According to the Income Tax Act, a taxpayer can save on taxes by investing in certain tax saving instruments as notified by the Income Tax Department. By investing in such tax saving options, the taxpayer can claim for tax deduction under Section 80C of the Income Tax Act, 1961.
Further, certain expenses incurred by the taxpayer, such as home loans, are also eligible for deductions in taxes under different subsections of Section 80C. The maximum deduction that can be claimed by the taxpayer every year under Section 80C is ₹1,50,000/-.
Section 80C applies to individuals and HUF or Hindu Undivided Family. Partnership firms, corporate bodies, and different businesses are excluded from availing tax exemptions as per Section 80C.
As per the Income Tax Act, 1961, deduction under Section 80C are further categorised in different subsections. They are:
Section 80CCC
Payment towards mutual fund and pension plans
Section 80CCD(1)
Payment towards schemes backed by the government, like Atal Pension Yojana, National Pension System, etc.
Section 80CCD(1B)
An investment to a maximum of ₹50,000 in the National Pension Scheme or NPS is qualified for exemption as per Section 80C.
Section 80CCD(2)
Contribution of the employer towards NPS (to a maximum of 10% including dearness allowance and basic salary) is qualified for exemption as per this section.
| Investment options | Interest | Minimum lock-in period | Assured return | Associated risk |
| NPS | 8% to 10% | Until the individual retires or attains the age of 60 years | No | High |
| ELSS | 12% to 15% (depends on fluctuations in the market) | 3 years | No | High |
| PPF | 7.90% | Until the individual attains the age of 60 years | No | High |
| SCSS | 8.60% | 5 years | Yes | Low |
| Unit Link Insurance Plan or ULIP | 8% to 10% (depends on fluctuations in the market) | 5 years | No | Moderate |
| NSC | 7.9% | 5 years | Yes | Low |
| SSY | 8.50% | 8 years | Yes | Low |
| Fixed deposit | Up to 8.40% | 5 years | Yes | Low |
Public Provident Fund
Contributions towards PPF or Public Provident Fund qualify deduction in taxes as per Section 80C. The maximum limit for deposits in PPF is ₹1,50,000. Thus, if the individual has deposited ₹1,50,000 in PPF, they can declare the entire amount for exemption under 80C of the Income Tax Act.
Any kind of voluntary contributions towards the PPF by an employee is qualified for deduction in taxes as per Section 80C.
Life insurance premium
Payment towards life insurance policy premiums is qualified for tax benefits under Section 80C. The individual can avail for these exemptions against policies for self, dependent children and spouse. Even HUF members are qualified for these exemptions.
Currently, the yearly premium of a maximum of 10% of the total assured sum of the policy is exempted from taxes under Section 80C.
Unit Linked Insurance Plans (ULIP)
ULIP schemes offer higher long-term returns in comparison to a conventional insurance policy. They have become quite popular, especially in the recent few years, due to the benefits in taxes offered as per Section 80C of the Income Tax Act, 1961. The individual can claim exemptions in taxes of maximum of ₹1,50,000 on the total amount invested as per Section 80C provisions.
Tax Saving Fixed Deposit
Tax Saving Fixed Deposit, better known as Tax Saving FD, is a fixed deposit scheme provided by post offices and banks that qualify for deductions in taxes under Section 80C. This scheme has a minimum of five years in the lock-in period. Exemption in taxes could be claimed up to ₹1,50,000 on the principal sum. But the reruns in such a plan after the lock-in period is subject to taxation.
National Savings Certificate
National Savings Certificate or NSC is a favourite tax saving investment instrument for its lower risk levels. The interest received gets compounded bi-annually. Plus, it has a maximum maturity duration of five to ten years.
There is no limit on the investment that an individual can make. However, only up to ₹1,50,000 is acceptable for exemption in a given financial year as per Section 80C.
EPF
The returns and the earned interest from the Employee Provident Fund qualify for exemption in taxes as per Section 80C. This provision is available for workers who have a service period of a minimum of five years. Also, if an individual is making voluntary payment contributions to EPF, these amounts qualify for exemptions in taxes as per Section 80C.
Repayment of principal towards the home loan
Repayment of the principal amount of the home loan (excluding the interest) qualifies for exemption in taxes as per Section 80C. But the individual has to satisfy a few criteria to become eligible for the tax benefit. They are:
The exemption can be claimed, only if the construction of the house or property is complete.
