Published: Jan 13, 2023, 2:59pm
Section 80C of the Income Tax Act, 1961 (Act) provides for a deduction of up to INR 1.5 lakh from the total taxable income of Individuals and Hindu Undivided Families (HUFs). This deduction may be claimed with respect to various investments and expenses specified for this purpose, and which have been incurred by March 31st of the relevant financial year (FY).
Traditionally, the deductions under this Section achieve the twin objective of saving tax as well as promoting savings and investments among taxpayers. This limit was raised from INR 1 lakh to INR 1.5 lakh in the 2014 Union Budget. However, there has been no increase in the limit since then despite representations to the government by different stakeholders. With the next Union Budget due on Feb. 1, 2023, this continues to be one of the key expectations of the common man.
It is important to note that taxpayers who have opted for the new tax regime introduced in the 2020 Union Budget are not eligible to claim deduction under this Section. The stated intent of the government is to simplify the tax regime and to do away with the tax deductions. At present an individual has an option to continue with the old regime and claim benefit under Section (u/s) 80C or to opt for the new tax regime.
In case of individuals in employment, the proof of specified investments made or expenses incurred is provided to the employer based on which the employer carries out the tax deduction at source (TDS) on salary income. In case of other individual taxpayers, the eligible tax deduction may be considered while determining the advance tax payable. The eligible investments or expenses are then reported in the income tax return by the taxpayers.
The popular investments or expenses which are eligible for deduction u/s 80C of the Act are discussed below:
RPF and PPF are two popular social security schemes availed by individual taxpayers that can help them accumulate the corpus for their retirement. The major difference between RPF and PPF is that PPF is available for both the salaried and non-salaried individuals whereas RPF is available only for salaried individuals. Both these social security schemes are widely utilized by taxpayers due to their simplicity, low investment risk and high tax savings potential.
Under RPF, both the employer and the employee contribute 12% of salary towards Provident Fund (PF) monthly. Subject to certain conditions, the employer’s contribution up to INR 750,000 per annum towards PF is exempt in the hands of the employee.
The interest earned on an employer’s contribution up to INR 7,50,000 is also exempt from tax. Withdrawal of accumulated balances in RPF post five years of continued services is also tax exempt in the hands of individual taxpayers.
The PF law also provides flexibility to withdraw specified amounts to meet requirements such as medical treatment, purchase of house, children’s education or marriage, among others. An employee may also contribute more than 12% of the salary towards RPF as voluntary contribution. However, interest on an employee’s contribution above INR 2,50,000 per annum would be taxable.
Under PPF, there is no employer’s contribution, and an individual can invest a maximum of INR 1,50,000 per annum in the PPF account maintained for self, spouse or children. Also, interest earned on contributions to PPF, and amount received on withdrawal is exempt from tax.
Subject to specified conditions, payments towards life insurance premium are eligible for deduction. One of the key eligibility conditions for claiming deduction is based on the amount of premium paid vis-à-vis the sum assured:
The policies covering lives of self, spouse, dependent children are eligible for this deduction. However, no deduction can be claimed for the premium paid for policies taken for siblings, parents, or parents-in-law or any other family members.
Also, the life insurance policy must be obtained from an insurance company registered with India’s Insurance Regulatory and Development Authority (IRDAI).
ULIP is an insurance cum investment plan wherein the subscribers can enjoy dual benefit of a life insurance cover and market linked returns on maturity. In terms of tax savings, ULIPs provide the twin tax benefits in terms of deduction u/s 80C of the Act on premiums paid towards ULIP and also amount received on maturity is exempt from tax, provided the annual premium is not more than 10% of actual sum assured (for policies issued after April 1, 2012)
It is important to note that in case of ULIPs issued after Feb 1, 2021, the maturity proceeds will be taxable in the hands of individuals where the annual premium payable for any of the financial years during the term of such ULIP exceeds INR 2.5 lakh.
Another type of investment scheme covered is the ELSS wherein at least 80% of the underlying assets are invested in equity instruments. The mandatory lock-in period for ELSS is three years from the investment date. ELSS is a popular option for those looking at long-term growth in wealth.
