Deducstion Under Section 80 C come with restrictions

Section 80C>>>

Deductions & Restrictions>>>

This time round the year when we are still grappling with the sky-high prices of onions, petrol and vegetables, the circular of tax deduction claims submission in our mail box has added to the concerns. This  is a fact of life with which we have to deal with and deal smartly.  As you are aware that  Section 80 C allows you deduction upto Rs. 1 lakh from your total income in respect of some of the items of investment and expenses. But what you are not aware is that these  items of deductions are subject to some restrictions with regard to  person in respect of whom you are claiming  these deductions.  Also there is a requirement with regard  to the period of holding of the investment/asset acquired.

In this article I intend to discuss these restrictions in respect to some major  deductions.

Life Insurance Premium

An individual or an HUF can claim deduction for Life Insurance Premium paid. An individual can claim this deduction in respect of  Life Insurance Policy taken on life of  the person himself, his spouse or any of his children. As a parent, you can pay and claim for life insurance of your children whether dependent or independent but  children can not pay and claim the tax benefits in respect of life insurance premium paid in respect of life of parents. The HUF can claim deduction on the  premium paid on  the life insurance policy taken on the life of any of its members.

In addition to the person in respect of whom the Life Insurance Premium can be paid, there is also a lock-in period of two years, till then you cannot  terminate or let the policy lapse.   In case this happens, the deductions allowed in earlier years are added to your income of the current year.

 

Education Expenses

Your children’s tuition fee is also covered  under Section 80 C, but with some conditions. It is restricted to two children only and institution should be in India only.   In case you have more than two children, the deduction in respect of other children can be claimed by your spouse.

Home loan repayment

One can claim deduction in respect of repayment of home loan, but this too is not without some restrictions.  First the deduction can be claimed only if the loan has been taken from specified financial institutions or entities like your employer which is a public limited company, central government or state government or board, corporation, university established by law.

Then there is another restriction with respect to ownership status of the property. You can claim this  deduction only if your are owner of the property. In one of my earlier articles, I have explained that the claim for deduction can only be made after you have obtained possession of the house property though the repayment might have begun while the property is still under construction. The third restriction is about holding of the property which is acquired with the help of a loan and on which deduction under Section 80 C is claimed. In case you sell the property within five years beginning the end of financial year in which possession of the property was taken, all the deductions in respect of this property shall be treated as income of the year in which you transferred the property.

PPF Account contributions

In respect of  PPF contributions there is no ceiling on the deduction under the Income Tax Act however there is a ceiling as per PPF rules.  You can not contribute more than Rs. 70000 in a single account in a financial year. Moreover  you cannot open a PPF account in the name of HUF after May 2005, however as per the provisions of the income tax act, the HUF can still claim deduction in respect of contributions made to the accounts maintained in the name of any member of the HUF.  You can claim deductions in respect of PPF contributions made towards your spouse as well as for your child. Let me bring to your notice that only PPF contribution is the items of pure investments where a parent can claim deductions in respect of  money deposited in the PFF account of your child and spouse. Since gift to your child is exempt and the clubbing provisions will not have impact as the interest on PPF account is exempt, By contributing to PPF account of your child you can help him build a corpus and save taxes at the same time.

Deposits under Senior Citizen Scheme:

Those who have completed 60 years of age, can claim deduction under 80C under Senior Citizen Deposit Scheme.   Moreover these deposits have to be maintained for a period of five year but if you withdraw the deposit before this period, the amount  withdrawn shall become taxable in the year of withdrawal in case deduction in respect of same has been claimed earlier. However any money received by the nominee or legal heirs on closure of the account due to death of the account holder shall not be taxed when received.

ELSS contributions:

Contribution of ELSS( Equity Linked Saving Schemes) of Mutual Funds, popularly known as tax saving schemes, have gained popularity since these have given better returns in line with the overall returns on investments in equity. Contributions  to these ELSS schemes have a restriction as to holding period of three years. This is the shortest holding period in respect of pure saving based investments qualifying for deduction under Section 80C. In case you sell the units acquired under ELSS before completion of three years, the deduction claimed earlier will become taxable in the year of withdrawal.

