Deduction Under Section 80C - Everything You Need to Know!

Date 09 Feb 2024
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As a citizen, you know that you must pay income tax on the total amount of money you bring in over a fiscal year from all sources. However, did you know that by using certain tax-saving products, you can reduce your taxable income?

The Indian Income Tax Act 1961 has several income tax deductions and exclusions that you may use to reduce your taxable income, in addition to the rules for determining your tax due.

A tax deduction provides people with a way to reduce their tax obligation. Several tools available in the nation enable people to reduce their tax obligations. However, many people choose the income tax deduction provided by Section 80C of the Income Tax Act, 1961, when it comes to tax-saving alternatives in India.

What is Section 80C?

Individuals and members of Hindu Undivided Family (HUFs) are eligible for a tax deduction of up to Rs1.5 lakhs under Section 80C of the Income Tax Act. People may use the tax deductions to lower their overall gross income and minimise their tax liability.

For instance, if you invest in a term insurance policy, you can save up to ₹1,50,000 in taxes under Section 80C.

Criteria for Eligibility

The following requirements must be satisfied to be qualified for a tax deduction under Section 80C:

  • You have to be a single taxpayer. These deductions are not available to other taxpayers, including corporations, partnerships, and organisations.
  • Under section 80C of the Income Tax Act, you are entitled to deductions whether you are an Indian resident or non-resident.
  • Your investment must be placed in a pension plan that pays an annuity at maturity to be eligible for these deductions.
  • Only the financial year you made the investment contributions are eligible for deductions under this provision.
  • The Insurance Regulatory and Development Authority of India must approve the pension plan that is chosen and bought to qualify for 80C deductions (IRDAI).
  • The total of your net taxable income cannot be more than the amount claimed as a deduction each year under section 80C.

Type of Deductions Applicable for Section 80C

There are several options available to taxpayers under Section 80C for tax savings. These may be divided into three general groups, which are as follows:

  • Investment plans
  • Savings plans
  • Expense

All different sorts of taxpayers may use them because of the diversity and flexibility of the service, depending on factors including age, family status, risk-taking prowess, and other factors.

The 80C investment plans are so well-liked that people automatically choose them as their first choice for tax-saving measures. As a result, the tax-saving route has become quite popular among those who want to save money on taxes. Under Section 80C, both individual taxpayers and HUFs are eligible for deductions.

Two subsections make up Section 80C; both Sections 80CCC and 80CCD. Retirement and pension programmes fall under Sections 80CCC and 80CCD. Tax deductions under these two subsections are permissible up to the 80C limit of ₹1.5 lakh.

Note that there is a lock-in period for each tax-saving option. Most of them have a lock-in duration of five years. The greatest lock-in is seen in PPF and NPS until the taxpayer turns 60. However, there is no lock-in period for EPF. EPF is reliant on the taxpayer's employment. These products provide liquidity if the investor wants to leave the position early. There are, however, consequences for leaving early.

The tax-deductible savings alternatives under Section 80C operate according to the Fixed Interest principle. All of these securities, in other words, provide a set interest return on the money that is parked. The interest for PPF, NSC, and SSY is declared every three months. Every year, the interest rate for EPF and infrastructure bonds is released.

Top Savings Plans for Section 80C Deductions

Some of the top savings plans for Section 80C deductions are:

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Life Insurance Premium
Taxpayers may deduct the cost of life insurance for themselves, their spouse, and their children. Under section 80C, premiums paid for brothers, sisters, and parents are not deductible. Another allowable deduction is the premium a HUF pays one of its members. The insurance coverage must be purchased from a company authorised to do business in India by the Insurance Regulatory and Development Authority of India, or IRDAI.
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Public Provident Fund (PPF)
Another popular tax-deductible small-savings programme under section 80C is the Public Provident Fund (PPF). Under this, one may invest up to $500,000 annually and get the full tax advantage. Though the interest rate is not set, it is currently more significant than other provident funds, standing at 8.70% per year. As part of the EEE tax structure, PPF is one of the most popular tax saving and investment tools.
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Voluntary Provident Fund (VPF) and Provident Fund (PF)
Employers' payments to the Provident Fund and Voluntary Provident Fund are taken from their pay. This fund is funded by both the employee and the company. The income from the employer is entirely tax-free, whilst the contribution from the employee is deductible under section 80C. Donations to the voluntary Provident Fund (VPF) are tax-deductible under this clause. The current annual interest rate on PF and VPF contributions is 8.5%.
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Tax-saving fixed deposits
The principle is covered by section 80C income tax deductions, while the interest is taxed at a slab rate. A five-year lock-in term is included.
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Sukanya Samriddhi Yojana (SSY)
Sukanya Samridhi Account is a government-sponsored savings account covered by this deduction. The account, which may be started with a minimum deposit of Rs 1000 till the girl reaches the age of ten, can have a maximum deposit of Rs 1.5 lakh, and the total sum is deductible under section 80C. This account covers a single account per female kid.
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Pradhan Mantri Vaya Vandhana Yojana
Pradhan Mantri Vaya Vandhana Yojana (PMVVY) is a guaranteed1 interest pension programme for seniors 60 years of age or above. Ten years pass before locking begins. The interest is tax-free, and the principal amount is deductible.
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Senior Citizen Saving Scheme (SCSS)
The Senior Citizen Saving Scheme (SCSS), which is accessible at all Indian post offices and approved banks, intends to provide senior people over 60 years a monthly income. A five-year lock-in term is included. The principal amount is tax-deductible under Section 80C, and the interest is not subject to tax.

