Articles 253 views January 19, 2022

The Budget 2022, which is scheduled to be presented by Finance Minister Nirmala Sitharaman on Feb 1, 2022, has generated enormous buzz surrounding tax concessions on various products. Industry representatives have put forward their demand for raising the tax deduction limit under 80C to INR 2.5 lakh from INR 1.5 lakh at present, bringing the focus back on tax-saver plans such as life insurance plans, ELSS, Sukanya Samriddhi Plan, Senior Citizen Saving Scheme where 80C deductions apply. The limit has not risen since the last seven years but expenses have, nullifying greatly the effects of the increased salary for most during that period. Let’s understand it with an example below before focusing on these 80C tax-saver plans.

How the Constant 80C Tax Deduction Limit May Not Have Helped You Much Despite Increasing Pay Hikes?

Salary growth for most remains around 10% annually, while inflation rises by about 6-8% annually to eat into their earnings. Not only the price rise but even the rise in additional responsibilities with time make people worried about savings. While saving is pivotal to effectively deal with life uncertainties, not maintaining a good lifestyle doesn’t make you happy either. So, you need to strike that balance. Let’s check it in the context of the 80C tax deduction.

In the seven years where 80C deductions were unchanged at INR 1.5 lakh, one may have switched around 2-4 companies with an average hike of 25% on each switch. Keeping that in mind, someone earning around INR 50,000 seven years ago would have his income raised to around INR 90,000, assuming three corporate switches during seven years. Expenses may have grown from INR 30,000 to INR 60,000 now. So no real difference in terms of savings, a meagre hike of INR 10,000. That INR 10,000 in the context of inflation would feel mostly negligible.

What if the Government Raises 80C Tax Deduction Limit to INR 2.5 Lakh?

This could help salaried and other investor classes save a fair bit and increase their post-tax income. Let’s consider an example below to understand the same.

Example – Assume your gross annual income is INR 10,00,000. Let’s check the difference in savings when 80C tax deductions of INR 1.5 lakh and INR 2.5 lakh are applied separately.

Income & Tax AspectsOutcomes with 80C Deduction of INR 1.5 Lakh (In INR)Outcomes with 80C Deduction of INR 2.5 Lakh (In INR)
Gross Income10,00,00010,00,000
Standard Deduction5000050000
80C Deduction1,50,0002,50,000
Taxable Income Post Deductions8,00,0007,00,000
Yearly TDS Including Surcharge75399.9652500
Yearly Income Post TDS9,24,600.049,47,500

Note – Tax exemptions also apply to provident fund contributions and other products. In case your income after all such deductions falls to INR 5 lakh or below, no taxes apply.

Let’s Come to the Tax-saver Plans That Enjoy 80C Deduction

As told earlier, investments in life insurance, home loan principal amount, ELSS, Sukanya Samriddhi Plan and others enjoy 80C deductions. Let’s talk about them individually.

Life Insurance

All life insurance products such as term insurance, unit-linked insurance plans (ULIPs), endowment and money back plans come with 80C deductions on the premium payable. The commonality among these plans is the payout your nominee receives upon your death without any taxes on the same. While term insurance offers death benefits only, others offer investment benefits too.

ELSS

An Equity-linked Savings Scheme (ELSS) is a tax-saver mutual fund entitling you with deductions on the amount invested in a financial year. The striking feature of ELSS is the shorter lock-in period of three years as opposed to five years in the case of its competing products such as PPF, Tax-saver Fixed Deposits, etc. What’s more, there’s no investment amount restriction in ELSS, whereas its competing products come with a total investment limit of INR 1.5 lakh in a financial year.

Tax-saver Fixed Deposits

You can open it with a minimum lock-in period of five years as told earlier. In return, you can invest a minimum and maximum of INR 100 and INR 1,50,000, respectively, in a financial year to gain 80C tax deductions. TDS applies to these tax-saver fixed deposits only when the interest earned on the same is more than INR 10,000 in a financial year.

Sukanya Samriddhi Yojana

To promote the welfare of girl children, the government has launched this scheme wherein one needs to deposit a minimum of INR 250 to open the account. Thereafter, one can deposit with a multiple of INR 150, up to INR 1.5 lakh in a financial year. You can deposit the same for up to 15 years, while the account is set to mature in 21 years. There’s no TDS on the amount invested, interest earned and the amount withdrawn. Currently, the interest rate on Sukanya Samriddhi Yojana stands at 7.60% per annum.

People Also Read