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Section 80C – Income Tax Deduction under Section 80C

Income Tax Deduction Under Section 80C

Introduction

Section 80C is a crucial provision that allows individuals toreduce their taxable income by making specific investments or incurring eligible expenses. Both individuals and HUFs (Hindu Undivided Families) can claim deductions under Section 80C. You can claim a maximum deduction of ₹150,000 from your Gross Total Income each year. Note that companies, partnership firms, and LLPs are not eligible for this deduction.

 

Purpose of section 80C

The purpose behind introducing Section 80C in the Income Tax Act is to encourage savings and investments while simultaneously providing tax relief to individuals and Hindu Undivided Families (HUFs). Let’s delve into the key reasons:

1. Promoting Financial Discipline –

By offering tax deductions for specific investments and expenses, Section 80C motivates taxpayers to allocate a portion of their income towards long-term financial goals. It encourages disciplined saving and investment practices.

2. Boosting Investment in Key Sectors –

    • Equity Linked Saving Schemes (ELSS):  ELSS funds, which fall under Section 80C, channel investments into the stock market. This promotes capital market participation and supports economic growth.
    • Infrastructure Bonds: Investments in infrastructure bonds contribute to the development of critical infrastructure projects.

3. Providing Tax Relief –

The deduction limit of ₹150,000 allows taxpayers to reduce their taxable income significantly. This translates to lower tax liability, benefiting both individuals and the economy.

4. Encouraging Homeownership –

Repayment of the principal amount of a home loan (home loan EMI) qualifies for Section 80C deduction. This incentivizes homeownership and real estate investment.

5. Supporting Long-Term Goals –

    • Retirement Planning: Contributions to the National Pension System (NPS) (under Section 80CCD) receive additional tax benefits.
    • Children’s Education and Marriage: Investments in schemes like the Sukanya Samriddhi Yojana (SSY) help secure a child’s future.

6. Simplifying Tax Planning –

Section 80C consolidates various eligible investments and expenses into a single provision. Taxpayers can plan their finances more efficiently.

 

Eligibility of Section 80C of Income Tax Act

This section is a favorite among taxpayers because it allows them to reduce their taxable income by making tax-saving investments or incurring eligible expenses. Here’s what you need to know:

Who can claim Section 80C deduction?

    • Individuals and Hindu Undivided Families (HUFs) are eligible.
    • Companies, partnership firms, and LLPs cannot avail this benefit.

 

How much deduction can be claimed under Section 80C?

Under Section 80C of the Income Tax Act, individuals and Hindu Undivided Families (HUFs) can claim a maximum deduction of ₹1.5 lakh per financial year from their gross total income. This deduction is not available to partnerships, companies, and other corporate bodies

Deduction is limited to whole of the amount paid or deposited subject to a maximum of Rs. 1,50,000. This maximum limit of Rs. 1,50,000 is the aggregate of the deduction that may be claimed under sections 80C80CCC and 80CCD(1).

Here’s a breakdown some of the eligible investments and their maximum deduction limits under Section 80C:

  1. Investment in Equity Linked Saving Schemes (ELSS): Up to ₹1,50,000.
  2. Public Provident Fund (PPF)Sukanya Samriddhi Yojana (SSY)National Savings Certificate (NSC)Senior Citizen Savings Scheme (SCSS), and other specified investments: Up to ₹1,50,000.
  3. Principal repayment of a home loan: Up to ₹1,50,000.
  4. Payment towards life insurance premiums.
  5. Payment towards pension funds (covered under Section 80CCC).
  6. Contributions to the Atal Pension Yojana (APY) or other notified pension schemes (covered under Section 80CCD).
  7. Additional deduction of ₹50,000 allowed under Section 80CCD (1B) for contributions made to the National Pension System (NPS).

 

What is covered under Section 80C?

1. Life insurance premium for policy –

 –    in case of individual, on life of assessee, assessee’s spouse and any child of assessee

 –    in case of HUF, on life of any member of the HUF

2. Contribution to Public Provident Fund Account in the name of –

 –    in case of individual, such individual or his spouse or any child of such individual

 –    in case of HUF, any member of HUF

3. Contribution for participation in unit-linked Insurance Plan of UTI –

 –    in case of an individual, in the name of the individual, his spouse or any child of such individual

 –    in case of a HUF, in the name of any member thereof

4. Contribution to notified unit-linked insurance plan of LIC Mutual Fund –

 –    in the case of an individual, in the name of the individual, his spouse or any child of such individual

 –    in the case of a HUF, in the name of any member thereof

5. Subscription to notified deposit scheme or notified pension fund set up by National Housing Bank [Home Loan Account Scheme/National Housing Banks (Tax Saving) Term Deposit Scheme, 2008]

6. Tuition fees (excluding development fees, donations, etc.) paid by an individual to any university, college, school or other educational institution situated in India, for full time education of any 2 of his/her children

7. Subscription to any notified security or notified deposit scheme of the Central Government. For this purpose, Sukanya Samriddhi Account Scheme has been notified vide Notification No. 9/2015, dated 21.01.2015. Any sum deposited during the year in Sukanya Samriddhi Account by an individual would be eligible for deduction.

8. Amount can be deposited by an individual or in the name of girl child of an individual or in the name of the girl child for whom such an individual is the legal guardian.

