Paying income tax on your earned income is your federal duty as an Indian citizen and so you need to pay income tax on the aggregate income that you earn during a financial year from all possible sources. However, you can save your net tax outflow by investing in certain tax-saving instruments.

Your tax liability is calculated as per the provisions specified in the Income Tax Act, 1961 which governs the taxation of income. The Act specifies the income sources and the applicable tax rates on the same.

Though the Income Tax Act, 1961 provides the guidelines for calculating your tax liability, it also specifies different types of deductions and exemptions which you can claim from your taxable income. These deductions and exemptions help in lowering your taxable income which, in turn, brings down your tax liability. Among the different deductions and exemptions mentioned in the Income Tax Act, 1961, the deductions under Chapter VI A of the Act are very popular. These deductions allow you tax benefits on different types of investments done and expenses paid in a financial year.

When talking about Chapter VI A of the Income Tax Act, 1961, the most popular Section is Section 80C. Let’s understand the section in details for a clearer understanding of the deductions offered by it – 

What is Section 80C?

Section 80C of the Income Tax Act, 1961 allows you a deduction of up to INR 1.5 lakhs from your taxable income. You can claim a deduction under Section 80C if you invest in specified investment avenues or if you incur specific expenses in a financial year. The maximum deduction which you can claim from all the eligible investments and expenses under Section 80C is INR 1.5 lakhs.

Who can claim Section 80C deduction?

The deduction under Section 80C can be claimed by individuals and Hindu Undivided Families (HUFs). Even senior citizens (individuals aged 60 years and above) and super senior citizens (individuals aged 80 years and above) can claim a deduction under Section 80C on their taxable incomes in the following investment schemes:

  1. Employees Provident Fund (EPF)
  2. Voluntary Provident Fund
  3. Public Provident Fund (PPF)
  4. Premiums paid towards a life insurance policy
  5. Equity Linked Saving Scheme (ELSS)
  6. Sukanya Smariddhi Yojana (SSY)
  7. National Saving Certificate (NSC)
  8. 5-year bank fixed deposits
  9. Senior Citizen Saving Scheme (SCSS)
  10. 5-year Post Office Time Deposit Scheme
  11. NABARD Bonds
  12. Infrastructure Bonds
  13. Investment into Tier II Account of NPS scheme

and can claim deduction for certain expenses as well like:

  1. Principal repayment of a home loan
  2. The tuition fee for dependent children
  3. Registration charges and stamp duty paid on a house property

which are listed in details below.

However, the benefit of Section 80C deductions is not available for companies, Body of Individuals, Association of Persons, Trusts, firms or any co-operative society.

Eligible investments and expenses under Section 80C

As mentioned earlier, Section 80C allows a deduction from your taxable income only if you invest in specified avenues or you incur specific type of expenses. So, let’s understand the eligible investments and expenses under Section 80C –

  • Eligible list of investments

    If you invest in any one or more of the following avenues in a financial year, the amount of money invested would be allowed as a deduction from your taxable income under Section 80C –

    1. Employees Provident Fund (EPF)

      EPF scheme is a mandatory scheme wherein a retirement corpus is created for salaried employees by deducting a part of their salary every month and contributing that part towards an EPF Account. The employer matches the employee’s contribution and invests in the EPF Account. When the employee retires, the balance in the EPF account can be used for meeting the financial needs post-retirement. Important features of the EPF scheme are as follows –

      • Employee’s contribution is limited to 12% of the basic salary plus dearness allowance 
      • Employer’s contribution is also 12% of the employee’s salary plus dearness allowance. However, of this 12%, 8.33% is invested in the Employees’ Pension Scheme (EPS) and the remaining is invested in EPF scheme
      • The EPF account earns a fixed rate of interest determined by the Government. The current interest rate is 8.65% up to 31st March 2020
      • Besides the amount invested by the employee, the interest earned and the redemption proceeds are also completely tax-free. However, if the employee earns interest in excess of 9.5%, the excess interest would be taxable
      • The EPF account matures when the employee retires after completing 55 years of age
    2. Voluntary Provident Fund

      The Voluntary Provident Fund (VPF) is also for salaried employees who want to invest more than 12% of their salary in a provident fund account. The rules for VPF account are the same as EPF and investments in VPF are also eligible for deduction under Section 80C.

