Other Tax Deductions under Section 80C

The past few articles we have seen how we can invest your money and also save tax under 80C using ELSS Mutual Funds, PPF, EPF, NPS and also Life Insurance. But 80C isn’t limited to just those schemes.

There are a few investment options which also enjoy 80C deductions.

Investment in House

Lets say you buy a house and like most of us middle class people, you will take out a home loan to buy your house. There are two ways you can get benefits under 80C.

Stamp Duty paid for Registration:

Registering a house involves paying Stamp Duty to the government. The stamp duty you pay and the amount paid for the registration of the documents of your house can be claimed as a deduction under 80C on the financial year when you purchase the house.

Home Loan Principal repayment

Home Loan means paying EMIs. Every month you are paying a fixed amount of money which go into servicing your loan. Your monthly payment has both principal component and interest component. In a financial year, all the money you paid back as principal enjoys deduction under 80C.
Remember in the initial few years of the loan, the principal component will be a very small amount vs interest paid. But the interest component can also help to significantly save your taxes, but that is under Section 24.

National Savings Certificate

National Savings Certificates or popularly called NSC is a savings bond and is part of the postal savings system. Anyone can buy a NSC from a post office in their own name or in the name of a minor. They have a maturity of five or ten years. The interest earned is liable to tax (taxable under your tax slabs). But since the interest is also reinvested, that amount can also be eligible for tax deduction under 80C.

Infrastructure Bonds

These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. Since this investment is helpful to build and develop the infrastructure of the country, you can claim a tax deduction under 80C.

Sukanya Samriddi Account

This is a new savings account introduced by the government couple of years back. This is applicable specifically for parents of girl child. This account can be opened if you have a girl child from the day of birth of the child, till she attains the age of 10 years.

The minimum deposit is Rs.1000 and maximum of Rs.1.5 lakh can be deposited in one financial year. Interest earned is fully tax exempt. The account can be closed after the girl has completed 21 years of age. Normal Premature closure will be allowed after completion of 18 years provided that girl is married.

Tax Savings Fixed Deposits

Banks provide a special type of fixed deposit scheme which has a lock-in of 5 years. The money you invest is tax exempt, but the interest earned is taxable at your tax slabs.

Senior Citizen Savings Scheme

This is a special scheme for senior citizens and this is available for anyone who has completed 60 years of age. There are also other age criteria for people who have retired under Voluntary Retirement Scheme or Defense personal.

The maturity period is 5 years and any number of accounts can be opened. The important difference between this and tax savings FD is the interest earned is credited back into your savings account every quarter instead of reinvesting back.
After maturity, one can also extend it further by three years.

Children’s Education Expenses

If you have children, any money you spend on their education like school or college fees can be claimed for tax deduction under 80C.

These are all the different possible tax deductions under 80C. Next article is about how to save tax on Medical Insurances under section 80D.

Difference between FD and RD

There are very few bank based savings options available for general consumers and the most popular amongst them are Fixed Deposits and Recurring Deposits. Today lets see the basic difference between FDs and RDs, which gives better returns and when to use what.

Why do banks ask for Deposits?

First understand why banks needs deposits. Only with the money you deposit, banks will be able to lend money to people who ask for loans. They will give loans at a higher rate of interest than the rate of interest they give for deposits. This difference between the rate of interests is what earns profits for the banks.

Fixed Deposits

When you create a Fixed Deposit account, you deposit a fixed amount of money for a fixed period of time. And the bank provides a fixed rate of interest for that period of time. The rate of interest is usually higher than savings accounts as you have been locked into that account for the term. So they are also called Term Deposits.

The minimum tenure for fixed deposits are 7 days and the maximum is usually 10 years. For terms spanning few days, the rate of interest will be very similar to Savings accounts. As you go to a year or more, the interest rate hits a peak and beyond 2 years, the rate decreases slightly.

If you plot the graph of interest rates, you would get a curve like this.
FD interest rate graph
Even though the money is locked into the bank for the term, you can withdraw the money prematurely if you agree for a slight penalty in the interest rate. The penalty is only on the interest you earn and not on the actual money you put in. So you don’t have to worry about liquidity of your money.

Recurring Deposits

When you start a Recurring Deposits (RD) account, you agree to deposit a fixed amount of money every month on a particular date and agree to withdraw it after N deposits are made. The rate of interest is also fixed when you start the account.

It is calculated on each installment you pay according to how many months it was with the bank. So if you start a 12 month deposit, the first installment will earn interest for 12 months and the last deposit will earn interest only for the last month.

RDs always has a minimum of 6 months of investment period and can go upto a maximum of 10 years usually in multiples of 3 months. After the minimum 6 months is done, you can stop the RD any time you want.

Which earns higher returns?

This brings us to the main difference between both in terms of returns earned. Lets compare a fixed deposit of Rs.1,20,000 vs a recurring deposit where you deposit Rs.10,000 every month for 12 months term.

I am using a calculator from HDFC Bank website and currently the rate of interest is 6.9%. You can put in your numbers and get your results. Calculator for FD and RD. At the end of 1 year, the FD will have a maturity of Rs.128497.00 and the RD will have a maturity of Rs.124589.00. The difference of the interest earned is almost twice in FD vs RD.

This clearly shows that FDs will always have a better return since you have deposited all the money at the beginning of the term vs monthly.

Other advantages of FDs

FDs also has other advantages. You can choose a much smaller term (like few days) than RDs (minimum 6 months). And you can also prematurely break the FD and withdraw your money.

FDs also has the advantage of quarterly or monthly payout. This is useful for senior citizens who have large deposits and would like to get back a fixed monthly income from the deposits.┬áBut the best way to “invest” in FDs is to let it compound (by default quarterly) so that even your interest earns interest over a time period.

The most important benefit I could see from FDs are the sweep-in account where you link your savings accounts with your FDs and can sweep in excess balance into FDs and back into savings account whenever you need it.

Advantages of RD

So does that mean Recurring Deposits doesn’t have any advantages? No. They are very useful for people to start getting into the practice of regularly saving every month. If you setup a RD to take away money from your salary account at the beginning of every month, you will soon get used to having lesser money in your account and naturally your expenses will come down.

In fact, investing in RDs was how I introduced the savings habit for my wife. In the beginning when she handled her finances herself, I made her to put in a RD on the 5th of every month. And naturally this built up a nice corpus of money which was useful when we needed the money.

Now since she has gotten into the habit, she has progressed into SIPs and investing in equity mutual funds for long term wealth creation. She still has an RD account to save up money for vacations.

Which brings us to the next point of saving up money for short term expenses. Some might have planned for a vacation in the next 6 months or might have marriage or educational expenses in a year or so. For salaried individuals with such tight deadlines, it is easier to start an RD account which automatically debits the account from their salary accounts. Unless you are in the top tax bracket, RDs are good enough instruments to save money.

Conclusion

Finally it comes down to what you capabilities and goals are. Whether you have a bulk money to invest in? or want to invest monthly for some short term goal. Choose the right deposit type for the right goal.