Types of deductions under section 80C. What is included under 80C?

Decoding section 80C of Income Tax Act

Most of us start worrying about the future quite early. That's because it’s unforeseen and we can’t do anything about it. Or Can we? It’s obvious that worrying leads you nowhere, but proper planning surely will. If you are a middle-class man working day and night to meet your financial needs or a small businessman who wants to keep the business running... In other words, if you are not super-rich, then there is always pressure to save for the future to meet unexpected expenses or other financial needs; therefore, proper financial planning is vital. One way to do this is by having various income sources and saving tax to be paid on that income. Proper tax planning reduces your tax liability, which also helps in saving for the future. Section 80C of the Income Tax Act, 1961, helps you to avail tax benefits of up to INR 1.5 lakhs in various investments made by you. Below is the list of all such investments, where you are allowed to receive the tax deductions under section 80C.

1. Life Insurance Premium:

Gains from these savings and Investments are tax-free under section 10(10)D if the premium is not more than 10% of the sum assured or if the sum assured is 10 times the premium. However, if the sum assured is less than 10 times the premium, the policyholder can claim a deduction on an annual premium of up to 10% of the sum assured under section 80C of the Income Tax Act, 1961.

2. Public Provident Fund:

Public Provident Fund or PPF, introduced in 1968, is one of the oldest tax-saving instruments in India. It is a long-term retirement savings option and has a minimum tenure of 15 years (which can be extended in blocks of 5 years). The investment made in the PPF account is eligible for the tax deduction of up to INR 1.5 lakhs. The maximum deposit limit is also INR 1.5 lakhs; thus, one can claim the entire amount as an exemption under section 80C. The current Interest rate on PPF is 7.9%. This interest rate is guaranteed, and the gains are tax-free on reclamation after maturity.

3. Employee Provident Fund:

Like PPF, the gains under EPF are tax-free, and the interest rate is guaranteed. The current interest rate on EPF is 8.65%. Contributions to EPF are permitted to receive tax benefits of up to INR 1.5 lakhs under section 80C of the Income Tax Act, 1961. The deposited money can be withdrawn from the account after 5 years.

4. National Savings Certificate:

The NSC is a guaranteed income investment scheme available at any post office in India. This scheme's tenure is fixed at 5 years, and the current guaranteed interest rate is 8%. Investors can avail the tax deductions of up to 1.5 lakhs, as per the provisions of section 80C of the Income Tax act. However, the gains are taxable under this scheme. Also, the interest accrued for the first 4 years qualifies for exemption.

5. Sukanya Samriddhi Yojana:

As the name suggests, this scheme is designed to provide a bright future for India's girl child. The SSY account can be opened at the post office or any designated bank. The account can be opened before the girl child turns 10 years old. The current interest rate under this scheme is 8.4%. Moreover, interest earned on this investment is tax-free.

6. Tax Saving Fixed Deposit:

Both banks and post offices offer this type of deposit scheme for 5 years. Under this, investors can claim a tax exemption of up to INR1.5 lakhs on the principal amount. Like NSC, returns on this investment are also taxable as they are added to your income. The current prevailing interest rate for such instruments ranges from 6.8% to 7.5%.

7. Senior Citizen Savings Scheme:

The SCSS is a scheme specially designed to address senior citizens' tax-saving needs. The government introduced this scheme for individuals whose age is 60 years old or above. The maturity period is 5 years from the date of account opening, which can be extended once by 3 years. The returns are guaranteed, and the current interest rate stands at 8.6%. As per section 80C, the maximum tax exemption limit under this scheme is INR 1.5 lakhs.

8. Equity Linked Saving Scheme:

This scheme falls under the equity mutual fund category, in which investments become eligible for tax benefits under section 80C. The tax deduction of up to INR 1.5 lakhs in a financial year can be availed. Unlike SCSS, ELSS is a market-linked instrument and does not guarantee any returns on the investments. The lock-in period for this scheme is 3 years. Interest rates are generally within the range of 12% to 14%, but they keep varying in accordance with the market behaviour. Please note that the level of risk connected with such instruments is high.

9. National Pension System:

The NPS is a voluntary retirement scheme through which you can create an old-age pension fund. This scheme is available for all the Indian citizens within the age group of 16 to 65 years. The investments under Tier 1 of the NPS are available for a tax deduction of up to 1.5 lakhs under section 80C. Further, an additional exemption for investments up to INR 50,000 in a financial year is allowed under section 80CCD (1B). The gains, along with the aggregate amount received on the maturity, are nontaxable.

10. Repayment of Home Loan:

For the payment of the principal component of the home loan, tax deductions are permitted under section 80C. This tax exemption also includes a payment made towards stamp duty and registration. To avail the tax benefits, certain provisions are to be followed:

• The construction of the property should be complete.
• Property should not be transferred within 5 years from its possession.
• If the property is transferred after 5 years, the amount claimed for tax deduction should be taxable in the year in which the property's transfer is made.

11. Payment towards Children’s Fees:

The fees paid by the parents for admission of their child in a school or college or universities in India qualifies for receiving tax benefits under section 80C. The tax exemption can be claimed for not more than two children.

12. Infrastructure Bonds:

Section 80CCF, a subset of section 80C, deals with the tax deductions for the investment made in government bonds. The deduction limit is up to INR 20,000 per year for long-term bonds with a minimum tenure of 10 years. The interest rate is fixed on these bonds. However, the gains on maturity are taxable.

13.  NABARD Rural Bonds:

National Bank for Agriculture and Rural Development issues rural bonds for the minimum tenure of 10 years. These bonds carry low credit risk and are safe investment options since they are backed by India's government. The Interest received on these bonds is nontaxable. The maximum amount eligible for deduction is up to INR 1.5 lakhs under section 80C.

14. ULIPs:

Unit-linked Insurance plan is linked to the financial markets and provides the investor with a choice to invest in either equity or debt along with life insurance coverage. Under Unit Linked Plans, the policyholder is given an option to choose the funds in which he/she wants to invest his premiums. This policy provides the policyholder with seven different fund options, and these multiple fund options are a mix of debt, equity, and balanced funds. Section 80C of the Income Tax Act, 1961, provides tax-saving benefits of up to INR 1.5 lakhs on the amount invested in such plans. Generally, the interest rate sways within the range of 8% to 10%. The minimum lock-in period is 5 years. Apart from that, an associated risk under such schemes is moderate.

Final Words

These were some of the important tax deductions available under section 80C of the Income Tax Act, 1961. Particularly an individual or a Hindu Undivided Family (HUF) is qualified for availing these tax benefits. Thus, the provisions of section 80C do not apply to a company or a firm. Besides, to claim the tax deductions under this section, one needs to produce proof of savings and investments in the products that he/she chooses.

Be mindful while making investment decisions as these are just the complimentary benefits you get for laying out your money. Don’t invest in the schemes for the sole purpose of tax saving but for accomplishing your financial goals and encountering unanticipated expenses.

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