Understanding section 80C of the Income Tax Act, 1961

Albert Einstein said, ‘The hardest thing to understand in the world is the income tax.’

But don’t worry, we’re making it as easy for you as possible. Tax is computed on the total income of an assessee. Total income is arrived at after considering gross total income and deductions under Chapter VI-A. Chapter VI-A comprises of various sections. Deductions under Chapter VI-A includes section 80C of the Income Tax Act, 1961.

The Government of India strove to cultivate a habit of savings and investments for individuals and HUFs. Savings not only help in increasing individual wealth and standard of living, but it also helps to grow the economy. With this view, individuals and HUF are offered deductions against certain avenues of investments.

Deductions under section 80C of the Income Tax Act, 1961 include the following:

Equity Linked Savings Scheme:

ELSS are equity-oriented mutual funds with a minimum lock-in period of 3 years. ELSS are market-linked and thus provide relatively higher returns compared to the traditional forms of investments. Returns range between 12-15%, and their risks are also higher compared to PPF, NSC, etc. You can avail tax benefits of mutual funds under the same section mentioned above.

Investment in PPF:

Public Provident Fund (PPF) is a traditional form of investment. Investment in PPF is risk-free since it is only available with the post office and government-sanctioned banks. It has a lock-in period of 15 years, and return for the FY 2019-20 is 8.1% (compounded annually). Withdrawals from PPF are tax exempt. Additionally, one can avail loan against the PPF account as well.

New Pension Scheme:

NPS offers various schemes which are market-linked. There is no guarantee of returns. Also, the proceeds on maturity are taxable. However, NPS is a Government initiative and an additional deduction of Rs. 50,000 can be claimed under section 80CCD(1B).

Employee Provident Fund:

Investment in EPF up to 12% of an employee’s salary can be claimed as a deduction. The interest rate for EPF is roughly 8.8%.

Tax Saving Fixed Deposits:

Tax-saving FDs are like traditional fixed deposits from banks with a lock-in period of 5 years. Interest earned on such FDs is 7-9%. But the maturity proceeds are taxable.

NSC:

National Savings Certificates one of the oldest ways to avail tax-saving benefits. They are long-term investment avenues issued by post offices. Interest earned from NSC is around 8.1%.

ULIP:

Unit Linked Insurance Plans are hybrid products. ULIP is a combination of life insurance and mutual fund. Along with providing a life cover, a part of the ULIP premium is invested. Hence they provide market-linked returns. Mutual fund taxation benefits help you save more in addition to life insurance tax benefits.

Life Insurance Policies:

Premium paid for any life insurance policy for oneself, spouse, or children can be claimed as a deduction. However, the deduction can be claimed only if the premium is less than 10% of the sum assured. E.g., if you have insurance of Rs. 5,00,000, you are permitted to claim up to Rs. 50,000 as a deduction.

Certain payments:

Interest on repayment of home loan can be claimed as a deduction, too. Such deduction is to be considered only once deduction under house property is claimed completely.

Also, payment of tuition fees for up to two children can be claimed as a deduction. However, it can be claimed only for a full-time course.

Other Investments:

Investments in Sukanya Samriddhi Yojana and Senior Citizens Savings Scheme can also be claimed as a deduction. Each of these schemes has a different eligibility criterion for investments, laid down by the regulatory authority.

It is worthwhile to note that deduction only up to Rs. 1,50,000 can be claimed under section 80C of the Income Tax Act, 1961. This limit does not apply to each form of investment. Instead, it is an aggregate, blanket limit per assessee.

To conclude, you have several options to save your hard-earned money, primarily through tax deduction u/s 80C of the Income Tax Act. However, choosing ULIP over other investments helps you in all the suitable ways.