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Best tax saving investment and expenses options under Section 80C

section 80c
section 80c

Section 80C of the Income Tax Act gives a privilege of tax deduction up to Rs1.5 lakhs to individuals and HUF. The tax deductions provide a means for individuals to reduce their gross total income and save tax. They, therefore, lead to lower outgo of money for taxes. In this article, all the deduction under 80C and its subsections are explained in detail.

What is Section 80C?

Under Section 80C, a taxpayer can claim a deduction for the investments made and expenses incurred up to INR 1,50,000 in a financial year. The investments and expenses in the financial year qualify for a deduction claim.

For example – To claim tax deduction in Financial Year 2019-2020, the deduction and expenses must be made between April 2019 and March’2020.

Deduction under 80C is applicable only to individual taxpayers and HUF. This deduction is not applicable to a partnership firm, LLP, and company.

Section 80C Deduction List

Section 80C offers quite a few avenues for taxpayers to choose from to save tax. The three broad categories under which these can be classified are:

  • Savings
  • Investments
  • Expenses

The variety and flexibility of the offering make them suitable for all types of taxpayers. Based on circumstances such as age, family status, risk-taking ability, and other conditions.

The popularity of the investment plans under 80C is such that, it is the first choice of tax-saving option by taxpayers, by default. Therefore, it is the tax-saving avenue that has gained much popularity among tax savers. Individual taxpayers and HUFs both qualify for deductions under Section 80C.

Section 80C has two subsections. Section 80CCC and Section 80CCD. These are not as popular as the other options. Section 80CCC and 80CCD focus on retirement and pension plans. Under these two sub-sections, tax deductions can be claimed within the overall 80C limit of Rs 1.5 lakh as a tax deduction.

SavingsInvestment PlansExpenses
5-year Tax Saving Fixed DepositEquity Linked Saving Scheme (ELSS)Children Tuition Fees
Public Provident Fund (PPF)Unit Linked Insurance Plans (ULIPs) 
Employee Provident Fund (EPF)National Pension System (NPS)
National Saving Certificate (NSC) 
Senior Citizens Savings Scheme (SCSS)
Sukanya Samriddhi Yojana (SSY)
Life Insurance Premium
Principal of Home Loan repayment
Infrastructure Bond
Contribution to the pension plan by insurers

Savings Options eligible for Section 80C Deduction

All tax saving options come with a lock-in period. The majority of these have a 5-year lock-in period.  PPF and NPS have the highest lock-in until the taxpayer reaches the age of 60. However, EPF doesn’t have a lock-in period. EPF depends on the employment of the taxpayer. Also, these instruments offer some liquidity in case the investor wishes to exit early. However, there are penalties for early exits.

The savings options that are eligible for tax deduction under Section 80C work on the principle of Fixed Interest. In other words, all these instruments offer a fixed interest return on the money parked. The interest is announced every quarter for PPF, NSC, and SSY. The interest rate for infrastructure bonds and EPF is announced annually.

Investors can more or less predict the gains and feel assured about their investment. Generally, low risk-taking investors prefer these kinds of tax-saving investments.

Investment Options eligible for a deduction under Section 80C

Taxpayers who want wealth creation from their investments in 80C can invest in ELSS, ULIPs, and NPS. The returns from these depend on the market. In other words, they provide equity exposure to investors. As the investment returns depend on the market, there is market risk. Higher the risk higher are the returns. Therefore, the investing options offer higher returns to investors compared to the savings options.

NPS and ULIPs allow the investor to choose the amount of equity exposure they would want. The highest equity exposure an investor can opt for in NPS is 75%. While in ULIPs, it rarely goes beyond 80%. And, ELSS offers the highest equity exposure. Therefore, like all market-linked instruments, the performance of these tax savings options with equity exposure depends on the prevailing market conditions.

