Section 80C of Income tax India, 1961 is the most popular among all other sections, since it provides for deductions that reduce the tax burden of individuals. To ensure that you get the maximum out of this section, it is important to understand the deduction in detail.
Deductions on Investments:
Section 80C of the Income-tax Act, India offers a maximum deduction of Rs. 1.5 Lakh every year, this section is deductible from the taxpayer’s total income or gross income thereby reducing the taxes significantly. Depending on the tax bracket you fall into, the tax savings would be as indicated below:
Tax Rate
5%
20%
30%
7500
30000
45000
In addition to the above, you will also save on surcharge as applicable and 4% education cess. The maximum amount of taxes that can be saved for an individual at a 30% income tax rate, 12% surcharge and 4% cess would be Rs. 52,416/- for a salaried individual.
Eligibility for section 80C and subsections:
The benefit under the section can be availed by individuals and Hindu Undivided Families (HUFs). The benefit is not extended to sole proprietorship firms, partnerships, LLP (limited liability partnerships), companies etc.
Section 80C is known only for its investment-related tax deduction, however, other subsections are a part of Section 80C. The sections which fall within the purview of 80C are 80CCC, 80CCD (1), 80CCD (1b), 80CCD (2).
While section 80C allows a deduction of up to Rs. 1.5 Lakh, an additional Rs. 50,000 is available as deduction under section 80CCD (1b).
Investments eligible for tax deductions under various sections
80CCD (1) – Contribution to NPS (National pension scheme)
Maximum of the following 3 conditions are allowed 1. 10% of salary 2. 10% of gross total income (for self-employed) 3. Rs. 1.5 Lakh (Section 80C limit)
80CCD (1b) Contribution to NPS
Additional deduction of Rs 50,000 is allowed for deposits into the NPS account Contributions to Atal Pension Yojana are also eligible
Rs. 50,000 in addition to 80C
80CCD (2) Contribution to NPS
Employers contribution allowed up to 10% of basic pay + DA (Dearness Allowance). Only salaried employees qualify for this section, not allowed for self-employed
Upto 10% of salary (basic pay + DA)
Investment options allowed under section 80C for deduction:
Investment options
Lock-in period for
Risk Profile
ELSS funds
3 years
High
NPS Scheme
Till 60 years of age
High
ULIP
5 years
Medium
Tax saving FD
5 years
Low
PPF
15 Years
Low
Senior citizen savings scheme
5years (can be extended for another 3 years)
Low
National Savings Certificate
5 years
Low
Kisan Vikas Patra
2.5 Years
Low
Sukanya Samriddhi Yojana
Maturity at girl's age of 21 years
Low
Below is an overview of each of the investment avenues in detail:
1. ELSS funds or Equity Linked Savings Schemes:
ELSS funds are diversified equity mutual funds that have at least 65% exposure to equity stocks, they are categorised as high–risk instruments with tax advantage. This is a high risk and high returns investment product. Hence there is always the possibility of downside in the markets.
ELSS funds are regulated by AMFI (Association of Mutual Funds of India). These funds have a lock-in of 3 years.
There are two types of returns generated namely, dividend and capital gains. Dividend is taxed at marginal tax rates. and capital gains tax which is applicable at 10% for gains exceeding Rs. 1 Lakh.
Minimum and Maximum Investment:
You can invest a minimum of Rs. 500 or even as low as Rs. 100, if you chooses the systematic investment route. There is no maximum limit applicable to these funds.
suited for:
It is best suited for someone who has a reasonable risk appetite and understands the workings of the market, these investments can be aligned with any long -term financial goals.
This is a retirement benefits scheme introduced by GoI (Government of India) to enable a regular income for employees post-retirement. The scheme is governed by PFRDA (Pension Fund Regulatory and Development Authority).
The NPS scheme is based on an account number called PRAN (Permanent Retirement Account Number). These schemes offer the flexibility to choose the point of presence (POP), investment mix (equity exposure), fund manager.
Tax Benefits of NPS:
Contribution to NPS can be availed under section 80CCD (1b) for Rs. 50,000, this is over and above the Rs. 1.5 Lakh available under section 80C.
Types of NPS:
There are two types of sub-accounts you can open under the same PRAN – Tier I which is also called the pension account qualifies for deduction u/s 80CCD(1b), Tier II – does not qualify for the tax benefit, additional funds can be parked here, there are no restrictions on withdrawal of funds from this account.
