The key to the Income Tax regime in India is its level of compliance. It impacts the direct tax revenue collection of the Government of India, which helps infrastructure and social sector development of the country. To provide, boost and incentivize compliance, several generous tax savings avenues have been defined. Among these, the most popular is Section 80C, which is patronized by most eligible taxpayers.
This section encompasses the most common instrument of investment and expenditure normally either within easy access or related to day to day life of taxpaying individuals. Additionally, most investments eligible for 80C deduction, is also deeply related to the financial planning of individuals, for not only setting future financial goals in harmony with different life stages and milestones but also to help money grow towards a healthy corpus.
What is Section 80C?
Income Tax Act of 1961 provides tax-saving avenues of different kinds to help taxpayers comply with their Income Tax liabilities. While ensuring income tax compliance, these tax-saving avenues are social welfare measure, indirectly helping to earn individuals to make future financial planning success. Deduction under Section 80C is the surest way to maximize tax planning and save handsomely through wise investments and compulsory spending to fulfil the dreams and aspirations of the family and children. Comprehending the range and scope of deduction under 80C needs a proper understanding of the contours of the Income Tax system to enable to fathom of its impact and importance.
Importance of Section 80C
Any Indian citizen or corporate body earning in India is liable to pay Income Tax on it. Individual citizens, whether domestic or NRI, fall within the tax net and need to pay taxes to the Government to finance for the development of the country. Income Tax is defined as direct tax and is governed by the Income Tax Act, 1961. Since agricultural income is not within the ambit of Income-tax, it has been the constant endeavour of the Government to increase the tax base to increase direct tax revenue. Deductions and exemptions in tax payable have been made available by the Government as an incentive. Deduction under this section has been one of the driving forces to providing impetus to the impressive widening of the individual tax net and, ultimately, compliance.
Concept of Financial and Assessment Year
The validity of the provisions under this section is confined to the financial year. Individual taxpayers, other than senior citizens, are required to submit advance tax based on the projected income in the financial year and file IT Return on its completion for the current Assessment Year. At this stage, it is incumbent to understand what Financial Year and Assessment Year mean.
Financial Year (FY)
The Financial Year is one year beginning on 1st April in the year the Budget is placed in Parliament, ending on 31st March of next year.
Assessment Year (AY)
It is the one-year timeframe the same as Financial Year but beginning only after the end of the Financial Year. In other words, it is the physical year when the IT Return is submitted with defined deadlines. With respect to the Assessment Year, the Financial Year for effective deduction under Section 80C is also termed as the Previous Year. A small illustration is self-explanatory.
The budget placed on February 1, 2020
- Financial Year (Previous Year): April 1, 2020, to March 31, 2021
- Assessment Year: April 1, 2021, to March 31, 2022
Thus, all investments and expenditure within the ambit of Section 80C during the Financial Year (Previous Year) from April 1, 2020, to March 31, 2021, is valid for income Tax deduction under 80C for the Assessment Year 2021-22.
Eligibility Norms for Deduction
Section 80C is a tax saving avenue which can be availed by individual and HUF taxpayers. It is valid for both residents and NRIs with income in India. It is to be noted that Companies, LLP, and other bodies are not eligible to claim deduction under this section. Presently, the maximum amount that can be claimed in a financial year is Rs 1.5 Lakh, inclusive of subsets named 80CCC and 80CCD (1). However, investment of Rs 50000 in Tier I account of NPS is additionally considered under 80CCD (1B), raising the overall deduction to Rs 2 Lakh.
Features of Section 80C
The activities for deduction can be broadly classified into two categories.
- Investment Activities
- Expenditure Activities
The various activities spread over these two broad categories are tabulated as under for easy comprehension and grasping the different options available to the taxpayer.
