Every individual, HUFs, AOPs, company, firm, trust, etc. are obligated under law to pay taxes. But there are several legally permissible tax-saving options that an individual can tap into to reduce their tax liability.
Tax Saving options under the Income Tax Act, 1961
Chapter VI A of the Income Tax Act, 1961 provides details of tax deduction options to help you reduce tax liability. Section 80C is a crucial part of this chapter. Under Section 80C , taxpayers can avail of tax standard deductions of up to Rs. 1.5 lakhs. This Rs. 1.5 lakh exemption is a combination of deductions available under 80C and the sub-sections 80CCC and 80CCD.
Apart from Section 80C, 80CCC and 80CCD, there are several other sections in chapter VI-A like Section 80D, 80E, 80EE, 80G, 80TTA and many more that can help you reduce your tax liability. For instance, Section 80D allows tax deduction on the premium amount an individual pays for a health insurance policy. Section 80E accounts for the tax deductions on the total interest paid towards repaying loans taken for higher education.
On the other hand, Section 80EE offers income tax deduction benefits to individual homeowners for the interest paid on their home loans. It allows deductions of up to Rs. 50,000 every year till the loan is repaid subject to other conditions being satisfied. Another notable section is Section 80G, which allows deductions on contributions made by a taxpayer to any charitable trust, fund, or institution. For some of the donations, there is no qualifying limit for the deductions and it may range from 50% to 100%, but for some of the donations, it is subject to the qualifying limit.
Thus, it is evident that there are several tax-saving options available under different subsections of Section 80 of the Income Tax Act, 1961. In this blog, we will discuss Section 80C and subsections 80CCC and 80CCD in detail covering various investment and expenditure options.
Tax Saving Investment Options under Section 80C
Section 80C is considered as one of the most important sections because it allows taxpayers to reduce their tax liability significantly by making some strategic investments. Below are some important investment options covered under Section 80C.
Public Provident Fund
Public Provident Fund (PPF) is a safe and popular investment scheme to save taxes with a lock-in period of 15 years. After the lock-in period is over, you can withdraw the amount or increase the tenure by another 5 years. The minimum investment amount per year is Rs. 500 and the maximum is Rs. 1,50,000. Partial withdrawals can be made after 7 years starting from the end of the year you made your first contribution . Note that this withdrawal can be made only once a year.
National Savings Certificate
National Savings Certificate (NSC) is a fixed-income investment scheme available at any post office branch. This scheme is a low-risk, fixed-income product that provides you an interest rate of 6.8% (this interest rate is regulated and revised by the government from time to time) with a minimum investment of Rs. 1000. The lock-in period is 5 years. The NSC is also covered under the umbrella of Section 80C and though there is no upper limit for investing in NSC, you will get a maximum tax deduction of Rs. 1,50,000 per year.
National Pension System
The National Pension System (NPS) was introduced with the objective of providing professionals as well as workers in the unorganised sector with a retirement pension plan. Under Section 80C an individual can avail of tax deductions up to Rs. 1,50,000. An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B).
Unit Linked Insurance Plan
A Unit Linked Insurance Plan (ULIP) is a scheme that delivers both investment and insurance benefits. While a portion of the corpus is placed into your insurance, the rest is invested in a balanced mix of equities, debts and other market linked instruments. Contributions in ULIP are also eligible for tax deductions of up to Rs. 1,50,000 under Section 80C. However, if the premium amount (note that a part of ULIP is insurance as well) exceeds Rs. 2,50,000 a year, then the proceeds earned from such schemes will be taxable.
Equity Linked Savings Scheme
Equity Linked Savings Scheme (ELSS) is an open-ended mutual fund scheme which offers tax benefits. ELSS comes with a lock-in period of 3 years and is eligible for tax deductions of up to Rs. 1,50,000 under Section 80C. In an ELSS, underlying investments are a combination of debt and equity. While equity provides higher returns, debt provides a cushion against volatility.
Bank Fixed deposit
Fixed deposits (FDs) in banks are considered as one of the most hassle-free and safest investment options. They provide flexibility in terms of tenure and interest payout. Tax saving FDs are similar to normal FDs, but there are a couple of differences.
- Tax-saving FDs provide you with a tax deduction on investments up to Rs. 1,50,000 under Section 80C.
- Tax-saving FDs have a lock-in period of 5 years.
In regular FDs, if you need money during an emergency and prematurely withdraw your funds, you have to pay a penalty. But tax-saving FDs do not have premature withdrawal facility.
So if you want a low-risk option for gradual wealth creation with tax benefits, this can be a good option.
Senior Citizen Savings Scheme
This particular savings scheme is designed for individuals above the age of 60 years looking for a low-risk investment option to park their retirement funds. The Senior Citizen Saving Scheme’s principal amount is eligible for a tax deduction of up to Rs. 1,50,000 per year under Section 80C of the Income Tax Act.
Sukanya Samriddhi Yojana
The government introduced the Sukanya Samriddhi Yojana (SSY) to help parents build a secure future for their daughters. Parents or legal guardians of a girl child can make a deposit in this scheme and can get tax deductions on the same. The account has to be opened in the name of the child before she attains the age of 10. An SSY account can be opened in post offices, public banks and private banks. The minimum deposit amount is Rs. 250 per year. The maximum tax deduction available under this scheme is Rs. 1,50,000 per year. After the girl attains 18 years of age, parents can make a partial withdrawal of up to 50% of the deposited amount to finance their daughter’s education. The interest earned on the deposits and the amount received after maturity is also tax-exempted.
