank, Life Insurance Corporation, National Housing Bank, etc.,” pointed out Surana.

Deduction on stamp duty and registration: The fees  paid can be claimed as a deduction u/s 80C only if the same pertains to residential house property. “Stamp duty and enrollment fees along with the additional expenses that are directly concerned with the transfer of the house property which is permitted beneath section 80C. But these expenditures upon the property bought or built must not be other than the residential house,” explained Amit Gupta, MD, SAG Infotech.

Tuition Fee: Regarding the deduction pertaining to the school/ tuition, the deduction would be available for the fees paid for maximum of two children for full-time education in India, and only the tuition fee component would be eligible for deduction.