As we head towards the end of the financial year, there is an advertising frenzy asking people to invest in ELSS mutual funds or ULIPs before time runs out. Both these instruments are tax deductible up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. Alternatively, bankers urge customers to sink money into 5-year tax-saving fixed deposits or PPF (Public Provident Account). In all the haste and sales pitches, nobody looks at whether the Rs 1.5 lakh deduction under Section 80C has already been claimed or not.
- Your mandatory PF (Provident Fund) Deduction
If you work in an organization with more than 20 employees, you may be enrolled in the Employees’ Provident Fund or EPF. Your employer is required by the EPF Act, 1952 to deduct 12% of your basic salary and pay it into your provident fund (PF) account. The employer is also required to match this contribution by paying another 12% of the basic salary from its own pocket, into your PF account.
You can find out the monthly deduction by looking at the CTC (Cost-to-Company) statement or monthly pay slip. However, these documents may not reflect the 12% employer contribution. Why does this matter?
Both your 12% and your employer’s 12% are counted towards the Rs 1.5 lakh tax deduction limit under Section 80C. In other words, if your basic salary is Rs 55,000 and above and you are enrolled in the EPF, the mandatory PF deduction alone is using up the 80C limit.
Eg: Your employer deducts Rs 4,800 from your monthly salary of Rs 40,000 towards PF. It matches this amount with another Rs 4,800 of its own (now in most cases, the total cost to the company includes the employer’s contribution as well). This adds up to Rs 115,200 for the whole year leaving you with only (150,000 – 1,15,200 = 34,800) as tax deduction for investments like ELSS funds.
The NPS (National Pension System) Contribution
This is mandatory for government employees. More and more private companies are also signing up for it and are deducting a portion of your monthly salary for it. For private sector employees, there is no mandatory fixed percentage of the salary that has to go into the NPS.
However, your employer may have set its own rules such as 10% or 15% of basic salary. If you are enrolled in the NPS, check how much (if any) is being deducted as your contribution. This contribution (but not your employer’s additional contribution) is counted the annual 80C tax saving limit.
However, note that you can also make an additional voluntary contribution to the NPS which is tax deductible under Section 80CCD (1B) up to Rs 50,000. This is over and above the Rs 1.5 lakh given under Section 80C.
- Your employer deducts Rs 1,000 from your monthly salary of Rs 40,000 as your monthly NPS contribution. It adds Rs 2,000 from its own pocket to your NPS account. Unlike EPF, contributions in NPS do not have to match from both sides.
- In this case (1000 * 12 = 12,000) will be used up from your 80C limit of Rs 1.5 lakh leaving you with Rs 138,000 to fill with investments like PPF and ELSS.
- The Rs 2,000 contribution made by your employer is tax deductible but does not use up the limit of Rs 1.5 lakh. However, note that the tax deduction on this additional contribution cannot exceed 10% of your salary.
- The additional NPS voluntary contribution limit of Rs 50,000 is still available to you to use up and get a tax deduction.
Employer-provided health insurance
If your employer cuts a portion of your salary as health insurance premium, this will be counted towards the Rs 25,000 annual health insurance deduction. The tax deduction on any additional premium you pay or top-up policy will be reduced by this amount so that the overall limit of Rs 25,000 is maintained.
Eg: Your employer deducts Rs 1,000 per month from your salary towards health insurance premium. This adds up to Rs 12,000 per annum, leaving you with only 13,000 as the tax deduction on any top-up premium you pay. In addition to this, there is a separate deduction on Rs 5,000 on medical check-ups.
Interest from National Savings Certificates
Any previous investment you have made in National Savings Certificates (NSCs) will earn an interest. This interest is also tax deductible, but it uses up the Rs 1.5 lakh limit under Section 80C.
Eg: You have NSCs worth Rs 2 lakh and they earn an annual interest of Rs 16,000. This interest amount will not be taxable, but it will reduce your 80C limit by 16,000. You will now have only Rs 134,000 left to fill up with ELSS/ULIPs/PPF.