Investment Activities Investment Type Name of Scheme Nature of Investment Fixed Income Provident Fund (EPF/VPF) Retirement Provident Fund (PPF) Long-Term (15 Years), Retirement National Savings Certificate (NSC) Long-Term Tax Saving Bank FD Long-Term Debt 5 Years PO Time Deposit Long-Term Debt Senior Citizen Savings Scheme Long-Term Debt NHB Deposit Scheme Long-Term Debt Market Linked Participating Endowment Life Insurance plus Investment NPS and Atal Pension Yojana Retirement ELSS Equity Mutual Fund Pension Plans of Insurers Retirement Annuity ULIP Life Insurance plus Investment
Expenditure Activities Tuition Fees for 2 Children Full-time education Stamp Duty and Registration of House Only on Purchase Home Loan Principal Payment Purchase with Housing Loan
Tax Saving Instruments under Section 80C – Factors to Consider
The variables in vehicles attracting deduction under 80C are wide, and there are a lot of factors that weigh with the taxpayer as intrinsic to financial planning. Making the right choice is the key to successful investment planning, which, in any case, should not be solely dependent on the quantum of tax saving under Section 80C.
It is essential to consider the various characteristics related to an investment like liquidity, risk, tax benefits apart from transaction cost involved.
It has already been done based on being contributory or expense oriented. However, considering the attributes and investment risk as well as the risk appetite of the individual, it makes sense to base it on whether the returns are guaranteed, or market-linked. Most of the guaranteed return vehicles are government-sponsored, and quarterly interest is declared by it, like PPF, EPF, SSY, and SCSS, etc. On the other hand, vehicles like NPS, ULIP, and ELSS are dependent on the volatility of market risks.
It is defined by the lock-in periods each tax saving instrument assigned for 80C deduction, as it turns out, ELSS has the lowest lock-in of 3 years but also highly risky. Liquidity is such instruments are low, and the taxpayer has to look elsewhere if it is a necessity.
Investments with the lowest risk profile are generally guaranteed return vehicles free from the volatility of markets. However, NPS, ULIP, and ELSS are potentially high yielding vehicles with very high exposure inequities. Irrespective of the lock-in, staying invested longer in these vehicles evens out the market volatility.
Tax Treatment of Gains
Most of the guaranteed return vehicles enjoy tax exemption at all stages. Market linked investments are generally taxed on its returns, making a choice difficult for the taxpayer to choose the right scheme for benefit under Section 8OC.
Name of Scheme Tax treatment Provident Fund (EPF) Returns are Tax exempt but taxable on leaving service Provident Fund (PPF) Returns are Tax exempt Tax Saving Bank FD Returns are fully taxable 5 Years PO Time Deposit Returns are fully taxable Senior Citizen Savings Scheme Returns are taxable at the applicable slab rate Sukanya Samriddhi Yojana Returns are tax-free Life Insurance Term Plan Returns are tax-free NPS and Atal Pension Yojana Tax-exempt until maturity 40% of the corpus is tax-free ELSS Returns over Rs 1 Lakh taxed at 10% under LTCG ULIP Tax-free
Having learned about the various types of expenses in a financial year coming under the purview of Section 80C, it is also imperative to be aware of the minimum time the taxpayer has to remain invested in them, to obviate reversal of rebate enjoyed under Section 80C.
Name of Scheme Minimum Lock-In Guaranteed Returns Risk Profile Provident Fund (PPF) 15 years Yes Low Tax Saving Bank FD 5 years Yes Low 5 Years PO Time Deposit 5 years Yes Low Senior Citizen Savings Scheme 5 years Yes Low Sukanya Samriddhi Yojana 21 years Yes Low Life Insurance Term Plan 2 years Yes Low NPS and Atal Pension Yojana Retirement at 60 years of age No High ELSS 3 years No High ULIP 5 years No Moderate Repayment of Home Loan 5 years
Details of Tax Savings Vehicles under Section 80C
It is already seen that the various avenues to claim 80C deduction comprises of investment or contributions to instruments and certain expenditures. It is imperative to learn about them in greater detail.
There are mainly two types in this category EPF and VPF. In EPF, the employer deducts a percentage of basic pay every month, with a matching amount from them for accumulation till retirement. It has limitations as interest earned annually more than 9.5%, and employer contribution over 12% of the basic pay is taxable in the hands of the taxpayer. An employee can choose to contribute an amount greater than the statutory requirement. It is called VPF. The annual total of EPF and VPF contribution is entitled to Section 80C deduction, subject to a maximum of Rs 1.5 Lakh.
Public Provident Fund
It is a Government-sponsored scheme and popular among taxpayers because of its inherent features. A PPF account can be opened in any of the Bank Branches or Post Offices. The initial term of the account is 15 years, which can be extended for another 5 years on specific request. The minimum deposit in a year is Rs 500 to keep it active, and the maximum is limited to Rs 1.5 Lakh. Enjoying a very generous tax regime of EEE, it is known for its consistent guaranteed interest returns declared by the Government.
