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:
and can claim deduction for certain expenses as well like:
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 –
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 –
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 –
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.
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 –
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 –
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 –
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 –
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 –
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 –
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 –
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 –
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.
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.
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.
Besides the above-mentioned investments, if you incur the below-mentioned expenses in a financial year, you can claim tax benefits under Section 80C –
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.
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.
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 –
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.
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 –
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.
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.
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 –
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.