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Ready to invest in tax-saving avenues?
January, 17th 2007

As the financial year enters its last leg, are you ready to invest in tax-saving avenues? Before going ahead with your investment, consider the implications of where the money for the investment comes from. A term present in a particular section of the Income-Tax (I-T) Act can change the meaning of the investment and create problems for investors. This usually affects investors seeking tax-saving benefits. It deals with Sections 80C and 80CCC, under which, most investors invest in specified instruments and claim a deduction up to Rs 1 lakh.

Operation of benefits

Under the I-T Act, a benefit of Rs 1 lakh is available as a deduction for individuals when they make specified investments. Investments under Section 80C (covering areas like PF, PPF, NSC, insurance premium, equity-linked savings scheme etc) and Section 80CCC (premium paid for pension policies with insurance companies) are together restricted up to Rs 1 lakh. In fact, till last years budget, the limit for premium on pension policies was Rs 10,000, which was increased to Rs 1 lakh, so that investors could put their money in various instruments and get the required benefit.

Source Of Funds

If you examine Section 80C, youll find there is no mention of the term out of income chargeable to tax. The absence of this term means that the amount invested in the specified areas can be generated through any type of income, which can include tax-free income as well. If the condition regarding the source of investment is not followed, the tax authorities can deny the benefit of deduction to the individual. In fact, the term out of income chargeable to tax was omitted to provide the necessary relief to investors. This frees up the source for investing and claiming the benefit under Section 80C.

However, Section 80CCC mentions the term out of income chargeable to tax. This means that if investors want to get tax benefits on premiums paid for pension policies with insurance companies, they have to ensure that the investment is made out of taxable income. Hence, investment should not be made from areas like dividend received or amounts earned as long-term capital gains, which are tax-free in nature.


This issue can affect the eligibility of tax benefits available to investors. When it comes to investments in areas like PPF, NSC or other areas covered under Section 80C, it does not matter where the money comes from. However, if investors seek a tax benefit by paying premium for a pension policy, they should make sure this investment is out of taxable income, else the benefit may be disallowed.

According to chartered accountants, while the last budget raised the level of investment, the rest of the Section was left untouched, which has led to this situation. Hence, investors should read the fine print and be aware of the distinction in the two Sections of I-T Act, so that they are not denied tax benefits.

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