Income Tax Saving: How Section 80C Of Income Tax Act Works

What is section 80c of income tax act?

Section 80C is one of the commonest forms of deduction that you get from the Income Tax Act in India. However, you can claim this deduction only when you go for the existing or old tax regime in a financial year. But if you choose the new concessional tax system you would not be privy to this benefit.

So, here is how this particular section works and how it can help you save money on income taxes. These deductions have been introduced by the Income Tax department to encourage the habit of investing and saving money among people. Section 80C is a part of Chapter VI A – the most well-known along with others such as 80CCC, 80D, and 80CCD.

What is the maximum money that you can save in this case?

As shared earlier, by using Section 80C, an HUF (Hindu Undivided Family) or an individual taxpayer can deduct a maximum amount of 1.5 lakh rupees from their gross total income in a fiscal. This means that their net taxable income would be reduced as a result as would be the income tax that they have to pay on the same. If you utilize this deduction to the fullest you can save a maximum amount of 46,800 rupees provided you are in the highest tax bracket of 30%. Please note that this figure includes the cess of 4%.

How to claim a tax deduction in these cases?

If you want to claim tax deduction under Sec 80C of Income Tax Act you would have to invest in instruments that are eligible to receive the tax benefit in the first place. You can also spend the money on deductibles that have been specified in said section as being eligible for a tax deduction. The maximum tax benefit that you can claim in this case is 1.5 lakh rupees a year. You can do it any way you like – through either expenses or investments or a combination of both.

Which investment avenues are eligible for such deduction?

Following are some options that you can invest in if you wish to claim income tax deduction under Section 80C:

• EPF or Employees’ Provident Fund
• PPF or Public Provident Fund
• ELSS or equity-linked savings scheme
• Mutual Funds
• Sukanya Samriddhi Savings scheme
• NSC or National Savings Certificate
• Tax-saving FDs or fixed deposits with term periods of five years – you can open these at post offices as well
• NPS or National Pension Scheme
• SCSS or Senior Citizen Savings Scheme
• Registration charges and stamp duty for buying property
• ULIPs or unit-linked insurance plans
• Infrastructure bonds

A comparison of these investment options 

The following table provides a comparison of the various tax-saving investments backed by Section 80C of Income Tax Act:

Investment Option	Lock-in Period	Interest Rate (Annual)
ELSS (Equity Linked Savings Scheme)	3 years	12–15% (market-linked)
NPS (National Pension Scheme)	Till age 60 (partial withdrawal allowed after 60)	8–10% (market-linked + fixed)
ULIP (Unit Linked Insurance Plan)	5 years	8–10% (market-linked)
Tax-Saving Fixed Deposits	5 years	7–8% (fixed)
PPF (Public Provident Fund)	15 years (partial withdrawal from year 7)	7.1% (government-backed)
SCSS (Senior Citizens Savings Scheme)	5 years (extendable by 3 more years)	8.2% (government-backed)
NSC (National Savings Certificate)	5 years	7.7% (government-backed)
Sukanya Samriddhi Yojana	Till the girl turns 21 (partial withdrawal allowed at age 18)	8.2% (government-backed)

A few things to keep in mind in this regard

There are a few other factors that you need to keep in mind in this context as well.

It is not only sufficient to know the complete details of Section 80c of Income Tax. You should know that each of these investment options is unique in terms of the amount of money that you can invest in them, the rate that they provide you with on return, how liquid they are, and the way income taxes are applied on the returns that they offer you. So, keep these in mind before you invest in them.

The expenses which are eligible for a tax deduction 

We have already talked about how this particular section allows you to reduce your taxable income through certain expenses.

Following are some expenses that are eligible for deduction as per Section 80C of Income Tax Act:

• Life insurance premium
• school fees of your children
• repaying the principal of your home loan

When can you go for these deductions?

We can assume that you must have heard plenty about this particular section, especially because we are so close to the tax season right now. People use this section the most often to save money on income tax. As we have already indicated, you have plenty of options that you can choose from in this regard.

However, please remember that you would only be eligible for the deductions afforded to taxpayers by Sec 80C of Income Tax Act if you have chosen to continue with the existing tax regime in a financial year. If you choose the new concessional system you would not be able to claim the deductions that we have spoken about so far. So, in case you are sticking with the old regime, there are a few things that you must know in this context.

How to save money beyond Section 80C? 

If you want to save more money on taxes than the deduction under Section 80C you can try some other avenues. You can invest in NPS where the maximum limit in a year as per rules and regulations is 50,000 rupees a year. In the case of medical insurance, it can be a maximum of 25,000 rupees, and in the case of the interest on home loans for self-occupied properties, it is two lakh rupees a year. This is especially beneficial for people who earn more than one lakh rupees a month and have not chosen the simplified income tax system.

This way, you can save as much as 82,500 rupees in a year on taxes. Normally in these cases, it is the PF contributions that can use up the benefit that you get from 80C of Income Tax Act.