Expenses eligible for deduction Under Section 80C

Taxpayers can claim the tuition fee for their children’s education. The claim can be made only by individual investors and not HUFs. There is a limitation. Taxpayers can claim tuition fees paid only for two children’s education. However, if both the spouses are taxpayers, they can claim for two children each.

Also, the deduction is only towards the tuition fee and doesn’t include additional expenses or fees. Therefore, coaching class fees, capitation fees, self-study expenses are all excluded. The deduction is for children only. Taxpayers cannot avail deduction for spouse’s and sibling’s tuition fees. With the increasing education fees, this deduction is a boon for taxpayers. Most importantly, a deduction cannot be claimed twice. In other words, a child’s tuition fee can be claimed only once by a parent.

Tax saving options under section 80C deductions

Below is the list of tax-saving options or investment plans which are eligible for deduction under section 80C:

Life Insurance Premium

Amount paid by a taxpayer towards life insurance premium for spouse, children, and self is allowed as deduction. Premium paid for parents, brothers, and sisters are not allowed as a deduction under section 80C. Premium paid by a HUF for its member is also allowed as a deduction. The policy must be taken from an Insurance Company registered under the Insurance Regulatory and Development Authority of India or IRDAI.

Public Provident Fund

PPF is a government scheme eligible for a deduction. The minimum investment is INR 500, and 80C is INR 1.5 lakh in a financial year. Principal, as well as interest amount, is tax-free with a lock-in period of 15 years.

Employee Provident Fund

Section 80C allows the amount paid as a contribution towards employee provident as a deduction.

Equity Linked Savings Scheme (ELSS)

ELSS is a type of mutual fund, with a lock-in period of 3 years. This fund invests at least 80% of assets in equity (stocks) – an offering which benefits the investor in the long term.

Section 80C allows the investment as a deduction.

Interest earned is taxable at 10% (LTCG), and dividend earned is taxable at 10% as Dividend Distribution Tax.

Unit Linked Insurance Plan

This plan offers both an investment as well as insurance. A portion of the amount is invested in an equity-oriented mutual fund or debt- oriented mutual fund and the rest in life insurance. The part of investments is decided based on the investor’s goals. Section 80C allows a deduction of investment up to INR 1.5 lakh and interest earned is tax-free.

National Pension Scheme (NPS)

National Pension Scheme aims at providing monthly income post-retirement to the investor. An investor must invest during his employment. The entire amount is accumulated and broken down into an annual plan. An annual amount is paid every month to the investor after retirement. NPS is allowed as a deduction under section 80CCD (1) and section 80C up to INR 1.5 lakh and additional INR 50000 under section 80 CCD (1B). The total amount invested towards NPS cannot exceed INR 1.5 lakh and INR 50000, INR 2 lakh in totality.

Tax Saving Fixed Deposits

Section 80C income tax deductions covers the principal amount, and the interest is taxable at a slab rate. The lock-in period is five years.

Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana is a government saving scheme to benefit a girl child who is ten years or less. A parent or guardian can open a maximum of 2 accounts. The principal amount qualifies for a deduction, and the interest is tax-free. The account matures after 21 years of investment or at the event of the marriage of a girl child.

Pradhan Mantri Vaya Vandhana Yojana (PMVVY)

PMVVY is a pension scheme for senior citizens aged 60 years or more with an assured interest of 8.3% per annum. The locking period is ten years. The principal amount qualifies for a deduction, and the interest is tax-free.

Senior Citizen Saving Scheme (SCSS)

Senior Citizen Saving Scheme (SCSS) aims at providing a regular income for senior citizens aged above 60 years available at a certified bank and all the post offices across India. The lock-in period is five years. Section 80C income tax deductions cover the principal amount, and the interest is tax-free.

Comparison between tax-saving options

ELSS is a popular investment among the various tax-saving options. All the tax-saving options are compared based on the lock-in period, risk, interest, and tax implication they offer.

