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:
- Employees Provident Fund (EPF)
- Voluntary Provident Fund
- Public Provident Fund (PPF)
- Premiums paid towards a life insurance policy
- Equity Linked Saving Scheme (ELSS)
- Sukanya Smariddhi Yojana (SSY)
- National Saving Certificate (NSC)
- 5-year bank fixed deposits
- Senior Citizen Saving Scheme (SCSS)
- 5-year Post Office Time Deposit Scheme
- NABARD Bonds
- Infrastructure Bonds
- Investment into Tier II Account of NPS scheme
and can claim deduction for certain expenses as well like:
- Principal repayment of a home loan
- The tuition fee for dependent children
- 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 –
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.