Section 80C of Income Tax Deductions in India
Guide to deductions under 80C
In this post, we will discuss Section 80C: also the deductions under Section 80C and how they work. Let’s take a look at each section in detail :
What is Section 80C?
The Income Tax Act’s Section 80C came into effect on April 1st, 2006. According to the section 80C, it allows individuals and HUFs to deduct up to Rs1.5 lakhs from their taxes. By using the tax deductions, individuals are able to reduce their gross income and save income taxes. As a result, they can reduce the amount of money spent on taxes.
Eg: Tax deductions under the old regime must be made between April 2021 and March 2022 in order to be eligible for the AY 2022–2023.
Only individual taxpayers and HUF are eligible for the deduction under section 80C. A partnership firm, an LLP, and a company are not eligible for this deduction.
How much can be claimed under Section 80C?
In a financial year, a taxpayer can claim a tax deduction under section 80C up to Rs 1.5 lakh. In order to calculate this amount, all investments and expenses must be taken into account.
Deduction On Investment Under Section 80C of Income Tax Act
Section 80C provides taxpayers with a number of options for tax savings. These can be categorised into three broad categories:
Section 80C – Tax Deduction on Savings Schemes
There is a lock-in period for each tax saving option. Most of these have a period of five years and the highest lock-in is between PPF and NPS until the taxpayer turns 60. However, there is no lock-in period for EPF. EPF is dependent upon the taxpayer’s employment. Also, these products provide some liquidity if the investor decides to exit early. However, there are consequences for leaving early.
The savings options that are deductible from income under Section 80C work based on the Fixed Interest basis.
Every three months, the interest for PPF, NSC, and SSY is announced. Every year, the interest rate for EPF and infrastructure bonds is released. Most investors can predict their gains and feel confident about their investments. Low-risk investors choose these kinds of tax-saving investments:
- Life Insurance Premium
- Public Provident Fund
- Employee Provident Fund
- Pradhan Mantri Vaya Vandhana Yojana (PMVVY)
- Senior Citizen Saving Scheme (SCSS)
Section 80C – Tax Deduction on Investment Schemes
Taxpayers who want to create wealth from their 80C investments can invest in ELSS, ULIPs, and NPS. The returns from these depend on the market. They give investors equity exposure, in other words.Market risk exists because investment results are dependent on the market. The returns are higher the larger the risk. As a result, investing options provide higher returns to investors than savings options.
NPSs and ULIPs allow investors to select the amount of equity exposure they would want. The maximum equity exposure an investor can choose in NPS is 75%.ULIPs, on the other hand, rarely exceed 80%. Beside that, ELSS provides the most equity exposure.
Section 80C – Tax Deduction on Expenses
Tuition fees for children’s education can be claimed by taxpayers. Individual investors, not HUFs, are eligible to make the claim. There is a limit. Tuition fees paid for only two children’s education can be claimed by taxpayers. However, If both spouses are taxpayers, they can each claim two children.
Besides that, the deduction only applies to the tuition fee and does not cover any other expenses or fees. As an outcome, coaching class fees, capitation fees, and self-study expenses are all excluded. Only children are eligible for the deduction.Taxpayers cannot claim a deduction for their spouse’s or sibling’s tuition. With rising education costs, this deduction is a good thing for taxpayers. Most importantly, no deduction may be claimed more than once. In other words, a parent may claim a child’s tuition fee only once.
How to Calculate Deduction Limit Under Section 80C of Income Tax Act?
As previously mentioned, The maximum 80C deduction amount is 1.5 lakh Indian rupees.
Therefore, by investing in one of the options, taxpayers can lower their tax liability. However, the amount of tax one can save is determined by the tax bracket under which they fall.
Look at this example, Mr. Raj has a net income of INR 15 Lakh. As a result, He comes under the highest tax rate of 30%. Let’s look at Mr.Raj’s taxable income if he invests and does not invest in 80C.
With 80C Deduction(A) ( ₹ ) | Without 80C Deduction(B) ( ₹ ) | Difference(B-A) ( ₹ ) | |
Income | 15,00,000 | 15,00,000 | |
80 C Deduction | 1,50,000 | 0 | |
Taxable Income | 13,50,000 | 15,00,000 | 1,50,000 |
Up to INR 2,50,000 | Nil | Nil | |
INR 2,50,001-INR 5,00,000 – 5% | 12,500 | 12,500 | |
INR 5,00,001-INR 10,00,000 – 20% | 1,12,500 | 1,12,500 | |
Above INR 10,00,000 – 30% | 2,17,500 | 2,62,500 | 45,000 |
Cess – 4% | 8,700 | 10,500 | 1,800 |
Total Tax | 2,26,200 | 2,73,000 | 46,800 |
Mr. Raj’s tax liability if she invests in 80C instruments is INR 2,26,200 (including cess). However, if he does not invest, his tax liability is INR 2,73,000 (including cess). By opting to invest in tax saving instruments, he can save up to INR 46,800. If a person’s income is under 30%, investing INR 150,000 in tax-saving instruments can help save up to INR 46,800 in taxes. Choosing the right investment can also help you earn returns. As a result, investing in 80C deductions can help save not only tax, but also earn a return on investment
Note: It is assumed that Ms.Raj has selected the Old Tax Regime and wants to claim all deductions.
Deductions on Investments under subsections of Section 80C
Let’s take a look at the various sub-sections and investments that can be deducted:
Section 80C
A deduction for life insurance premiums, deferred annuities, contributions to provident funds, or subscriptions to certain shares or debentures.Sections 80CCC and 80CCD together have a deduction limit of Rs. 1.5 lakh (1).
Section 80CCC
Deduction for contributions made to specific pension funds. Sections 80C and 80CCD together have a deduction limit of Rs. 1.5 lakh (1).
Section 80CCD(1)
A deduction of 10% of an employee’s salary (basic + DA) and 20% of his/her gross total income in a fiscal year will apply to contributions to the Central Government pension scheme.Together with 80C and 80CCC, the overall cap is Rs 1.5 lakh.
Section 80CCD(1B)
Deduction for contributions to the central government’s pension plan of up to Rs. 50,000 (NPS)
Section 80CCD(2)
Deduction made by the employer for the employee’s pension scheme payment to the central government. If the employer contributes on behalf of the Central Government, a tax benefit is given on the full 14% of that contribution; or else, a tax benefit is given on the full 10% of any other employer’s contribution.
We have reached the conclusion of this post on Section 80C and other deductions under Section 80C. Feel free to share your views and opinions with us in the comment section below.
