Understanding 80C of the Income Tax Act

Aug 17, 2022

What is 80C of the Income Tax Act?

Section 80C helps you decrease your tax burden by enabling a deduction from your taxable income in a financial year. Section 80C is the most common answer that you receive for the question: how can I save taxes on your income? Under Section 80C of the Income Tax, 1961, you can claim tax deductions on contributions, payments, and investments in a manner that the Income Tax law specifies.  These include a subscription to National Savings Certificate, payment for your life insurance premium, contribution to Public Provident Fund (PPF), ULIP,  5-years tax-saving fixed deposit plans, Sukanya Samriddhi Yojana, or any recognized superannuation fund and provident fund.

What is the limit of Section 80C?

In a financial year, the maximum amount that you can claim as a deduction is INR 1.5 lakh. If you wish to make the most of the provision, you have to limit your contribution to specific products that are eligible for deduction under this section. Individuals and HUFs can claim tax deductions under 80C. Companies, LLPs, and partnership firms cannot claim tax deductions under this section. Section 80C includes subsections, 80CCC, 80CCD (1), 80CCD (1b), and 80CCD (2).

What investments does 80C cover?

The following are the popular payments/investments eligible for deductions under 80C.

  • Investment in a five-year bank fixed deposit. It has a maximum limit for a deposit of INR 1.5 lakh in a financial year. It is a low-risk investment.
  • Investment in a five-year post office time deposit
  • Investment in a Senior Citizens Savings Scheme. It has a lock-in period of five years. You can extend this period by another three years. It is a low-risk investment.
  • Investment into a voluntary provident fund or EPF
  • A PPF investment. This investment has a lock-in period of five years and it is a low-risk investment.
  • A National Savings Certificate investment. It comes with a lock-in period of five years and is a low-risk investment.
  • Investment in the NPS scheme. You must lock your money in this scheme until you are 60 years old.
  • The contribution you make to the Sukanya Samriddhi Account. This scheme has a long lock-in period of 21 years from the date of investment. It is a low-risk investment.
  • Payment of premium for Life Insurance Policy (including ULIP) for yourself, your spouse, or your child.
  • Contribution to any recognized superannuation fund
  • The contribution you make to a ULIP (Unit-linked Insurance Plan 1971) and ULIP of Life Insurance Corporation (LIC) Mutual Fund. Contribution to a recognized annuity plan of LIC. An investment in ULIP is a medium-risk investment.
  • Payment to ELSS of a mutual fund
  • Repayment of the principal of your home loan; the amount you pay for registration fee and stamp duty etc.
  • Payment of tuition fees for your children’s full-time education. You can claim this deduction for up to two children in any school, college, university, or other educational institution.
  • Infrastructure bonds

What is Section 80CCC?

Section 80CCC of the Income Tax Act, 1961, enables one to claim deductions of up to INR 1.5 lakhs in a year. You can claim these deductions on your contributions towards specified pension funds. The Life Insurance Corporation (LIC) or any other insurance provider under a pension scheme that IRDAI has approved.

The exemption limit of INR 1.5 lakhs includes any payments to purchase a new policy or for the continuation or renewal of an existing policy. To avail of this exemption, you need to make sure that the policy on which you have your money offers a periodical annuity or a pension. You must consider 80CCC along with 80C and 80CCD (1). The tax deduction that you can claim under all these three sections cannot be beyond INR 1.5 lakhs. A Hindu Undivided Family or HUF is not eligible to seek deduction under this section.

What is 80CCD?

Section 80CCD includes the deductions that are available to individuals on their contributions to the Atal Pension Yojana (APY) or the National Pension Scheme (NPS). There are three subsections in the section, 80CCD (1), 80 CCD (1b), and 80 CCD (2).

Section 80CCD (1)

This section includes tax deductions that are available for contributions made towards NPS by government employees, private employees, or self-employed individuals. The key provisions of the section are as follows:

  1. You can avail yourself of a maximum dedication of 10% of your salary (basic or DA) or 10% of your gross income if you are an employee.
  2. In FY2017–18, this limit increased to 20% of the gross total income if you are a self-employed individual.
  3. The maximum limit is INR 1,50,000 in a financial year.

The union budget of 2015 added a new amendment as 80CCD (1b). According to the amendment, individuals can claim an additional deduction of up to INR 50,000.  This applies to both salaried and self-employed individuals. This amendment increased the maximum deduction limit under 80CCD to INR 2,00,000.

Section 80CCD (2)

Section 80CCD (2) comes into the picture when an employer contributes to the NPS of an employee. The employer’s contribution can be equal to or higher than the employee’s contribution. The section applies to only salaried individuals but not self-employed individuals. Salaried individuals can claim deductions up to 10% of their salary. This amount can either include the basic pay and dearness allowance or can be equal to the employer’s contribution towards the NPS.

How can you save tax under 80C?

Section 80C provides the tax benefit at the investment stage. There are some investments, such as PPF, wherein your investment amount, interest earned, and maturity amount are all tax-free. But, the maturity amount of not all investments under this section is tax-free.

Tax on Earnings Through P2P Lending

One of the rapidly growing, technology-enabled investment opportunities is P2P lending. In P2P lending, investors earn income in the form of interest on the amount they lend. The fixed maturity peer-to-peer investment plan from LenDenClub offers up to 10–12% annual returns on investment from money lenders. Similar to the interest earned on other instruments such as a fixed deposit, the interest income in P2P lending is also taxable. Lenders’ interest income from peer-to-peer lending comes under “income from other sources” and is added to their taxable income.

Conclusion

If you have a deep understanding of Section 80C, you can save a significant part of your earnings every year. Given the un ty of life, long-term investments such as those that 80C provides are important for you to have a secured future.

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