Tax Saving Payment Options Under Section 80C
Apart from investments, some expenses are also eligible for tax deductions under Section 80C of the Income Tax Act.
Payment of LIC Premium
The premium paid for a life insurance policy is tax deductible. Overall deduction under Section 80C (along with deduction u/s 80CCC & 80CCD) allowed is up to Rs. 1,50,000 per year. The tax deduction is available for the policy taken in the name of the taxpayer, his/her spouse, and children. An important point to know is that the premium for every life insurance policy is not eligible for a tax deduction. Sub-sections 3 and 3A of 80C list out the life insurance policies that are eligible for deductions.
Repayment of Principal amount of a Home Loan
If you have taken a home loan to buy or construct a house, then you are eligible for tax deductions for the loan principal amount repayment. You can avail a tax deduction up to Rs. 1,50,000 per year on the principal repayment portion of the EMI paid.
Tuition fees for children
If you are a parent and your children (maximum two) are attending school, then you can also claim a tax deduction under Section 80C of the Income Tax Act. The tuition fee paid qualifies for a tax benefit under Section 80C and you can claim deductions up to Rs. 1,50,000.
Tax Saving Options Under Subsection 80CCC
Under Section 80CCC, public or private sector employees can claim tax deductions for their contributions towards certain annuities and pension plans that are eligible under Section 10(23AAB). This includes payment made for the purchase, renewal, or continuation of the pension or periodic annuity policy. The maximum deduction allowed is Rs. 1,50,000 per year.
In order to qualify for a tax deduction under Section 80CCC, the following conditions must be met:
- Only those pension plans that give an annuity on maturity are eligible.
- The fund or the pension plan must be approved by the Insurance Regulatory and Development Authority of India (IRDAI).
Tax Saving Options Under Subsection 80CCD
Section 80CCD offers tax deductions on investments made in the National Pension System (NPS) and Atal Pension Yojana (APY).
NPS is meant for tax deductions for any working professional from the organised or unorganised sector. You need to be an Indian citizen within the age group of 18 to 60. There is no limit on maximum contributions; however, the lock-in period is until the age of 60 since it is a pension scheme. People mainly invest in this scheme to save for their post-retirement years.
On the other hand, the Atal Pension Yojana (APY) targets the weaker sections of society who are employed in the unorganised sector and belong to the age group of 18 to 40. The premium is very low and must be paid for a minimum of 20 years. The government will make a co-contribution of 50% of the annual contribution made by the individual or Rs. 1000/year – whichever is lower for the first five years. Upon attaining the age of 60, you will get a monthly minimum pension of Rs. 1000 and a maximum of Rs. 5000.
Now, Section 80CCD is divided into subsections 80CCD(1), 80CCD(1B) and 80CCD(2)
This subsection of the Income Tax Act allows tax deductions for contributions made by the government, private individuals or self-employed individuals to the National Pension System or Atal Pension Yojana.
This subsection permits an additional tax deduction of Rs. 50,000 for investment in NPS (Tier I account) over and above the contribution made under Section 80CCD(1).
Under this subsection, contributions made by the employer towards an employee’s pension fund are eligible for deductions. The deduction is limited to 10% of the employee’s basic salary plus Dearness Allowance (DA).
In order to benefit from tax-saving options, you must understand the Income Tax Act of India. Section 80C is one of the most important sections of it, as it helps you reduce your tax liability massively. Having discussed various tax-saving options under Section 80C, it is important to understand that the maximum deduction that can be availed under Section 80C, 80CCC, and 80CCD(1) is Rs. 1,50,000. And there is an additional deduction of Rs. 50,000 under 80CCD(1B).
What is the 80C deduction under VI-A?
The 80C deductions under VI-A are some of the most popular tax saving options since they cater to the deductions with respect to life insurance premiums, PPF, investments in certain schemes, children’s tuition fee deductions, etc.
Which investments are tax deductible under Section 80C?
Some of the best tax-saving investments under Section 80C are –
PPF – Public provident fund
ULIP – Unit-linked insurance plan
ELSS – Equity Linked Savings Scheme
SCSS – Senior citizen saving scheme
Bank Fixed Deposits
SSY – Sukanya Samriddhi Yojana
Can I save more tax than Rs. 1,50,000 under Section 80C?
The subscribers of the NPS (National Pension System) Tier I Account have the exclusive opportunity to claim deductions of Rs. 50,000 over and above the standard limit of Rs. 1,50,000 in a financial year. It is possible under subsection 80CCD(1b).
Investing in which tools will help me save tax?
Investing in ELSS, ULIP, tax-saving FDs, NPS, provident funds, etc. will help you reduce your tax liability.
What is Chapter VI-A of the Income Tax Act?
Chapter VI-A of the Income Tax Act contains various subsections of section 80 that enable an individual to claim deductions from the gross taxable income on the basis of several donations, tax saving investments and expenditures. Thus, these deductions enable the person to considerably decrease the tax liability.