The total premium in a financial year towards any life insurance plan, be it Term, Endowment, ULIP, Child, and Retirement for self, spouse, and dependent children are considered for 80C deduction. The returns on investment in life insurance plans differ greatly depending on the type and nature of the plan, determining the maturity benefit, other than Term Plans. The premium amounts in more than one life insurance plan are clubbed together.
Tax Savings Fixed Deposit with Banks and Post Office
It is considered a safe investment treated as any other term deposit in a bank or a post office, other than that it is locked in for 5 years. The interest earned on this deposit is taxable, subject to the Income Tax rules.
Unit Linked Insurance Plan
It is a life insurance plan suitable for individuals with a high-risk appetite. Apart from life risk cover, ULIP offers higher returns from investment in market-linked instruments. But the charges levied in the plan are higher because of the life risk cover.
Equity Linked Savings Scheme (ELSS)
It is a type of Mutual Fund offering tax rebate under Section 80C. It is potentially a high yielding due to investments in market-linked vehicles. These are considered high-risk investments with lock in an element of 3 years. Returns from the scheme are considered Long Term Capital Gains and taxed if it is over Rs 1 lakh in a year. Dividends are, however, tax-free.
Sukanya Samriddhi Yojana Account (SSY)
As the name suggests, it is specially designed for the girl child. Though the account is opened in the name of minor girl child up to the age of 10 years, it matures after 21 years. The amount to be deposited is in the range of Rs 250 and Rs 1.5 Lakh annually, but only up to 15 years.
Senior Citizen Savings Scheme (SCSS)
It is meant for senior citizens, with relaxations for retired defence personnel above 50 years of age; Voluntary Retired individuals above 55 but below years of age. The account must be opened within three months of retirement, and the maximum cumulative deposit permitted is Rs 15 Lakh. Interest earned in this account is taxable as per norms.
National Pension Scheme
It is a Central Government sponsored scheme launched in 2004 for their employees but opened to all employees in 2009. The scheme mandates opening of Tier I and Tier II accounts, the former being by default, and the latter optional. One has to continue investing in NPS until retirement at 60 years of age to receive a pension. However, 60% of the maturity amount has to be invested in Annuity, income from which is taxable. It is the only investment option where the combined tax savings amounts to Rs 2 Lakh in total, with contributions under Section 80C and 80CCD, but contribution confined to Tier I account only. Similar is the treatment of contribution to Atal Pension Yojana.
National Savings Certificate
It is a small savings scheme sponsored by the Government with a maturity period of 5 years. It is a popular instrument offering purchase at a low amount of Rs 100 only. The payable interest is compounded annually and is taxable. However, the scheme being cumulative, interest is reinvested and is also eligible for deduction under Section 80C, except for the last year.
Payment of Tuition Fees
The annual tuition fees outgo for regular educational courses in India only is allowed Section 80C deduction. The number of children for which the cover is given is two.
Repayment of Home Loan
The deduction is confined to the repayment of the principal component of the EMI. The interest component enjoys tax deduction under another section.
How is Section 80C Rebate Calculated?
As a thumb rule, all the 80C deductions are calculated by compiling investments and expenses that are eligible for deduction under 80C as well as its subsets 80CCC, 80CCD (1), 80CCD (1B) and 80CCD (2). All these together should not exceed Rs 2 Lakh with the first three logging maximum of Rs 1.5 Lakh. The rebate is illustrative in the following grid:
|80C||Life Insurance Premium, Investment in Provident Fund (EPF, VPF, PPF), ELSS, NSC, SSY, SCSS, Repayment of Home Loan, Tuition fees, etc.|
|80CCC||Contribution to schemes to receive a pension in the future with Insurers and Mutual Funds|
|80CCD (1)||Contribution to NPS and Atal Pension Yojana|
|Sub Total||Rs.1.5 lakhs for the above three cells|
|80CCD (1B)||Additional Rs 50000 to NPS|
|80 CCD (2)||Contribution to NPS by the employer subject to a maximum of 10% of the salary (Basic + DA)|
|Grand Total||Rs 2 Lakh|
How to Claim Rebate under Section 80C?