Scheme PlanLock-in period (Years)Risk LevelInterest RateTax Implication
Equity Linked Savings Scheme (ELSS)3High12% annually (historical). Market LinkedPrincipal amount – 80C deduction
Interest – 10% LTCGDividend – 10% DDT
Unit Linked Insurance Plan (ULIP)5HighMarket LinkedPrincipal amount – 80C deduction
Interest – Tax-free
National Pension System (NPS)Till RetirementHigh7-8% p.a.Principal amount – 80C deduction
Interest – Only 40% of the fund is tax-free on maturity
Public Provident fund (PPF)15Low7-8% p.a.Principal amount – 80C deduction
Interest – Tax-free
National Savings Certificate (NSC)5Low7-8% p.a.Deduction on a deposit made up to Rs 1.5 lakh
Tax Saving Fixed Deposits5Low6.50% – 7.25% p.a. differs bank to bank.Principal amount – 80C deduction
Interest – Taxable as per the IT slab rate
Employee Provident Fund (EPF)Till RetirementLow8.5% p.a.Principal amount – 80C deduction
Interest – Tax-free
Maturity Amount – Tax-freeIf any amount is withdrawn before completing 5 years of service, then it is subject to tax and TDS (if withdrawal is above INR 50,000)
Sukanya Samriddhi Yojana (SSY)21Low7.5-8.5% p.a.Principal amount – 80C deduction
Interest – Tax-free
Senior Citizens Savings Scheme (SCSS)5Low8.6% p.a.Principal amount – 80C deduction
Interest – Taxable as per the IT slab rate TDS – if interest is above INR 50,000
Life Insurance PremiumDepends upon the scheme chosenLowNAPremium – The premium paid towards life insurance is tax-deductible up to INR 1.5 lakhs, provided the sum assured is 10 times the premium amount.
Maturity – Upon maturity, the income will be taxed. But upon death, the income will be tax-free.

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

As mentioned previously, INR 1.5 lakh is the maximum 80C limit for income tax deductions. Therefore, taxpayers can reduce their tax liability by investing in one of the options. However, the amount of tax one can save depends on the tax bracket they fall under.

For example, Ms. Trupti has a net income of INR 15 Lakh. Hence she falls under the highest tax bracket of 30%. Let’s see the taxable income for Ms. Trupti if she invests and doesn’t invest in 80C.

 With 80C Deduction(A) ( ₹ )Without 80C Deduction(B) ( ₹ )Difference(B-A) ( ₹ )
Income15,00,00015,00,000 
80 C Deduction 1,50,000 0 
Taxable Income13,50,00015,00,0001,50,000
Up to INR 2,50,000NilNil 
INR 2,50,001-INR 5,00,000 – 5%12,50012,500 
INR 5,00,001-INR 10,00,000 – 20%1,12,5001,12,500 
Above INR 10,00,000 – 30%2,17,5002,62,50045,000
Cess – 4%8,70010,5001,800
Total Tax2,26,2002,73,00046,800

The tax liability for Ms. Trupti if she invests in 80C instruments is INR 2,26,200 (including cess). On the other hand, if she doesn’t invest, her tax liability is INR 2,73,000 (including cess). By choosing to invest in tax saving instruments, she can save up to INR 46,800.

Investing INR 1,50,000 in tax saving instruments can help save tax up to INR 46,800 if the person falls under 30% income slab. And choosing the right investment can also help earn returns. Hence, investing in 80C deductions can help save not only tax, but also earn a return on the investment.

Note: Here, it is assumed that Ms. Trupti has opted for the Old Tax Regime and wants to claim all deductions. Budget 2020 has given a New Tax Regime and the Old Tax Regime to benefit low-income and high-income taxpayers.

Subsections of Section 80C

The Section 80C laid down the deductions allowed, whereas Subsections of Section 80C provide clarity to the taxpayers.