    3. Public Provident Fund (PPF)

      While the EPF and the VPF schemes are only for salaried employees, every individual can subscribe to the PPF scheme. This scheme is also a fixed interest scheme and offers tax benefits under Section 80C. The salient features of the scheme are as follows –

      • The investment period is 15 years which can be increased by 5 more years if required
      • The interest rate is determined and reviewed by the Government every quarter. The current interest rate up to 31st March 2020 is 7.90%
      • The minimum contribution to the scheme is INR 500
      • The interest earned and the redemption amount are both tax-free in the hands of the investor
    4. Premiums paid towards a life insurance policy

      If you buy a life insurance policy, the premium paid towards the policy is allowed as a deduction under Section 80C. The deduction is available on all types of life insurance policies except pension plans. For pension plans, the deduction is allowed under a different section. To claim the deduction, the following conditions would have to be fulfilled –

      • If you buy the policy on or after 1st April 2012, the premium should not be more than 10% of the sum assured. If the premium is more than 10% of the sum assured, the deduction would be allowed only on the amount which is 10% of the sum assured. The excess premium would be taxed
      • If the policy has been bought before 1st April 2012, the premium should not be more than 20% of the sum assured
      • If the policy is bought for or by a disabled individual on or after 1st April 2013, the premium should not be more than 15% of the sum assured 
      • If a single premium plan or a traditional life insurance policy is bought, it should not be surrendered within the first two years. Moreover, premiums for the first two years should be paid
      • If a unit-linked plan is bought, it should not be surrendered before the completion of the first five policy years
    5. Equity Linked Saving Scheme (ELSS)

      ELSS Funds are equity-oriented mutual fund schemes which give you tax benefits on your investments. You can invest in an ELSS scheme either in a lump sum or in monthly instalments through SIPs. The important features of the scheme are as follows –

      • There is a lock-in period of 3 years during which investments cannot be redeemed
      • Returns earned from the scheme are tax-free up to INR 1 lakhs. If the returns exceed INR 1 lakh, the excess return would be taxed @10%
      • Returns under ELSS schemes are non-guaranteed as they depend on the market performance
      • The scheme is an equity scheme and so it has investment risks due to the volatility of the financial market
    6. Sukanya Smariddhi Yojana (SSY)

      The SSY scheme is a saving scheme which builds a corpus for the girl child. The scheme can be taken by parents or guardians of a girl child. The salient features of the scheme are as follows –

      • This is a fixed-interest scheme whose interest is determined by the Government. The current interest rate is 8.40% up to 31st March 2020
      • The scheme runs till the girl child attains 21 years of age or till she is married, whichever is earlier
      • The tenure of the scheme can be extended if the girl child attains 21 years of age. However, the maximum tenure would be limited to 15 years
      • The minimum contribution to the scheme is INR 250
      • The interest earned and the redemption proceeds are completely tax-free
    7. National Saving Certificate (NSC)

      NSC is also a fixed-interest saving scheme which helps you earn guaranteed returns as well as tax-benefits on investments. The features of the scheme are as follows –

      • The investment tenure is 5 years
      • The minimum investment is INR 100 and there is no limit to the maximum investment
      • The interest rate for the scheme for the quarter ending on 31st March 2020 is 7.9%. The interest rate is determined by the Government and reviewed every quarter
      • On maturity of the scheme, the interest earned is taxable in the hands of the investor
    8. 5-year bank fixed deposits

      If you choose a fixed deposit with a term of 5 years, you can claim a deduction on the amount deposited under Section 80C. The features of 5-year FDs are as follows –

      • Only 5-year deposits qualify for tax deduction under Section 80C
      • The interest rate on FDs varies across banks. It can range from 7% to 8.5%
      • The interest earned would be taxable in the hands of the investor 
      • For senior citizens, interest earned up to INR 50,000 would be tax-free under Section 80TTB
    9. Senior Citizen Saving Scheme (SCSS)

      SCSS is a fixed income investment avenue for individuals aged 60 years and above. You can also invest in the scheme if you are more than 55 years of age provided you have retired from employment under the Voluntary Retirement Scheme or Special Voluntary Retirement Scheme and you have invested in the scheme within three months of retirement. The salient features of the scheme are as follows –

      • The interest rate is determined by the Government and also reviewed periodically. The current rate is 8.60%
      • Interest earned is paid back to the investor after every quarter
      • The interest earned from the scheme is taxable in the hands of the investor 
      • The investment tenure is 5 years which can be extended by another 3 years if needed
    10. 5-year Post Office Time Deposit Scheme

      Another long term deposit scheme which earns you a deduction under Section 80C is the post-office deposit scheme. It is like a fixed deposit scheme with a term of 5 years and is offered by the post office. The features of the scheme are as follows –

      • Interest is guaranteed and is determined by the Government. The rate up to 31st March 2020 ranges from 6.90% to 7.70%
      • Interest is compounded quarterly and is paid at the end of the year
      • The interest earned on the deposit is taxable in the hands of the investor 
    11. NABARD Bonds

      The National Bank for Agriculture and Rural Development offers rural bonds which pay a guaranteed rate of interest. Investment into these bonds qualifies as a deduction from taxable income under Section 80C.

