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Income Tax Deduction Under Section 80C Explained With Example June 23 2020Income Tax Deduction Under Section 80C

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Every year as the return filing date approaches, most of us stress out thinking abouthow to save taxes. Some approach their ‘gyani’ friends, while others reach out to their colleagues and there are some who seek help from tax advisors. Whichever way you choose, the point is, you need to be aware of the various tax saving options available to you as per the Income Tax Act, 1961.

 

One of the most widely used option to save income tax is Section 80C of the Income Tax Act. It helps you reduce the tax burden by allowing a deduction from the total taxable income in a financial year. Let us understand how you can benefit from Section 80C deductions.

 

What is Section 80C Deduction?

As per Section 80C, an individual or a Hindu Undivided Family (HUF) can claim a deduction of up to Rs. 1.5 lakh from the gross total income if investments are made or expenses are incurred in specified avenues. These avenues include contribution to ULIP, Public Provident Fund (PPF),payment for life insurance premium, contribution to any recognised provident fund and superannuation fund, tax-saving fixed deposit plans, subscription to National Savings Certificate, among others. We will see this list in detail in the next section. While the maximum limit for tax saving under Section 80C is Rs. 1.5 lakh, there is no minimum limit.

When you claim a deduction, you reduce your gross taxable income and thereby the total tax payable by you in the financial year. Let us understand this with an example.

Let’s say, in FY 2019-20, your gross total earnings are Rs 10 lakh and you have invested Rs 1.5 lakh in the various schemes which are eligible for deduction under section 80C. Now, you can claim the tax benefit and reduce your income tax liability to Rs. 8.5 lakh (i.e. Rs. 10 lakh – Rs. 1.5 lakh) and pay tax on the same.

 

Eligibility to Claim Section 80C Deduction

As mentioned earlier, an individual or a HUF can claim a deduction under this section.Note that this deduction is not available to partnerships, companies and other corporate bodies. Besides, you can claim a deduction only from the income of the financial year in which you have made these specified investments or incurred the expenditures.

 

What Qualifies as Eligible Investment and Expenditure for Deduction Under Section 80C?

Some of the popular investments and payments eligible for tax deductions under Section 80C are as follows:

1.     Investment Schemes - Unit Linked Insurance Policies (ULIPs), Equity Linked Savings Scheme (ELSS) Mutual Funds

2.     Retirement Savings Schemes - Public Provident Fund, (PPF), Employees Provident Fund (EPF), Voluntary Provident Fund (VPF), National Pension System (NPS), Superannuation Funds

3.     Fixed Income Schemes -SukanyaSamriddhiYojana, National Savings Certificate (NSC), KisanVikasPatra (KVP), Senior Citizens Saving Scheme (SCSS), 5-year Post Office Term deposits, 5-year bank fixed deposits

4.     Insurance Schemes - Term Insurance, Annuity Plan, Endowment Insurance

5.     Miscellaneous - Home loan repayment, tuition fee payment

 

Taxation Rules, Lock-in Period and Returns of Various Section 80C Investments

Investments

Taxation Rules

Lock-in period

Approximate Returns

Public Provident Fund

Completely exempt

15 years

7% to 8%

Employees’ Provident Fund

Completely exempt unless withdrawn before completion of 5 years of service

5 years

8.65%

Equity Linked Savings Schemes

Principal investment is tax deductible. Returns are taxable if annual capital gains exceed Rs. 1 lakh

3 years

15% to 18%

National Pension Scheme

Amount deposited annually is tax deductible. Pension pay-out is taxable as per slab rate

Till retirement

12% to 14%

Tax saving fixed deposits

Investments are tax deductible. Interest earned is taxable at pay-out.

5 years

6% to 7%

National Savings Certificate

Principal investment and reinvested interest are tax deductible. Final year’s interest is taxable

5 years

7% to 8%

SukanyaSamriddhiYojana

Investments are tax deductible

21 years

8.5%

Senior Citizen Savings’ Scheme

Investments are tax deductible. Returns are taxable as per slab rate of senior citizens

5 years

8.7%

 

Apart from the above investment options, deductions are also available for certain payments. Let us understand the tax rules regarding them.

 

Taxation Rules of Various Section 80CExpenses / Payments

Expenses / Payments

Taxation Rules

Home Loans

Principal amount of a home loan is exempt every year, if the house is not sold within 5 years of possession. A deduction is also available on registration fee and stamp duty payments

Premium Payment on Life Insurance Policies

Amount paid annually as premium is tax deductible

School or Tuition Fees paid for your Child’s Education

Amount paid as tuition fees for college, school, university, etc. for the education of up to two children is exempt

 

Tax Exemptions other than Section 80C

Apart from the above-mentioned deductions, there are also certain tax exemptionsavailable from various other sub-sections of Section 80. These include:

·         Section 80D

Under this section, you can claim an exemption on the premium payments towards health insurance of self, parents, spouse and children. A deduction is available up to Rs. 25,000 for self and spouse and an additional Rs. 25,000 for parents.

 

·         Section 80G

Under this section, you can claim an exemption of up to 50% or 100% for the donations made towards various charities and social causes, depending on the cause of donation.

 

·         Section 80GGC

Under this section, you can claim an exemption for donations made towards any political party, provided payments are made throughmodes other than cash.

 

Tax deductions are an excellent way through which you can do your tax planning and reduce your overall taxable income. However, the amount of deduction varies depending on the type of investment and claim.

For more updates on tax planning, financial planning, investments and other latest stock market updates, follow our articles at Indira Securities.

 

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