Guide to Section 80c Deduction

Taxpayers are a harried lot. They are inundated with messages, WhatsApp, emails, and calls by overzealous salespersons soliciting their monies to save tax. For the salaried, there is an additional reminder from the office HR office to furnish proof of tax savings. It could be intimidating for even seasoned taxpayers to be baffled by all the attention, especially as thee approach the last few months of the financial year. A tax saving avenue that has gained wide popularity among taxpayers is the possible ways to save tax under Section 80C of the income tax. 

Such is the popularity of section 80C that it is undoubtedly the first brush with tax-saving that all taxpayers experience. Taxpayers across generations and income tax slabs claim to save their tax liability under this section, which provides a wide choice of avenues to save tax under this Section up to Rs 1.5 lakh in a financial year. The benefit of contributions in instruments that qualify for deductions under this section can be availed by individual taxpayers and Hindu Undivided Family (HUF).

Section 80C Deduction List

There are over a dozen avenues that taxpayers could use (See: Section 80C umbrella for Assessment Year 2020-21 (FY 2019-20)) to save tax under Section 80C, which could be categorized under three broad heads – savings, investments, and expenses. The flexibility of products makes them suitable for all types of taxpayers, depending on their circumstances, as well as the risks they can take when deploying monies into savings and investments. 

Savings options eligible for deduction under Section 80C 

Most tax savings instruments have a 5-year lock-in; there are exceptions like the PPF, which has a 15-year lock-in or the NPS in which contributions remain till one is 60. There is also lock-in with the EPF, which depends on how many years one is employed. These instruments do offer some form of liquidity if one wishes to exit earlier, with applicable penalties.

The savings type tax-saving instruments work on the principle of earning a fixed interest on the money parked in them. The interest rate on tax saving options that fall under the small savings schemes such as PPF, NSC, and SSY are reviewed every quarter and may change depending on the government announcements. The interest rate on EPF and infrastructure bonds is notified annually. The fixed rate of return brings in an element of predictability in the gains that one can expect when saving money in these instruments. Generally, these options are preferred by low risk-takers. 

Expenses you can claim as deductions under 80C

A relatively lesser-known option to save tax under Section 80C is payments towards tuition fees that individual taxpayers can claim and not HUFs. This avenue covers for tax savings towards tuition fees paid on two children’s education. If Assessee has more than two children, then he can claim tuition fees paid of only two children. However, if both the spouse are taxpayers and they have more than two children, both the husband and wife can claim for two children each. 

The deduction is only towards the fee paid and excludes payments towards capitation fee, any coaching class fee, and even expenses incurred in case of self-study. The deduction is available for only children and not spouse or siblings. The deduction on tuition fees of full-time education of children is boon for taxpayers, especially at the lower bracket. Given the rising cost of education, this is a generous and much-needed tax relief. Note that the deduction cannot be claimed twice – tuition fee paid for a child can be claimed only once by a parent. 

Investing options eligible for deduction under Section 80C

Taxpayers looking towards wealth creation with equity exposure have the scope to explore options that have equity exposure. Investments in ELSS, ULIPs, and NPS are market-linked. Nowadays, even contributions to the EPF have minuscule equity exposure, but as taxpayers, you have little say in where and how this can be invested. These options could be used as the first step to equity investments by taxpayers. 

Among the other options, there is a fair degree of choice within NPS and ULIPs on the equity exposure that one could take, with the highest exposure in NPS being 75%, and in the case of ULIPs, the equity exposure seldom goes beyond 80%. The ELSS, however, stands out because of the higher equity exposure that it offers. However, like all market-linked instruments, the performance of tax saving instruments with equity exposure also depends on prevalent market conditions. 

Section 80CCC and Section 80CCD: Sub-sections under 80C

There are two lesser-known sub-sections under Section 80C – Section 80CCC and Section 80CCD that focus on contributions towards retirement and pension plans. Under these two sub-sections, tax deductions can be claimed within the overall Rs 1.5 lakh tax deduction cap applicable under Section 80C. 

Section 80CCC Tax Deduction

Contributions made towards pension plans by individuals to purchase annuity plans or retirement plans qualify for deductions under this section. This deduction is available to both individuals as well as HUF. However, the pension, interest, or bonus earned from such plans does not qualify for deductions and are added to income and taxed accordingly. Likewise, the money received after the surrender of such plans also attracts income tax.

Section 80CCD Tax Deduction

Contributions made to two Government pension schemes: National Pension Scheme (NPS) and Atal Pension Yojana (APY) qualify for tax deductions under this section. 

• Section 80CCD (1): It deals with tax deductions for employees of Central Government or other employers, including self-employed taxpayers. Salaried employees enjoy a maximum deduction of 10% of salary, and self-employed taxpayers can claim a deduction of 10% of gross income.
• Section 80CCD (1B): The NPS finds additional attraction among taxpayers as an additional tax deduction of Rs 50,000 is possible under Section 80CCD (1B) for investments made in the NPS. This additional contribution can take the collective tax deduction under Section 80C to Rs 2 lakh.
• Section 80CCD (2): This section deals with the employer’s contribution to NPS. An employee can claim a deduction if their employer makes payment to the employee’s NPS account with 10% of the employee’s salary.

How much tax can you save with Section 80C deductions?

There is a cap of Rs 1.5 lakh, which is the maximum sum that one can deploy under Section 80C. By doing so, you can reduce your income tax liability depending on the tax bracket that you fall under. 

For instance, taxpayers with net income over Rs 10 lakh and in the highest 30% tax bracket can save a maximum income tax of Rs 46,800 under Section 80C, including 4 percent cess (See: Real tax savings under Section 80C). For taxpayers who are enrolled in the NPS, there is an additional tax savings of Rs 50,000 possible, taking the cumulative tax savings to Rs 2 lakh. This works to Rs 1.5 lakh deduction under Section 80C and Rs 50,000 deduction under subsection 80CCD(1B).

Whatever the tax slab that you fall under, if planned and aligned smartly, tax savings avenues under Section 80C can fit into your suitable asset allocation. It can even help you achieve your financial goals in a tax-efficient manner.

Overall, the tax savings process under Section 80C provides you with immense flexibility, but you should not obsess with it. For instance, if you are left with limited monies after your routine expenses to use up the Rs 1.5 lakh limit, you could simply pay tax. For instance, at the lowest tax slab of 5%, the maximum that one could save tax by maximizing the Rs 1.5 lakh contribution is Rs 7,500, excluding cess. 

Given the low-income base of Rs 2.5 to Rs 5 lakh for those in the 5% tax bracket, it may make sense to pay Rs 1,000 in income tax if they were able to claim only Rs 1.3 lakh under Section 80C. Knowing the intricacies involved with tax-saving avenues allows you to stay in control of your financial life and address tax savings each year in a less stressful manner. You may also streamline your tax-saving process throughout the year than get into any last-minute hurry.