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An alternative to NSC?
Rachna C
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March 01, 2006

Every tax payer should be aware of what Section 80C includes and what it implies.

Investments and expenses that fall under this Section are eligible for an income deduction up to a limit of Rs 100,000.

This Budget, there has been just one addition to this list.

Banks were lobbying hard to get their fixed deposits included under Section 80C. If the finance minister had obliged them, then post office deposits too would have to be included under this section.

Hence, the finance minister has declared that fixed deposits in scheduled commercial banks would fall under Section 80C. This was only applicable, however, if they have a tenure of at least five years. This means it will not be valid for deposits of a shorter tenure.

Similar to NSC?

This makes the five-year fixed deposit largely similar to a National Savings Certificate. Now, both are eligible for a deduction under Section 80C.

The key differences are that NSC has a slightly longer maturity of six years. While the deposits are only for five years. 

However, where NSC scores is the higher interest rate. You will get 8% on NSC but a lower interest rate on the bank (the actual rate varies between banks). You could probably expect a maximum of 6.5% to 7% on these deposits.

When NSC matures, the interest is taxed in the hands of the investors. Will the interest on the bank deposit get similar treatment? Logically, it should.

Investments under Section 80C

Premium on life insurance policies

Contribution to Employee Provident Fund

Investment in Public Provident Fund

Investment in National Savings Certificate

Investment in infrastructure bonds

Investments made in Unit Linked Insurance Plans

Investments in Equity Linked Saving Schemes of mutual funds

Investments in notified pension funds set up by mutual funds

Expenses under Section 80C

Repayment of the principal amount of the home loan

Tuition fees

Any change in the sub-limits?

Overall, the limit under Section 80C is Rs 1,00,000. This is irrespective of how much you are earn and under which tax bracket you fall. This has not been touched in this Budget.

However, there may be individual limits for each. For instance, the maximum that you can invest in PPF is Rs 70,000 per annum.

Also, under Section 80CCC, the contribution made to pension funds is subject to a maximum of Rs 10,000. But this Budget, it has been proposed that this limit be removed and the ceiling of Rs 1,00,000 applies.

So, you can choose to invest the entire amount in ELSS or infrastructure bonds. The choice is entirely up to you as to how you want to reach this limit.

Or, if you are repaying a home loan and the principal repayment amounts to Rs 1,00,000, you can claim the entire amount as a deduction.

Similarly, the deduction for tuition fees under Section 80C is available towards payment of education fees for children upto a ceiling of Rs 1,00,000. However, in order to avail of this deduction, you will have to produce the fee receipt.

The calculation

Let's take an example to better explain the tax working:

Net taxable income

Tax rate

Upto Rs 1,00,000

Nil

Rs 1,00,001 � 1,50,000

10%

Rs 1,50,001 � 2,50,000

20%

Rs 2,50,001 onwards

30%

Salary income: Rs 3,20,000

Home loan interest payment: Rs 1,20,000

Home loan principal repayment: Rs 80,000

NSC investment: Rs 30,000

Salary (a)

320,000

Income from house property (b)*

120,000

Gross total income (c) (c = a � b)

200,000

 

 

Home loan principal repayment

80,000

NSC investment

30,000

Section 80C investments

1,10,000

 

 

Limit for Section 80C deduction (d)

1,00,000

Taxable income (c � d)

100,000

Tax on taxable income

Nil

* The tax man views the home loan interest payment as negative income from house property.


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