With the E-filing of ITR being the norm, it is very convenient to claim rebate. The online page of ITR has provided relevant columns to input claim deductions in Part C of the Third Tab "Computation of Income and Tax." The best part is that these columns are automatically populated from Form 24Q, which is the TDS Return filed by the Employer and previous year's ITR. It, however, needs a check for authenticity and altered if necessary. It is imperative to enter all the deductions to claim a rebate. If any item is missed, the deduction is denied. It needs submission of revised return to claim the deduction afresh.
In the first three rows, one is prompted to enter deductions under 80C, 80CCC, and 80CCD (1). The common deductions considered in these rows are:
- The premium for Life Insurance
- Investment in EPF, VPF, PPF, etc.
- Repayment of Housing Loan Principal
- Investment in vehicles like ELSS
- Contribution or investment in guaranteed return instruments like SSY, SCSS, NSC, etc.
- The next step is to enter investment in Pension Plan of other insurers under 80CCC
- Contribution to NPS and Atal Pension Yojana under 80CCD (1)
- All these added together is limited to a maximum of Rs 1.5 Lakh
- In the final step input of 80CCD (1B) for a maximum of Rs.50000 and 80CCD (2) if the employer's contribution to NPS does not exceed 10% of the salary comprising of Basic Pay and DA thereon
- After clubbing all the above entries, a maximum of Rs 2 Lakh is allowed for deduction from the gross income to arrive at the taxable income
Calculation of Taxable Income and Tax Liability
Let us consider a salaried individual, who is 30 years old with an annual gross income of Rs.15 Lakhs. Other than Section 80C deductions, there are no other deductions to consider. The tax outgo for such a person will be
|Financial Year 2019-20 (Assessment Year 2020-2021)|
|Gross Salary||Rs 1500000|
|Standard Deduction (Less)||Rs 50000|
|Subtotal Taxable Income||Rs 1450000|
|Total Section 80C (Less)||Rs 200000|
|Gross Taxable income||Rs 1250000|
|Amounts under Section 80C|
|LIC Premium||Rs 25000|
|Tuition Fees||Rs 48000|
|Repayment of Home Loan||Rs 60000|
|NPS (80CCD (1)||Rs 72000|
|Sub Total||Rs 320000|
|Additional NPS 80CCD (1B)||Rs 50000|
|Grand Total 80C||Rs 370000|
|Effective total 80C deduction||Rs 200000|
|Financial Year 2019-20 (Assessment Year 2020-2021)|
|Gross Taxable Income||Rs.1250000|
|Tax slabs||Rate||Tax Amount|
|0 to Rs 250000||Nil||0|
|Rs 250001 to Rs 500000||5%||Rs 12500|
|Rs 500001 to Rs 1000000||20%||Rs 12500 + Rs 100000|
|Rs 1000001 and above||30%||Rs 112500 + Rs 75000|
|Education and Health Cess||4%||Rs 7500|
|Total Tax Liability||Rs 195000|
Ans: Yes, they have to pay taxes on income within India, and Section 80C applies to them.
Ans: The exemption is limited to 10% of sum assured for policies purchased on and after 01/01/2012. In the case of disabled persons, it is 15% on and after 1st April 2013.
Ans: The only fee for full-time education courses in school, college, and the university is eligible.
Ans: Yes, playschool activity covering pre-nursery and nursery classes are also covered.
Ans: Merely payment of taxes is not sufficient. Filing of IT Return within the stipulated time frame is compulsory.
Ans: There are three slab rate structures. One for persons below 60 years of age, second for senior citizens from 60 to 80 years of age, and the third for super senior citizens over 80 years of age.
Ans: The minimum amount of contribution is Rs.500 to Tier I account and Rs.1000 to Tier-II account on registration.
Q: Are persons retired under a Voluntary Retirement Scheme eligible to open SCSS with relaxed age parameters?Ans: Yes, they have to be within the age range of 55 and 60 years.
Ans: From AY 2021-22, income taxpayers will have the option to forego tax exemptions, including Section 80C, and enjoy lower income tax slabs. However, the old regime for the calculation of tax liability will continue.
Ans: Yes, they are eligible, and the deduction remains Rs.1.5 lakhs maximum, as 80CCD does not apply to them.