Section 80CCC – Insurance Annuity Plan

The Section 80C provides for deduction for life insurance premium paid, and section 80CCC offers a deduction for the amount deposited in an annuity insurance plan. Under the annuity plan, the pension received, surrender claim, and interest all are taxable in the year of receipt. The total combining 80C and 80CCC deduction cannot exceed Rs 1.5 lakh.

Section 80CCD Contribution towards Pension Funds

  • The amount deposited in the pension fund can be claimed as a deduction. If the taxpayer is an employee, a deduction of 10% of the salary will be allowed. If the taxpayer is a self- employed individual, a deduction of 20% of gross total income up to Rs 1.5 lakh will be allowed.
  • Investment in NPS up to Rs 50000 will be allowed over and above the limit of Rs 1.5 lakh under section 80C. Hence total Rs 1.5 lakh plus additional Rs 50000 can be claimed as a deduction.
  • Employer’s contribution towards NPS can be claimed as a deduction. The amount contributed must not exceed 10% of the basic salary plus dearness allowance of the employee.

Section 80CCF Investment in Long Term Infrastructure Bond

This section allows a deduction for investments made in the Government notified long term infrastructure bond. The investor be an individual taxpayer and HUF investing up to Rs 20000.

Section 80CCG Government Notified Equity Schemes

Contribution towards Government notified equity schemes by an individual taxpayer up to Rs 25000 can be claimed as a deduction. Deduction claimed will be limited to 50% of the invested amount.

Frequently Asked Questions

What is the difference between a tax deduction and tax exemption?

Tax exemption is provided on a particular source of income and not the entire income. It means one does not have to pay a tax on income from that source. For example, agriculture income. Whereas tax deduction can be claimed on the entire gross total income. Certain expenditures and investments can be claimed as deductions—for example, 80C deduction, education loan.

Is personal accident insurance covered under Section 80c?

No, personal accident insurance is not eligible for deduction under section 80C. However, one can claim the cost of insurance premium against loss of income. If a person can prove that he/she has paid the premium for a tax deduction to protect their taxable income, then he/she can claim a tax deduction. But it doesn’t come under Section 80C.

Can both resident Indians and NRIs claim deduction under Section 80C?

Yes, both Indians and NRIs are eligible for tax deduction under section 80C.

Are taxpayers allowed to claim 80C deductions while filing an Income Tax return?

Taxpayers can claim a deduction for investments done throughout the entire year under section 80C. So every year taxpayers have one financial year to invest. Investments done from April 1st to March 31st of the next year can be claimed under section 80C.

Which year will the investments reflect in the Income Tax return?

For income tax purposes, ‘Financial Year (FY)’ is the year one earns income. ‘Assessment Year (AY)’ is the year one files tax and claims deduction. For example, for income earned in FY 2019-2020, the taxes are filed in AY 2020-2021. The financial year in 2019-2020 and the assessment year is 2020-2021.

Who can claim deductions under Section 80C of the Income Tax Act, 1961?

Any individual or Hindu Undivided Family (HUF) can claim deductions up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.

Does the limit of INR 1,50,000 mean that a taxpayer can invest in more than one instrument and claim deductions of up to Rs. 1,50,000 for each investment?

No. The limit of INR 1,50,000 is for all the instruments available under Section 80C. The taxpayer can invest in multiple 80C instruments, but they have to add up to INR 1,50,000. They can invest more than INR 1,50,000, but they can claim tax for just INR 1,50,000 on the gross income.

What are the conditions associated with claiming tax deductions under Section 80C on home loan principal repayment?

The amount used to pay back the principal of a home loan can be claimed as deduction under Section 80C. The following conditions are put on claiming a tax deduction for home loan principal repayment.
1. To claim this tax benefit, the construction of the property should be complete.
2. If the person transfers the property before the end of 5 years from the year it’s possession has been taken by the person; no tax benefits for this. Additionally, the amount claimed as a deduction in the earlier years shall become taxable in the year that the property is transferred.

Published on January 10, 2020