It is however important to note that unlike certain other investments, the maturity proceeds of ELSS are not entirely tax-free. Long-term capital gains of up to INR 1,00,000 annually is tax-free and any gains above this limit would be liable to long-term capital gains tax at the rate of 10% plus applicable cess and surcharge.
Investments made in the SSY (a saving plan for girl child) are eligible for deduction u/s 80C of the Act. This account can be opened by a girl’s parent or legal guardian anytime before the girl child attains the age of 10 years. A SSY account can be opened for two girl children (one account per girl child) and can be extended to a third girl child in case of twins.
While the contribution period in an SSY account is 15 years, the account matures after 21 years of opening the account or upon a girl child’s marriage after attaining 18 years. Withdrawals are permitted for the account holder’s higher education to cover educational costs. The maturity proceeds from the SSY account are tax exempt.
The maximum contribution permissible in SSY is INR 1,50,000 per financial year.
The SCSS, which is accessible at Indian post offices and accredited banks, intends to provide senior citizens with a regular income. In comparison to other types of deposits with banks, the returns are relatively higher, and interest is paid on a quarterly basis. The amount deposited has a maturity period of five years. Individuals must be at least 60 years old to participate in the SCSS. Those who have opted for specified voluntary retirement schemes may invest in SCSS after the age of 55 as well. The principal amount invested up to INR 1,50,000 is eligible for deduction u/s 80C.
Interest earned on SCSS is taxable as per the tax slab applicable to the individual. In case the interest amount earned is more than INR 50,000 for a financial year, TDS is applicable on the interest earned.
Most banks provide tax-saving FDs where the initial investment qualifies for deduction. The tax-saving FDs have a lock-in period of five-year and the amount invested in such FDs up to INR 150,000 during the financial year is eligible for deduction. However, the interest earned on such “tax-saving FDs” is taxable, and subject to TDS.
Investments made under the NSC up to INR 1,50,000 per financial year is eligible for deduction. The scheme has a five-year maturity period with a minimum investment of INR 1,000, and no capping on the maximum deposit limit.
NSC is a secured fixed-income investment scheme of the Government of India which has relatively low risk.
The interest earned from NSC is not exempt from tax, however in case the interest is further reinvested in NSC, deduction u/s 80C can be claimed up to the overall threshold of INR 150,000 for the interest as well.
The repayment of the principal component of the housing loan installment is eligible for deduction u/s 80C, subject to certain conditions. The housing loan may have been availed for purchase or construction of the house.
One of the key conditions for claiming this deduction is that the house must not be sold within five years from the end of the financial year in which the possession was obtained. Else, the deductions allowed in previous years will be added back to the income in the year of sale of house.
The stamp duty and registration fees incurred for purchase or construction of house property are also allowed as deduction within the overall threshold of INR 1,50,000.
Tuition fees for children’s education paid to any university, college, school or other educational institution situated within India can also be claimed as deduction under this section. This is applicable for a maximum of two children of the taxpayer. The deduction only applies to the tuition fee and excludes any additional expenses such as development fees, donation, capitation fees, hostel or self-study expenses.
In addition to the above-mentioned eligible investments or expenses, there are other investments as well which qualify for deduction u/s 80C. These include investment in Infrastructure Bonds, NABARD Rural Bonds, etc. Taxpayers can explore these avenues for investments to ensure that the maximum eligible deduction of INR 1,50,000 can be claimed for a financial year.
It is important to note that the maximum tax deduction u/s 80C is capped at INR 150,000 for all the investments/ expenses prescribed for this purpose. While this provision offers an opportunity for tax saving, it is imperative for taxpayers to select the appropriate investment based on their personal requirements. Taxpayers should ensure that the conditions prescribed for claiming the deduction are met and necessary documents are maintained to claim the deduction.
Vikas Vasal is the national managing partner of tax at Grant Thornton Bharat LLP. He is a chartered accountant and has 20 years of experience in advising clients on tax and regulatory issues. He pursued a senior leadership programme at Saïd Business School, Oxford University, and is a graduate of Shri Ram College of Commerce, University of Delhi.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
