Section 80 of the Income Tax Act Decoded
Everyone who earns an income beyond a certain point has to pay income tax. This is an important source of revenue for the government, and it will take steps to ensure that it maximises revenues from this tax. It is a burden that you, the taxpayer, will have to bear. However, the Income Tax Department has several sections that enable you to reduce your taxable income and thus lower your tax burden. These include sections like Section 80C, 80CCC and 80D. Let’s take a look at the various sections, the difference between 80C and 80CCC, and the difference between 80C and 80D.
The most popular section in the Income Tax Act for reducing taxable income is Section 80C. Let’s first look at this section, and the difference between 80C and 80CCC.
Section 80C allows you to reduce your taxable income by Rs 1.5 lakh by investing in certain specified instruments. Among the investments eligible for 80C deduction are equity-linked savings schemes (ELSS), Public Provident Fund (PPF), certain bank deposits, National Savings Certificates, life insurance premiums, Sukanya Samriddhi Yojana etc.
Remember that the maximum you can invest to get benefits under Section 80C is Rs 1.5 lakh. So you have to choose among these different avenues. Let’s look at the various 80C deductions.
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Public Provident Fund (PPF)
One of the most popular 80C deductions is PPF. This is very popular among risk-averse investors since it is backed by the government, so there is no risk of default. The tax advantages too are considerable, since PPF enjoys EEE tax treatment. EEE stands for exempt, exempt, exempt. What this means is that the initial investment is deducted from your taxable income, the interest earned is not taxed, and the ultimate proceeds too are not taxed.
The maximum amount that can be invested in a year is Rs 1.5 lakh. So if your income is Rs 10 lakh, you can reduce it to Rs 8.5 lakh by investing in PPF. The benefits are higher for those in the higher tax brackets since the savings are more. So PPF may not provide any great benefit if you are paying very little income tax.
The investments in PPF can be made as a lump sum or instalments. But you have to make a deposit at least once a year. The minimum amount is Rs 500.
Interest rates for PPF are fixed by the government from time to time. These are generally on a par with bank fixed deposits, or even marginally higher, but the tax advantages mean that your actual rate of return will be higher.
The disadvantage of PPF is that it’s not particularly liquid. There is a lock-in period of 15 years, and you will get the amount only after the end of the period. However, you can avail of partial withdrawal facilities from the seventh financial year onwards. You can withdraw a maximum of 50 percent of the amount which is there in your account at the end of the fourth year, or the year immediately preceding the withdrawal, whichever is lower.
You can also avail of a loan facility from your PPF account. You can take a loan between the third and fifth years. The loan amount is restricted to 25 percent of the second year preceding the loan application.
PPF is available for all Indian citizens and Hindu undivided families (HUF). However, it is not meant for companies.
Despite all the drawbacks like low liquidity and relatively low returns, it is worthwhile investing in PPF. You cannot invest all your savings in one asset like equity. It’s always better to have a diversified portfolio to minimise risk, and PPF must be an integrated part because of the substantial tax benefits and fairly high returns.
Investments in PPF can be done in post offices and banks like State Bank of India (SBI). More and more banks, including private sector ones, are offering PPF facilities, so make sure you invest in it. The time to start investing is when you are younger, since the money will be locked in for 15 years. But at the end of it, you will have a nice nest egg.
Equity-linked savings schemes
Over the past few years, equity has outperformed most asset classes when it comes to returns. So equity mutual funds must form a considerable chunk of your investments if you want to grow your savings. And if you want to grow your capital as well as reduce your tax outgo, there’s no better choice than equity-linked savings schemes, or ELSS.
Mutual funds offer ELSS funds that are eligible for Section 80C deduction. You can invest a maximum of Rs 1.5 lakh in these schemes and reduce your taxable income by that extent. This would mean a substantial savings in income tax, especially if you are in the higher tax brackets.
ELSS funds are basically equity funds and invest in a diversified basket of stocks. You must remember that investing in equity involves market risk, and past returns are not a guarantee of future earnings. However, in a growing economy like India, equity has the potential to offer significant returns to investors over a longer time period. These will generally be higher than fixed income options like PPF or bank savings deposits.