9. Sum paid towards notified annuity plan of LIC (New Jeevan Dhara/New Jeevan Dhara-I/New Jeevan Akshay/New Jeevan Akshay-I/New Jeevan Akshay-II/Jeewan Akshay-III plan of LIC) or other insurer

 

Other 80C Deduction

  1. Contributions by an individual made under Employees’ Provident Fund Scheme
  2. Contribution by an employee to a recognised provident fund
  3. Contribution by an employee to an approved superannuation fund
  4. Subscription to notified savings certificates [National Savings Certificates (VIII Issue)]
  5. Certain payments for purchase/construction of residential house property
  6. Subscription to notified bonds issued by the NABARD.
  7. Deposit in an account under the Senior Citizen Savings Scheme Rules, 2004 (subject to certain conditions)
  8. 5-year term deposit in an account under the Post Office Time Deposit Rules, 1981 (subject to certain conditions)
  9. Term deposits for a fixed period of not less than 5 years with a scheduled bank
  10. Contribution to specified account of the pension scheme referred to in 80CCD, in case of central Government employee.
  11. Subscription to any units of any notified [u/s 10(23D)] Mutual Fund or the UTI (Equity Linked Saving Scheme, 2005)
  12. Contribution by an individual to any pension fund set up by any mutual fund which is referred to in section 10(23D) or by the UTI (UTI Retirement Benefit Pension Fund)
  13. Subscription to equity shares or debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions

 

How to calculate Section 80C deduction?

Certainly! Let’s delve into calculating the Section 80C deduction with an example. Section 80C of the Income Tax Act allows you to reduce your taxable income by certain investments and expenses, resulting in tax savings. Here’s how you can compute it:

  1. Gather Financial Information –
    • First, collect the necessary financial details:
      • Your gross taxable income (before any deductions).
      • Any standard deduction you’re eligible for (e.g., Rs. 50,000 per year).
  2. Identify Eligible Investments and Expenses –
    • Section 80C covers various investments and expenses, including:
      • Life insurance premium paid
      • Deposit in provident fund
      • Investment in fixed deposit/Bonds
  3. Calculate Deduction –
    • Subtract the eligible investment and expense amounts from your gross taxable income.
    • For example:
      • Gross taxable income: Rs. 9,00,000 per annum
      • Standard deduction: Rs. 50,000 per year
      • Other eligible investments/expenses: Let’s assume you’ve invested Rs. 1,50,000 in a fixed deposit.
      • Total deduction under Section 80C: Rs. 1,50,000 (Rs. 1,50,000 fixed deposit)
  4. Adjusted Taxable Income –
    • Deduct the total Section 80C deduction from your gross taxable income:
      • Adjusted taxable income = Gross taxable income – Total Section 80C deduction
      • In our example: Rs. 9,00,000-Rs. 50,000 – Rs. 1,50,000 = Rs. 7,00,000
  5. Tax Calculation –
    • Calculate your income tax liability based on the adjusted taxable income using the applicable tax slabs.

 

Feature of Investments made under section 80C

Certainly! Section 80C of the Indian Income Tax Act provides a valuable opportunity for taxpayers to reduce their tax liability by investing in specific instruments and making eligible expenses. Let’s explore some of the key options available under Section 80C:

  1. Equity-Linked Savings Schemes (ELSS):
    • ELSS funds, also known as tax-saving mutual funds, offer a dual benefit: tax savings and potentially higher returns.
    • Features:
      • Investment in ELSS funds qualifies for tax deductions under Section 80C.
      • Lowest locking period of 3 years.
      • Historically, ELSS funds have delivered higher returns compared to fixed deposits (FDs), Public Provident Fund (PPF), or National Pension System (NPS).
      • Dividend earned is taxable.
  2. Tax-Saving Fixed Deposits (FDs):
    • These are similar to regular fixed deposits but come with a lock-in period of 5 years.
    • Features:
      • Maximum deduction of ₹1.5 lakh per annum under Section 80C.
      • Interest earned on tax-saving FDs is taxable.
      • Interest rates range from 5.5% to 7.75% across different banks.
  3. Public Provident Fund (PPF):
    • A long-term investment backed by the Indian government.
    • Features:
      • Lock-in period of 15 years, extendable by 5 years.
      • Tax-free interest earned.
      • Minimum and maximum investment limits: ₹500 and ₹1.5 lakh, respectively.
      • Partial withdrawals allowed after 7 years.
  4. Employee Provident Fund (EPF):
    • Available to salaried employees.
    • Features:
      • 12% of basic salary + DA contributed by the employer and employee.
      • Lock-in period: Can withdraw PF balance after 2 months of leaving a job.
      • Interest rate: 8.5% for the financial year 2020-21.
      • Entire PF balance (including interest) is tax-free if withdrawn after continuous service of 5 years

 

 

Frequently Asked Questions

Q – Do recurring deposits come under section 80C tax deduction?

Ans : Recurring Deposits (RDs) do not fall under the purview of Section 80C tax deductions.

 

Q –  Is Section 80C eligible if we are filing taxes under 44AD?

Ans : Section 80C deductions are available even if you are filing taxes under Section 44AD. You can claim deductions under Section 80C while benefiting from the presumptive taxation scheme. However, the maximum deduction remains ₹1.5 lakhs.

 

Q – Is term insurance exempted under section 80C or section 80D?

Ans : term insurance policyholders can avail of tax deductions under section 80C. Section 80D  primarily associated with health insurance plans, you can also claim a deduction under Section 80D if you purchase healthcare add-ons like critical illness riders, surgical care riders, etc.

 

Q – Do the assessee withdraw amount from post office before the expiry of term?

Ans – If any amount, including interest accrued thereon, is withdrawn by the assessee from his deposit account made under (a) Senior Citizen Saving Scheme or (b) Post Office Time Deposit Rules, before the expiry of the period of five years from the date of its deposit, the amount so withdrawn shall be deemed to be the income of the assessee of the previous year in which the amount is withdrawn and shall be liable to tax in the assessment year relevant to such previous year.

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