Top Investment Plans for Section 80C Deductions

Taxpayers may invest in ELSS, ULIPs, and NPS if they desire to create wealth from their 80C investments. The market will determine the rewards. In other words, they provide investors with equity exposure. There is a market risk since investment returns are market-dependent. The rewards increase as the threat does. As a result, investment options provide investors with more significant returns compared to savings alternatives.

Investors may choose the level of equity exposure they want with NPS and ULIPs. An investor may choose up to a 75% equity stake in NPS. In contrast, it seldom exceeds 80% in ULIPs. Furthermore, ELSS provides the most equity exposure. As a result, as with other market-linked instruments, these equity-exposed tax savings options' success is based on the market's state.

  • iconbullet 1. Equity Linked Savings Scheme (ELSS)

    An equity mutual fund has a three-year lock in period. This fund makes a long-term investment that benefits the investor by holding at least 80% of its assets in equities (stocks). The acquisition is eligible for a deduction under Section 80C. Earned dividends are taxed at 10% as dividend distribution tax, and interest is taxed at 10% (LTCG).
  • iconbullet 2. Plan of Unit-Linked Insurance

    This strategy provides both an investment and insurance. The money is split between a life insurance policy and a mutual fund that invests in debt or equities. Based on the investor's aims, the portion of investments is chosen. Assets up to INR 1.5 lakh may be deducted under Section 80C, and interest is tax-free.
  • iconbullet 3. National Pension Scheme (NPS)

    The National Pension Scheme's (NPS) primary objective is to provide investors with a monthly income once they retire. An investor must make investments while working. A yearly plan is created by adding and breaking down the total sum. After retirement, the investor receives a monthly payment equal to an annual sum. NPS is eligible for a deduction under section 80CCD (1), section 80C, and up to INR 1.5 lakh. Section 80 CCD also permits an extra INR 50,000 deduction for NPS (1B). Depositing more than INR 1.5 lakh, INR 50,000, or INR 2 lakh total in NPS is not allowed.

Expenses Applicable for Section 80C Deductions

The tuition for a taxpayer's child's schooling is deductible. However, HUFs cannot make a claim; only individual investors may. There's an additional restriction - taxpayers may claim only the tuition for the education of two children.

The deduction only applies to the tuition amount and excludes any other costs or fees. As a result, prices for coaching classes, capitation fees, and independent study are disregarded. Only kids are eligible for the discount - the cost of tuition for a taxpayer's spouse and siblings is not deductible. This deduction is a blessing for taxpayers, given the rising cost of schooling. Most significantly, a deduction may only be used once. In other words, a parent may only submit a single claim for a child's tuition price.

Section 80C Subsections

Section 80C established the allowable deductions, while Subsections of Section 80C offer additional clarity to taxpayers.

  • Section 80CCC - Annuity Insurance Plan

    Section 80C allows for a deduction for paid life insurance premiums, whereas Section 80CCC provides a deduction for amounts in an annuity insurance plan. The pension, surrender claim, and interest are all taxable in the year of receipt under the annuity plan. The total deduction for 80C and 80CCC cannot exceed ₹1.5 lakh.

  • Section 80CCD - Pension Fund Contribution

    The money placed in the pension fund may be deducted. A 10% salary deduction will be permitted if the taxpayer is an employee. If the taxpayer is self-employed, they may deduct 20% of total gross income up to ₹1.5 lakh.

    Investment in NPS allows investors to enjoy a higher tax break than the ₹1.5 lakh limit under Section 80C. As a result, a total of ₹1.5 lakh plus an extra ₹50000 may be claimed as a deduction.

    The employer's payment to the NPS may be deducted. The amount donated cannot exceed 10% of the employee's base pay + dearness allowance.

  • Section 80CCF - Long-Term Infrastructure Bond Investment

    This clause provides a tax deduction for government-issued long-term infrastructure bond investments. Individual taxpayers and HUFs may invest up to ₹20000 each.

  • Section 80CCG - Notified Government Equity Schemes

    Individual taxpayers may claim a deduction for contributions to government-notified equity plans up to ₹25000. The deduction claimed will be restricted to 50% of the amount invested.