To avail of income tax benefits under ELSS, you need to stay invested in them for a period of three years. This might seem rather long, but it’s the shortest lock-in period among all the different kinds of instruments available for Section 80C deductions.
In order to realise the true benefits of equity investment, you must take a longer-term perspective. The optimum time period for equity investments is five to 10 years. So while you can redeem the ELSS funds after three years, it might not be a bad idea to keep it going for some time longer. In any event, you will need some equity component in your investment portfolio to ensure capital growth. If you put all your eggs in the fixed income basket, your capital will grow marginally, and if inflation is on the higher side, it could even lead to erosion of capital.
So, the benefit of investing in ELSS is two-fold – you get to save income tax, and you will see your capital grow at the same time.
National Savings Certificates
Another investment avenue that enjoys the benefit of Section 80C deductions is National Savings Certificates (NSC). NSC, like the PPF, is a government-backed scheme aimed at small investors. These are available at post offices around the country, and investments in them can be deducted from taxable income up to Rs 1.5 lakh.
NSC is very similar to PPF, and offers similar interest rates to investors. However, there are some crucial differences. One is that the maturity period is five years, instead of 15 as in the case of PPF. The interest earned on NSC is reinvested and the investor can claim the entire amount after five years.
There is no tax deduction at source on NSC. This is unlike bank deposits, where tax is deducted at 10 percent if interest earnings exceed Rs 10,000 in a year. The interest earned on NSC is fully taxable on maturity. It is added to your taxable income and taxed according to whatever slab you’re in. However, the reinvestment of interest by NSC can be considered an investment under Section 80C and you can claim that. Of course, this is subject to a limit of Rs 1.5 lakh, inclusive of any other investment you may have made under this section.
The minimum investment for NSC is Rs 100. You can invest in NSCs at any one of the 1.5 lakh post offices across the country. NSC is open to all individuals and there is no limit on the amount that can be invested. However, only Rs 1.5 lakh is allowed as a deduction from income in a year.
Another advantage of NSC is that it can be used as collateral for loans from banks and certain other institutions.
Sukanya Samriddhi Yojana
The Sukanya Samriddhi Yojana (SSY) is similar to the PPF in that it is government-backed and offers similar tax benefits. However, the interest rates are slightly higher than PPF. This scheme is intended to encourage parents to invest money for the benefit of their girl children – whether to pay for their education or for their marriage.
Like PPF, SSY also enjoys the EEE benefit. That is, the principal amount invested, interest and corpus after maturity are all tax exempt. So if you invest Rs 1.5 lakh in SSY, your taxable income could go down from Rs 10 lakh to Rs 8.5 lakh.
Any parent or legal guardian who has a girl child under 10 years of age can invest in SSY. Investors can withdraw the entire sum (principal + accrued interest) once the girl child beneficiary has reached 21 years of age, or if she has married after the legal age of 18, whichever is earlier. This is an excellent investment avenue if you want to protect the interests of your girl child and save income tax at the same time.
You can invest in SSY at any post office in India. Many banks too offer this facility. Some even have online deposit facility which makes investing seamless and easy. The minimum investment in SSY is Rs 1,000 a year.
Life insurance premiums
Life insurance is a must to protect the financial interest of families if the earning member passes away. You can also claim Section 80C deductions on the premiums that you have paid for yourself, your spouse or children. Only individuals or Hindu divided families can avail of this deduction under Section 80C (2). The benefit is available for premiums paid to any insurance company that has been approved by the Insurance Regulatory Development Authority of India (IRDA).
The maximum amount that can be claimed as a deduction from taxable income is Rs 1.5 lakh for all investments made under Section 80C. Remember that if you claim the entire amount for premiums paid, you will have to forgo investments made in income-earning investments. So it’s better to claim less from life insurance premiums and put more money in other schemes, especially if your investible surplus is just Rs 1.5 lakh.