Transferring the house or property within five years of gaining possession will disqualify the individual from exemptions in taxes under Section 80C.
If the property is transferred after five years, the amount claimed for exemption will become taxable in the given financial year.
Sukanya Samriddhi Yojana
The Sukanya Samriddhi Yojana is designed to fulfil the financial obligations of education and marriage of the girl. This is a savings scheme, wherein, the legal guardians or the parents of the girl child (age ten years or below) can open the account. Plus, parents or legal guardians of two or more girls (only twins) are eligible to invest funds in this savings scheme. The interest received for this scheme qualifies for exemption from taxes as per section 80C.
The maximum amount which could be claimed for exemption under Section 80C is ₹1,50,000. By deploying this sum in various tax-saving instruments, you reduce your tax liability as per your tax bracket.
For example, an individual who has a net income of more than ₹10,00,000 and falls in the 30% tax slab, which is also the highest, can save income tax of up to ₹46,800 as per Section 80C. This includes the 4% cess. If the individual enrols into NPS, they can save additional taxes of up to ₹50,000. Thus, their cumulative savings from taxes is ₹2,00,000. Wherein, ₹1,50,000 is deducted as per Section 80C, and a further ₹50,000 is deducted as per sub-Section 80CCD(1B).
Regardless of the tax slab you fall into, if you plan and align your investment smartly, the different tax saving options under Section 80C can easily provide you with proper asset allocation which will help you save money on taxes. Plus, smart and planned investments under Section 80C can help you realise your financial objectives in the most efficient manner.
| Tax rates | Tax saved on every ₹10,000 as per 80C | Maximum tax saved with 4% cess |
| 5% | ₹500 | ₹7800 |
| 20% | ₹2000 | ₹31,200 |
| 30% | ₹3000 | ₹46,800 |
Overall, this tax saving option gives you immense flexibility. However, don’t be too obsessed with it. For example, if you are left with limited money after all the routine investments to utilise the ₹1,50,000 tax limit, then that is an even tougher situation. You might as well pay tax and have some more money at your disposal.
For instance, if the individual falls in the lowest 5% tax slab, the maximum tax that can be saved after maximising the contribution limit of ₹1,50,000 is ₹7500. This amount is excluding the cess.
The income group of ₹2,50,000 to ₹5,00,000 falls into the 5% tax slab. For an individual who falls under this lower-income base, it may be sensible to pay an income tax of ₹1000, if they can only claim ₹1,30,000 exemption under Section 80C of the Income Tax Act, 1961.
It is better to know and understand the fine print of the different tax savings options, as it will help you to remain in command of your finances. Plus, you can address the tax-saving aspect more effectively. The best thing to do is to streamline the tax-saving procedure through the year rather than making the last minute hustle to make the investments.
1. Can a taxpayer claim deductions under Section 80C while filing their income tax returns?
Yes. The taxpayer can claim for deductions while filing their income tax returns before the appropriate assessment year ends.
2. In which year will the tax-saving investments made by you reflect in your income tax returns?
If the individual has made a tax saving investment as per Income Tax Section 80C on 30th April 2020, then they can claim the tax exemption on these investments during the assessment year 2020-21.
3. Can an individual invest in 2 or more investment schemes and claim exemption of 1.5 lakhs on each investment scheme?
No. The maximum tax exemption limit of ₹1,50,000 is the sum total of all investments made under Section 80C of the Income Tax Act. However, there is no limit to the amount of investment in any of the tax-saving schemes. But the total maximum amount that you can claim for exemption is ₹1,50,000 under Section 80C.
4. Can donations qualify for exemptions as per Section 80C?
Donations to specific funds and institutions qualify for exemption from taxes under Section 80C.
5. Can an individual claim for deductions under Section 80C, for making life insurance premium payments to a private insurance company?
Yes. Life insurance premium payments to any insurance company recognised by the IRDA (Insurance Regulatory Development Authority) qualify for tax exemptions under Section 80C of the Income Tax Act.
Multiple tax-saving instruments feature under Section 80C of the Income Tax Act. Thus, an investor or taxpayer should possess comprehensive knowledge of different tax saving schemes, as the different benefits available under this act can help you save a substantial amount from your tax liability.
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