    12. Infrastructure Bonds

      Bonds issued by infrastructure companies for raising funds are called infrastructure bonds. These bonds are also allowed as a tax-free investment under Section 80C.

    13. Investment into Tier II Account of NPS scheme

      The National Pension System allows you to create a retirement corpus. If a Central Government employee invests an amount into Tier II of the NPS scheme and such amount is not withdrawn for the next three years, the investment would be allowed as a deduction under Section 80C. This deduction is available only to Central Government employees. Other individuals who contribute towards the Tier II Account of the NPS scheme would not be able to claim any deduction on their investments.

  • Eligible list of expenses 

    Besides the above-mentioned investments, if you incur the below-mentioned expenses in a financial year, you can claim tax benefits under Section 80C – 

    1. Principal repayment of a home loan

      If you have bought a house property which is financed by a home loan, you can avail tax benefits when you repay the loan. The principal amount of repayment, i.e. the EMI less interest, is allowed as a deductible expense under Section 80C. Moreover, even if you pay an amount to a development authority like the Delhi Development Authority, the amount paid would be allowed as a deduction.

    2. The tuition fee for dependent children

      The amount paid as tuition fee for dependent children is allowed to be deducted from your taxable income under Section 80C. The deduction is allowed for up to two children provided the fee is paid to a recognized school, university or college located in India.

    3. Registration charges and stamp duty paid on a house property

      The registration charges or stamp duty which you pay when buying a house property would be allowed as a deductible expense under Section 80C.

Subsections of Section 80C

Section 80C is further subdivided into different subsections which provide tax deduction on specific investments. These sub-sections and their respective deductions are mentioned below –

  • Section 80CCC

    This section allows a deduction on the premium paid towards a life insurance pension plan. If you invest in a pension plan offered by a life insurance company registered with IRDA (Insurance Regulatory and Development Authority), the premium paid would be allowed as a deduction under this section. The deduction is available to individual taxpayers who can be residents or non-residents. Moreover, the deduction would be allowed only if the pension plan pays annuities after maturity.

  • Section 80 CCD 

    This subsection of Section 80C allows deductions for investments done in the National Pension System (NPS). The section is further subdivided into three subsections which are as follows –

    • Section 80 CCD (1)

      Investment done in the NPS scheme by a salaried or non-salaried employee can be claimed as a deduction under this Section. Employees can claim deduction on up to 10% of their basic pay plus dearness allowance. For self-employed individuals, the deduction is allowed for up to 20% of their annual income. However, the maximum allowed deduction is limited to INR 1.5 lakhs which includes deductions under Section 80C and 80CCC.

    • Section 80 CCD (1B) 

      This section allows an additional deduction on the amount invested in the NPS scheme. This additional deduction allows deduction over and above the deduction limits of Section 80C, 80CCC and 80 CCD (1). You can claim an additional deduction of up to INR 50,000. This makes the total available deduction INR 2 lakhs under Section 80C and its sub-sections.

    • Section 80CCD (2)

      This section is available only to salaried individuals whose employers contribute towards the NPS scheme. The employer’s contribution, up to 10% of the employee’s salary and dearness allowance, would be allowed as a deduction under Section 80 CCD (2). This is an independent deduction which is not limited by the deductions under Sections 80C, 80CCC and 80 CCD (1).

Important points to remember about Section 80C deductions

While Section 80C allows you a good deduction on various investments and expenses, here are some important points to keep in mind when claiming the deduction under the section –

  • The maximum deduction under Section 80C, 80CCC and 80 CCD (1) cannot be more than INR 1.5 lakhs
  • The deduction would be available in the financial year in which you invest or incur an eligible expenditure. Investments and expenses of earlier financial years cannot be claimed as a deduction in the current financial year. For instance, for the financial year 2019-20, the investments and expenses should be incurred between 1st April 2019 and 31st March 2020. If the investment or expenses are done before or after this date, they would not be considered for Section 80C deduction for the financial year 2019-20.
  • You can choose as many investment avenues from Section 80C investment options as you want without any restrictions. However, the maximum deduction would be limited to INR 1.5 lakhs
  • Section 80C limit is determined by the Government of India. It is not fixed and can be changed by the Government through a resolution passed in a Union Budget

So, use Section 80C investments and expenses to reduce your taxable income so that your tax liability also reduces. Understand the eligible investments and expenses so that you can plan your portfolio as per your suitability and tax planning.