However, you must also note that under Section 80C (3), the deduction for premium is available only up to a limit of 10 percent of the actual amount assured. If the policy was purchased before 2012, this figure could go up to 20 percent.
Another point to note is that if the life insurance policy is terminated before two years after purchasing it, you will not be able to claim deduction under Section 80C. Moreover, even the amount that you may have claimed in the previous year will be disallowed and added to your income. In the case of Unit-Linked Insurance Plans (ULIPs), the minimum period is five years.
Five-year bank deposits
If you prefer bank deposits, you can invest in them and also avail of Section 80C deductions. These are not applicable to all deposits, but only specified ones that have to be held for a minimum of five years. The advantage is that they are convenient. Many banks offer this kind of deposit, and you can open one in your own bank.
The interest rate will depend on the bank, but they are usually slightly lower than PPF. Interest rates earned on these deposits are fully taxable and taxes are deducted at source. However, since most banks calculate interest rates on a quarterly basis, the maturity proceeds could well be higher.
Like all other fixed deposits, interest earned from them will be added to your taxable income and taxed according to the bracket you’re in. So you will have to pay more if you are in a higher tax bracket. If your income is below the taxable limit, you don’t have to pay tax. If this is the case, you can submit form 15G to request the bank not to deduct TDS. If you are a senior citizen, you should submit form 15H. Moreover, senior citizens are eligible for a deduction of Rs 50,000 on interest earned under Section 80TTB. And banks offer higher interest rates for senior citizens as well.
National Pension Scheme
National Pension Scheme (NPS) was introduced by the government to ensure post-retirement income to senior citizens. It was initially launched for government employees in 2004 and made available to everyone in 2009. Any Indian citizen between the ages of 18 and 60 can join the scheme.
Investments in this scheme are eligible for a reduction in taxable income to the tune of Rs 1.5 lakh under Section 80C. This scheme has two tiers for different types of investors, and tier I investors are eligible for an additional Rs 50,000 over and above the Rs 1.5 lakh of Section 80C, under Section 80CCD (1B).
A Tier I account has some limitations on withdrawal. You can withdraw 20 percent of the corpus before the age of 60. After 60, you can withdraw up to 60 percent. The remainder has to be used to buy annuity plans from approved life insurance companies. Tier II has no such limitations.
NPS has several classes of funds that invest in equity, corporate bonds or central government securities.
If you have taken a home loan, you can avail of Section 80C to reduce your tax burden. The principal amount of the equated monthly instalments (EMIs) you pay can be deducted from your taxable income up to a limit of Rs 1.5 lakh.
However, the property should not be sold within five years of taking possession. If you do sell the house before that time, any deduction that you may have claimed in previous years will be added back to income and taxed accordingly.
You can also claim a deduction from taxable income for expenses incurred on stamp duty and registration charges, in the year in which they were incurred. This too comes under Section 80C and subject to an overall limit of Rs 1.5 lakh.
There are other sections in the Income Tax Act that allow you reduce your tax burden. For instance, you can reduce Rs 2 lakh from your taxable income on the interest paid on your housing loan under Section 24. First-time homeowners are also eligible for a deduction of Rs 50,000 under Section 80EE. However, the loan amount should be Rs 35 lakh or less, and the value of the property should not exceed Rs 50 lakh.
Joint loan holders can each claim a deduction on interest paid up to Rs 2 lakh under Section 24 and Rs 1.5 lakh on principal repayment under Section 80C. So if you and your partner are both earning, it’s better to take a joint home loan since you will enjoy substantial tax benefits.
Unit-Linked Investment Plan (ULIP)
A unit-linked investment plan or ULIP is an instrument that combines insurance with investment. While one portion of the premium is used to provide you with life cover, the remaining is invested in income-earning assets like equity, debt instruments and so on.
So, it’s a hybrid product that combines the best of both worlds, or the worst, depending on which way you look at it. This is because there are some who feel that investment and insurance are two different things and should not be combined. However, for those who want life insurance and invest some money, but do not have the time or inclination to go around looking for investment options, it may be a good choice.
