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Before claiming Section 80C Income Tax deductions, be aware of these conditions

All of us avail tax benefits under Section 80C of the Income Tax Act, but only a few are aware that these benefits come with certain strings attached. Let us discuss those strings.

Home loan repayment

Tax benefit for repayment of the principal amount of home loans is eligible for deduction under Section 80C, but the deduction is available only in respect of home loans taken for acquiring a residential house property and that too from specified entities, including banks and housing finance companies. In contrast, the deduction for interest under Section 24(b) is available for the money borrowed from anyone, including your friends and relatives. The deduction for interest u/s 24(b) is available even for money borrowed for repair, renovation of any property including a commercial property.

Moreover, the tax benefit availed under Section 80C gets reversed and the tax rebate availed in earlier years is added to your income if you transfer the house within five years from the end of the financial year in which possession is taken. There is no similar provision for reversal of interest benefits for transfer of your house later on. Likewise, there is no provision for reversal of benefits if you prepay your home loan within five years.

Life Insurance Premium

Deduction for life insurance premium is available on insurance policies taken on your own life as well as the life of your spouse and children. There is no restriction on the number of children for which you can avail this benefit. Moreover, no condition is attached as regards financial dependency of your children for claiming this deduction. So, retired parents can optimize their tax outgo by paying the life insurance premium of their earning children whose bucket of items available under Section 80C gets overflown.

In contrast children cannot claim tax benefits for payment of premium on life insurance policy taken on life of their parents even if they are financially dependent. An HUF can also claim the tax benefits for the premium paid for the policy on life of any of its members.

Premium upto 10% of the sum assured is only allowable and excess premium is not eligible for tax rebate whereas in case of money received back on life insurance policies from an insurance company during the life time of insured gets taxed if the premium paid for the policy exceeded 10% of the sum assure even for one year during the premium paying term. So, though deduction upto 10% is available under Section 80C in case premium for any policy is more than 10% but exemption under Section 10(10d) gets lost if the premium exceeds 10% for any year.

There is provision for reversal of benefits enjoyed earlier if you terminate or let your life insurance policy lapse before completion of two years. In such a situation deductions allowed in earlier years is added back in the year in which the policy lapses and no deduction is allowed for such premium in that year.

PPF contributions

You can claim income tax deduction for the contributions made to your own PPF account as well as the PPF account of any number of your child and your spouse. Though HUF cannot open a PPF account in its name, but it can claim deduction for contribution made to the PPF account of any of its members. Since gift to your child and spouse is exempt under Section 56(2) and clubbing provisions do not have any impact because interest on PPF is exempt, you can use the PPF account to effectively minimize your tax outgo and transfer your assets to your spouse. This will also help your children to build a corpus for their future. Please note as per the PPF scheme 2019, you can not contribute more than Rs 1.50 lakh to your PPF account and the PPF account of your minor children taken together. However, the restriction of Rs 1.50 lakh will not apply for contributions made to the PPF account of your spouse and major child.

The PPF account has an initial tenure of 15 years but this can be extended for a block of five years at a time for any number of times.

Education Expenses

You can claim deduction for the tuition fee paid for your children but only for two children for full-time education in India. So, in case you have more than two children, though the deduction in respect of other children cannot be claimed by you but your spouse can claim if he/she is also a tax payer.

Deposits under Senior Citizen Scheme/Tax Saving Fixed Deposit
You can claim tax benefits by depositing money in the Senior Citizen Savings Scheme (SCSS). This account has a lock in period of five years and becomes taxable if withdrawn earlier. However, any money received on closure of the account due to death of the account holder even before five years is fully exempt.

ELSS contributions

Investments in the Equity Linked Savings Scheme (ELSS) are eligible for tax benefits under Section 80C. It is the only investment product which has the lowest holding period requirement of three years. In case investment in ELSS is made through the Systematic Investment Plan (SIP), each instalment of SIP is treated as separate investments and the lock-in period is computed accordingly. You enjoy an initial exemption of one lakh on profits made on redemption of ELSS together with long-term capital gains made on any equity product on which STT has been paid.

We are sure, with this article you have become aware about the various conditions attached with the Section 80C deduction.