Making the best use of section 80C for tax saving: an example

Published: August 9, 2016 at 8:53 am

Last Updated on September 4, 2018 at 10:46 am

We all that know that one can invest up to Rs. 1.5L under section 80 to save tax*. However, are we making the best use of section 80C for tax saving? Have we cluttered the portfolio in the name of saving tax? Is tax saving an integral part of our goal planning portfolios? Here is an example of making the best use of section 80C. This is the model adopted by Ashal Jauhari, the owner of Facebook Asan Ideas for Wealth and India’s best financial literacy proponent.

(*) Many believe that they are saving Rs. 1.5L tax by using 80C. The taxable income can be reduced by Rs. 1.5L using section 80C financial instruments. The actual tax saved depends on one’s tax slab: 1.5L times tax rate.

Utilizing  mandatory expenses for  section 80C tax saving

Tuition fee/School fee/ Education fee for children: The entire Rs. 1.5L limit is available for deduction for up to two children.

Term Life insurance premium: Any life insurance premium (ULIP, moneyback etc.) can be used for deduction. However, since one should not mix insurance and investment, I prefer to term life insurance as the only mandatory life insurance.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Home Loan Principal Repayment: The principal component of your home loan EMI can be claimed under section 80C. To calculate this principal component, you can use this Excel Home Loan Amortization Schedule Template

Utilizing  mandatory investments for  section 80C tax saving

These are  the well-known EPF or NPS contributions (employee contribution). Read more: Do Not Invest Rs. 50,000 in NPS For Saving Tax!

For Ashal, the above avenues constitute his section 80 tax saving.  BY intelligently utilizing mandatory expenses and investments for tax saving, he avoids instruments like PPF which come with an extended (15 financial years) lock-in period. His investible surplus can be utilized in a desirable asset allocation. Read more: Deciding on asset allocation for a financial goal

Other possibilities

School fees and home loan principal component do not apply to everyone. In that case, investments are necessary.

Here is a way in which once could plan.

  1. Determine amount needed for retirement goal. You could consider using the Low-stress retirement calculator with flexible asset allocation. Let this be a nice round Rs. 25,000 per month.
  2. Let term insurance premium be Rs. 9,000 per year. Thus Rs. 1,41,000 needs to be accounted for via investing. This includes EPF as well.
  3. Now, Rs. 11,750 a month has to be invested for maximizing section 80C deduction. Let total EPF contribution be Rs. 5,000 a month. Now. Rs. 6750 has to be invested saving tax.
  4. Let us assume an asset allocation of 60% (of Rs. 25,000) in equity and 40% in fixed income.
  5. Amount to be invested in fixed income is Rs. 10,000. Out of which Rs. 5,000 is already invested in EPF.

Here is a possibility (all values per month):

Section 80 Tax saving:

Rs. 5000 in EPF
Rs. 5000 can be invested in Voluntary Provident Fund*

Rs. 1750 can be invested in ELSS mutual funds

Non-tax-saving investments for retirement

Rs. 13, 250 in non-ELSS mutual funds.

This will ensure a total of Rs. 11750 is invested in Section 80c instruments and Rs. 13,250 (to reach Rs. 25,000 limit) in non-ELSS mutual funds.  The asset allocation is preserved for the retirement goal.

Another possibility (suggested for young earners).

Section 80 Tax saving:

Rs. 11,750 in ELSS mutual fund and Rs. 3250 in non-ELSS mutual funds.

Rs. 5000 in EPF

Non-tax-saving investments for retirement

Rs. 5000 in VPF or PPF (as desired). This will not count for tax saving.

Alternatives: This Rs. 5000 can also be put in arbitrage mutual funds to earn tax-free returns (as of now). This would count as part of  debt asset class. Do not use if you do not understand the asset class. Long-term returns may not beat PPF or EPF.

Or if one does not mind paying a little tax, debt mutual funds. Again long-term returns after tax nay not be higher than PPF.

Note: Each SIP installment in ELSS mutual funds would be locked in for  3 years. You can alternatively set up quarterly SIPs or invest the equivalent amount once or twice a year. Use only until needed.

Also, Do not use ELSS mutual funds for last minute tax saving

Conclusion

  1. Take advantage of mandatory expenses for saving tax under section 80 C.
  2. Associate tax planning with a long-term financial goal like retirement.
  3. Some of the investments chosen for such a goal can be tax-saving instruments.
  4. Invest such that the asset allocation for a goal is not disturbed.
  5. Do not choose any tax-planning instrument unnecessarily.
  6. Do not invest Rs. 1.5 Lakh in PPF. Focus on Asset Allocation instead
Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)