ULIPs offer some flexibility in that you can choose between debt and equity depending on your risk appetite and investment goals. Generally risk-averse investors choose debt since it is considered to be safer. Those who are prepared to take more risks will want to invest more in equity in exchange for higher returns.
The good thing about ULIPs from the income tax point of view is that they offer some benefits. Premiums paid on ULIPs are exempt from income tax under Section 80C up to a limit of Rs 1.5 lakh. But the premium amount must be less than 10 percent of the insurance cover provided by the company. Moreover, the returns on ULIPs are exempt from income tax under Section 10(10D) of the Income-Tax Act.
Difference between 80C and 80CCC
Now that we have explained Section 80C, let’s look at the difference between 80C and 80CCC. Section 80CC is a sub-section under Section 80C that can be used to claim income tax benefit. Section 80CCC allows you claim deduction of Rs 1.5 lakh from taxable income for contributions made to certain annuity funds of the Life Insurance Corporation of India (LIC). This is clubbed together with Sections 80C and 80CCD, so the maximum you can claim from all three is just Rs 1.5 lakh.
You can also save tax by investing in infrastructure and other specified bonds under Section 80CCF. The maximum allowable under this section is Rs 20,000, which you can deduct from your taxable income. Interest earned on these bonds is taxable.
Difference between 80C and 80D
There’s another section that allows you reduce taxable income, and that is section 80D. Let’s take a look at the difference between 80C and 80D.
Section 80D allows you to deduct premiums paid for health insurance from your taxable income. You can claim up to Rs 25,000 per year on medical insurance premiums for yourself, your spouse and your children. If you are above 60, you can claim Rs 50,000 per year.
You can also claim a deduction for health insurance premiums paid for dependent parents. The amount that can be claimed is Rs 25,000 if your parents are under 60 years. If they are above 60, the amount that can be deducted is Rs 50,000.
In addition, you can also claim Rs 5,000 on health check-up expenses every year.
However, note that the premiums will be eligible for deduction only if they are paid for dependent children. You cannot claim deductions for your children if they are working.
There are other subsections that can be claimed under the Income Tax Act. Under Section 80DD, you can reduce your taxable income up to Rs 70,000 on the treatment of a dependent with a disability. This includes treatment, rehabilitation and nursing. The figure goes up to Rs 1.25 lakh for dependents with severe disability. Dependents can include your spouse, children, or parents and siblings.
Section 80DDB also allows you to claim a deduction of Rs 40,000 for expenses on certain specified illnesses like cancer, kidney failure, Parkinson’s disease etc. This can be claimed for yourself, your spouse, children, siblings and parents. Senior citizens above the age of 65 are eligible for a deduction of Rs 1 lakh. You will have to produce a medical certificate from a doctor working in a government hospital to avail of the deduction.
Section 80U enables a taxpayer to claim a deduction of Rs 75,000 if he/ she suffers from a disability. The deduction is for someone who has at least 40 percent disability. The various kinds of disabilities include blindness, hearing loss, leprosy cured, mental illness etc. A deduction of Rs 1.25 lakh is available for those with severe disability, that is, 80 per cent or more.
Remember to make all the premium payments through cheque or electronic payment. Payments made in cash are not eligible for deduction.
Income tax is unpopular among most taxpayers because the effect is direct and immediate, and there’s not much you can do to prevent the taxman deducting part of your income. This is unlike an indirect tax on a commodity or a service. If one commodity or service is taxed heavily, you can either reduce consumption or switch over to an alternative, depending on the nature of the service/ commodity.
However, the income tax department does offer you several ways of reducing your income tax burden through Section 80C, 80CCC and 80D. Make sure you do your tax planning in advance in reducing your tax burden to the fullest extent permissible under the law. Yes, paying your tax is your duty as a law-abiding citizen, but tax saving is not the same as tax evasion.
You should remember to make all your investments in Section 80C before the end of the financial year. Don’t forget to get all the documentation ready well ahead of time to claim the various deductions available to you. With some amount of planning, you will be able to reduce your income tax burden to a somewhat tolerable level.