Points to Keep in Mind

It will be tough to comprehend every aspect of taxes and optimise savings if you are unfamiliar with it. However, we can make you more aware of the dangers and errors that taxpayers often make due to inadequate preparation so that you can make the most of it.

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Failure to observe the lock-in time
There is a lock-in period for certain Section 80C deductions. Fixed deposits, for example, have a 5-year lock-in term. Similarly, Equity Linked Savings Schemes (ELSS) have a three-year lock-in term. If the taxpayer breaches the lock-in time limits, the income will be recognised as the taxpayer's income for that fiscal year and will be subject to tax.

Taxpayers would now face a similar scenario with long-term investments such as PPF, which has a 15-year lock-in period to qualify under Section 80C. As a result, taxpayers are urged to choose assets that will assist them in meeting their financial objectives. Furthermore, the taxability of investment returns and the amount paid at maturity are issues that every taxpayer should consider when selecting an investment plan.
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Claiming a deduction for private loan repayment
It has been noticed that taxpayers attempt to claim a deduction under Section 80C for compensation for any home loan; however, it should be noted that the main component of private loans (loans obtained from friends and family) is not covered under Section 80C.

If a taxpayer wishes to claim a deduction for the main component of a house loan, they must ensure that the loan is supplied by the designated entities/persons under Section 80C(2)(xviii) (c). It includes loans from a bank, co-operative bank, National Housing Bank, Life Insurance Corporation, and others.
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Registration and stamp duty exemptions
Section 80C allows charges such as stamp duty, enrolment fees, and other expenses directly tied to the transfer of residential home property (only). These costs are not deductible under Section 80C for commercial buildings. As a result, taxpayers should pick the property type prudently when claiming Section 80C deductions.
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Error in claiming Tuition Fee Deduction
If a taxpayer wishes to claim a deduction for school or tuition fees, the taxpayer must first review specific requirements. The deduction will be allowed for full-time education expenses paid in India for a maximum of two children, and only the tuition charge component of the total fee would be eligible. So, before supplying any data, do some calculations.
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Excessive reliance on endowment insurance plans
Endowment insurance plans are types of life insurance benefits for tax savings and critical investments. However, spending a significant portion of your hard-earned money on this will not provide positive results. So, if you want to save more, consider investing in a term plan, which is also tax deductible under Section 80C.

Maximising Section 80C Tax Savings

The total income tax savings you may obtain under Section 80C is limited to ₹1.5 lakh. As previously stated, the regulations encompass a variety of fund alternatives that provide insurance and investment advantages. The most notable aspect of saving tax under section 80C is that it permits you to invest the whole ₹1.5 lakh in one investment or diversify across many assets.

There is no optimal strategy to take advantage of Section 80C deductions since it depends on an individual's requirements. That is why it is essential to choose the appropriate instruments. Your financial objectives and risk tolerance should inform your decision.

Conclusion

It is considerably simpler to reduce your taxable income if you thoroughly grasp all the tax deductions available to taxpayers under the Income Tax Act. The goal is to prepare ahead of time and begin investing as soon as possible. With the above list, you may quickly identify how your money is spent, calculate the amount, and claim deductions for whatever falls into the above categories.

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Frequently Asked Questions

The payment of life insurance premiums to any IRDAI-approved insurance aggregator qualifies as a tax deduction under Section 80C. (Insurance Regulatory and Development Authority of India). Businesses in the public and private sectors are affected.
For all investments made in tax-saving instruments, taxpayers are only eligible for a maximum tax exemption of ₹1,50,000 under Section 80C.
Under Section 80C, you may deduct the stamp duty paid on acquiring a home in the year the payment is made.
Any taxpayer may deduct contributions to one of the below institutions, funds, or organisations under Section 80G.
You may deduct rent paid as part of your wage under section 80GF if you do not get HRA. The maximum permitted deduction, however, is Rs 60,000 per year.
You may claim the rent deduction under section 80 GG even if your salary does not include an HRA component or other self-employment income. The absence of dwelling at the place of living is a prerequisite for deductions under section 80GG.
Employees who are self-employed or work in the informal sector and do not get HRA as a portion of their income are entitled to an 80GG deduction. Anyone who owns a residence in the city where they live should not claim this deduction.
Employees and self-employed people who contribute to the National Pension Scheme are eligible for a deduction under section 80CCD (1). Workers may deduct up to 10% of their base wage plus a dearness allowance under IRC 80CCD (1). 20% of a self-employed person's income may be deducted, up to a maximum of Rs 1.5 lakh, by Section 80C.
The tax deductions companies offer for payments made to a pension plan for their workers are covered under Section 80CCD. You may deduct up to 20% of your employer's total revenue if it makes pension contributions to its workers' accounts.
Senior persons are entitled to a deduction of up to Rs 50,000 under Section 80TTB for interest income received on fixed deposits or savings accounts.
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