Looking to save tax? Don’t be taken in by hype on Section 80 C

Come March, Section 80 C enters the popular lexicon. We are talking about Section 80 C of the Income-Tax Act here. It allows tax deductions of up to Rs 1 lakh in some specific investments such as Public Provident Fund, 5-year bank fixed deposits and tax-saving mutual fund schemes, among others. 

Many taxpayers always grumble that they don't get enough time to make an intelligent investment choice to save taxes. Financial advisors, on their part, blame it on the habit of finalising tax-saving investments at the eleventh hour as the main reason why many taxpayers get stuck with bad investments. 

Looking to save tax? Don’t be taken in by hype on Section 80 C
But aren't they making a big deal about Section 80? Think of it: The section allows a maximum deduction of only Rs 1 lakh. An average taxpayer would have claimed at least half of it if s/he is contributing to employees provident fund — Here are the numbers: Rs 4,000 to EPF every month adds up to Rs 48,000 in a year. 

Add to that another Rs 10,000-15,000 towards insurance premium, and you will see that one really doesn't have much to save under Section 80. Remember, we have used conservative numbers for both EPF contribution and insurance premium in the example. 

In fact, most individuals may be paying way above the figure in the example because they mostly prefer expensive insurance policies with savings and investments elements over a plain vanilla term plan. 

"The importance of this section is certainly overdone. For example, we never get to talk about this section to our clients because most of them have already exhausted it. Many well-paid individuals need not do anything to cover the section as their EPF and life insurance premium take care of it," says Suresh Sadagopan, principal planner, Ladder7 Financial Advisories. He also says the media and experts play up the importance of this section because most people are aware of its existence. 

"Most people know about only a few sections that deal with deductions. For example, everyone knows about Section 80 D that deals in health cover premiums. They also know tax deduction is available for repayment of home loan interest or on donations. 

But they wouldn't know sections that deal in specific deductions like education loan or employer's contribution to NPS," adds Sadagopan. Several financial advisors agree. 

They argue that overemphasis on this section is leading to rampant mis-selling of investments covered under it. "Most so-called experts know that an average individual hardly totals up the numbers before shopping for tax-saving investments. 

They just give these unsuspecting individuals some random figure and push some expensive insurance policy," says a wealth manager, who doesn't want to be named. 
He says this could explain why the insurance policy sales zoom in the last three months of every financial year. This is a real cause of concern because many individuals end up investing well above the permissible Rs 1 lakh limit under Section 80C, say experts. Needless to say, such investments don't qualify for tax deductions. 

And experts say many taxpayers don't even know about it until they meet a financial advisor who would break the news to them. "The focus has to shift from investing to save taxes to overall investment and saving taxes. The idea is not about just to save taxes, but maximising returns with the help of tax breaks and meeting your financial goals on time," says Sadagopan. 

"That can happen only if one fixes financial goals and makes regular investments to achieve them. Once you start the process, you will realise that chasing short-term trends, focusing alone on taxes or returns can only distract you from your final goal. In fact, you will figure out that none of these things will matter in the final analysis," he adds.

Source : The Economic Times


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