In case the investment was made through Systematic Investment Plan, this limit of three years will apply to each contribution.

I hope restrictions applicable have become clear to you in respect of whom you can claim deductions under Section 80C. Besides, you have also understood the importance of holding period of the asset in respect of which you plan to avail the deduction in your tax returns.

Tax benefits for interest on home loans in India

Your house, and Interest related tax deductions

The benefits of interest for house loan allowed under present income tax laws is dependent on usage of the money borrowed, here we will explore the provisions of the same in this article. 

For  claiming the interest benefit, first and foremost thing you should  keep in mind is that the benefit is available in respect of house owned by you which is ready for occupation. Thus you cannot claim this benefit in case either the house is not owned by you or during the period when it is under construction. However any interest paid, during the period when the construction was going on can be claimed in five equal installments beginning from the year in which the construction is completed. The benefit of interest is available on accrual basis and it is not necessary that you should have actually paid the interest by issuing a cheque.

 

Most of people have a notion that interest on loan can only be claimed if the loan has been taken for the purpose of either buying a house or for the purpose of construction on the plot owned by you, which is not true. Even the  interest on money borrowed for the purpose of repair, renovation or reconstruction of house is also eligible for deduction.  However if you have borrowed money against your property for the purpose which is not covered above, you will not get any deduction under the head “Income from house property”. However the same can be claimed  under other heads if the money borrowed against your property has been used in some business or for making some investments, implying a direct linkage is not established.

So what are the sources from where you can borrow besides banks, HFCs and NBFCs? Borrowing from friends and relatives too entitle you for this benefit.    This way we see that for claiming the deduction, it is not the source of money which is  important, but the purpose is and you should be in position to prove the end use of the money for claiming this tax benefit. You  can even claim the interest paid on personal loan taken for making down payment as the banks will not fund you more than 80% of the cost of the house.

However in case the money is borrowed on or after 1^st April, 1999 for the purpose of buying the house in which you are staying, you have to obtain a certificate from the person who has lent you the money specifying the amount of interest payable on this  loan. So except for the loan taken from the period beginning from 1^st April 1999 for the property occupied by you, the law does not require you to even obtain a certificate from the  lender but you will have to conclusively establish the linkage between the amount borrowed and the end usage.

Now you would like to know the quantum of deduction  available for interest which mainly depends on the usage of the property and  timing of the  loan.  For the properties which are let out, the entire amount of interest is allowable. In respect of  properties which are occupied by you or your relatives, implying  it is self-occupied, the normal amount of deduction available is Rs. 30,000. However you can claim an enhanced deduction of Rs. 150000 if loan has been taken for purchase or construction of a house  on or after 1^st April 1999 and the purchase or construction of the property is completed within a period of three years from the end of financial year in which the  loan was  taken. For loan taken for repairs, renovation or reconstruction of the house occupied by you, the limit of deduction is still Rs. 30,000 but there  is no limit in respect of interest on loan for repairs, renovation or reconstruction of house which is let out.

In case of more than one property occupied by you or your relatives, the law allows you to choose one house as self-occupied and all the other house/s shall be treated as let out and the deduction will be available to you accordingly.

I  hope now you know fully about the interest benefits in respect of house owned by you, so if you have been depriving yourself for any such deduction till now, make the first move!

Accumulate gold for your daughters' marriage in small quantity

Graduate from electronic goods to electronic gold!

Indian marriages are unthinkable without gold jewellery. Almost  all  parents gift   gold jewellery to their daughters at the time of their marriage and welcome their daughters-in-law with gold jewellery. With on-going global crisis and gold prices hitting the roof,  parents are a worried lot as gold constitutes a significant proportion of expense in daughter’s marriage  of any Indian. 

In this article I will discuss about suitability of various products for the purpose of accumulating gold  for marriage of your daughter. Till now you have been buying electronic goods with easy EMIs, now you can buy electronic gold too. This is a big boon for those parents whose daughter’s/ son’s marriage is few years ahead. 

So what are options available for buying gold electronically?  You can choose the option depending on the  various factors like the time horizon over which you want to accumulate gold or how long you want to remain invested in gold. The other important factor which may impact your decision is the purpose  of investing in gold.

Till some time ago there was only one way by which you could invest in gold i.e. by purchase of jewellery, gold coins or gold bars. Now with electronic medium for purchase of gold stepping in, you can choose between  these products -  Gold ETF,  Gold Funds and E Gold. Electronic mode scores over physical mode for accumulating gold over a longer period of time attributing to various reasons like purity, storage cost,  risk of theft and convenience of buying in small quantity which are taken care of by gold electronically purchased

Investment through Mutual Funds

Once you have zeroed on electronic mode of buying gold for the purpose of accumulating it for the marriage of your daughter, there are two options through which you can proceed. One is through the medium of Mutual Funds and other is E-gold product offered by National Spot Exchange. The Mutual funds offer two products -  the gold ETF which are traded on the Stock exchanges where you can buy and sell gold with your existing stock broker and  a demat account. In addition to the brokerage cost payable at the time of purchase and sell, 1% is  charged by the mutual fund houses for managing the scheme which effectively reduces the return on investment by approx. 1% over returns generated by the underlying asset Gold. A few mutual funds have very recently launched gold fund schemes where  units  can be purchased from the mutual funds directly like other mutual fund schemes. These schemes will in turn invest the money collected in the gold ETF schemes of their fund houses only. Though these offer the convenience of investing without having a demat account and also let you invest a fixed sum of money through SIP and take the benefit of rupee cost averaging. However like in case of gold ETF, here also the annual fund management expenses may be around 1.50% which will effectively reduce your returns by around 1.50% as compared to returns given by the underlying asset i.e. Gold.

In addition, you cannot convert your gold holding directly into gold by tendering the same to concerned Mutual Funds  unless your holding is equivalent to 1000 grams of units. Moreover since you cannot convert the units into gold, you have to invariably sell these units and pay capital gains tax and purchase gold only equivalent to the money left after providing for capital gains tax.

 

Investment through E-gold

This is the recent fad under the electronic Gold mode of investment in gold. In case you want to accumulate gold in small quantity over the long period then E Gold makes better sense. Firstly, the E gold units purchased by you through National Spot Exchange Limited are fully backed by the equal quantity of Gold unlike in case of gold ETF where the investment in gold may not necessarily be exact equivalent to the number of units issued by the mutual fund. This is due to  annual cost incurred for managing the funds and other factors like maintenance of cash balances by the mutual funds.

Since NSEL does not charge anything akin to the fund management charges on yearly basis, the cost which you incur are basically the brokerage cost paid at the time of purchase of E- gold units and then annual charges for  the demat account which are anyway payable in case you invest in gold ETF also. Since you plan to accumulate sufficient quantity of gold in small quantity over a long period of time, the cumulative impact of saving on account of around 1% or 1.50 % over the long period gets translated into huge saving,  thus ensures returns on this investments equivalent to the returns provided  by the underlying assets i.e.  Gold since each units is exactly backed by one gram of gold in the vault  of the NSEL. This is due to the reason that  NSEL presently does not recover any charges towards storage costs of the gold being incurred by them for safe keeping of the same with safe deposit vaults.

Though there are some charges per request for conversion of electronic gold into physical  and making charges for taking physical delivery of gold, this will not be significant as you will be taking the delivery in larger denomination and the request for such conversion will be one time only at the time of marriage of your daughter.

One more benefit here is that you save on account of capital gains which you can ensure if you decide to take physical delivery of gold from the NSEL against your holding of E Gold units. Let us understand this. Once you have taken possession of the gold from the NSEL it does not amount to any transfer attracting any capital gains liability under the provisions of Income Tax Act. The same gold can be used for the purpose of making jewelry to be gifted to your daughter. What you have to do is to obtain an invoice for labour charges in respect of jewelry made with the gold obtained from NSEL.

Since gift between close relatives is fully exempt without any limits, you can gift the jewelry to your daughter without having any income tax implications in respect of capital gains

I hope that now you know that E gold provides you an opportunity to accumulate gold over the periods co terminating at the time of marriage of your daughter./son with cost advantages attached with it.