Minimum and Maximum investment:
Funds cannot be transferred from Tier I to Tier II, however, the other way round is allowed. The minimum account opening requirement for Tier I is Rs. 500; Tier II is Rs. 1000/- the additional contribution can be made with Rs. 500/- and Rs. 250/- respectively.
Tier I requires a minimum contribution of Rs. 1000/ per year, there is no restriction on the number of contributions that can be made in a year. However, a minimum of at least 1 contribution in a year is considered mandatory for Tier I. The annuity received upon retirement is fully taxable in the year of receipt.
Best suited for:
It is best suited for all individuals who plan to secure their retirement with a steady flow of income.
3. ULIPs or Unit Linked Insurance Plans:
ULIPs are insurance plans with the option to invest in market-linked instruments according to the risk appetite of the policyholder. These are considered to be moderate – high-risk instruments depending upon the choice of investment made.
Tax Benefits of ULIP:
While the tenure is as per the choice of the insured / policyholder, the tax benefit is applicable on all plans which have a minimum tenure of 5 years provided the premium is not more than 10% of the sum assured of the plan. These plans offer partial withdrawals and surrender benefits after a lock-in period of 5 years.
The death benefit derived from these plans is not taxable in the hands of the beneficiary/nominee under section 10(10D) provided the sum assured is at least 10 times the annualised premium. However, based on the recent changes brought in place under the budget FY 2021-22, the maturity benefit is tax-free only for a premium less than Rs 2.5 lakhs a year. For higher premium payment, the maturity benefit paid out in the form of the fund value is subject to tax similar to how mutual funds are treated.
The switches between the equity to debt funds in ULIPs and vice versa is exempt from any long term capital gain taxation. This is unique to ULIPs only.
Minimum and Maximum investment:
There is no minimum or maximum amount of investment in ULIPs, but for a tax advantage, the maximum premium is Rs 2.5 lakhs a year.
Best suited for:
This is one of the unique investment options which combines insurance and investments under the same universe, it is an ideal option if you are planning for long term goals arising well over a 10-year framework. You can consider planning your financial goals such as retirement, children education etc., through these plans.
4. Tax saving fixed deposit:
This remains one of the most coveted products by most investors, either due to the lack of knowledge or due to pure lethargy. It is a conventional product, hence the risk profile is on the lower side, the returns are taxable at normal rates under the head income from other sources.
The returns are guaranteed, the interest is paid is either paid monthly or quarterly. The lock-in period is 5 years, if it has to qualify for deduction under section 80C. A TDS (tax deduction at source) is applicable at 10% + surcharge/cess on interest earned more than Rs.40,000/-.
These fixed deposits can be availed from any bank or financial institution, they fall under the regulation of RBI (Reserve Bank of India), the interest rate is applied upon fixed deposits as per the prevailing market interest rates and as declared by the RBI. The interest rates may vary from one – bank to another only marginally.
If the fixed deposit is broken at any point for withdrawals, a penalty of about 1% is charged on the value of the deposit. In addition, such withdrawals will lead to the reversal of tax benefit availed by the individual until the date (previous years’ tax benefits will be reversed).
Best suited for:
These instruments are suitable for individuals who are extremely conservative and do not intend to risk their investments, it is also suitable for individuals who are fast approaching retirement and may not have the required risk appetite or tenure to look at other equity-related alternatives.
5. Employee Provident Fund i.e. EPF or Public Provident Fund i.e. PPF –
a. EPF:
EPF is a mandatory account that the company is required to open for all its employees who offer EPF benefits to its employees.
Minimum and Maximum investment:
There is a 12% salary contribution made by the employee, a similar contribution is made by the employer as well. The risk profile of EPF is very low, the interest rate is declared by the EPFO (Employees Provident Fund Organization) every year and the interest rate is applicable as indicated. For the year 2021-2022, it is stipulated at 8.5% per annum. The interest is compounded yearly.
Portability of EPF:
Portability of EPF account is allowed between companies. The maturity amount is tax-free in the hands of the recipient. Partial withdrawals are allowed under these accounts after 5 years, however only for specific reasons such as construction/purchase of a house, daughter’s marriage etc.
b. PPF:
Public Provident fund is similar to that of EPF; however, it is an account that you shall avail voluntarily through a bank/post office etc., it is issued and regulated by the Government, the interest rate on PPF stands at 7.1% per annum for the year 2021 - 2022.
It has a tenure of 15 years which can be extended by an additional 5 years post maturity. The maturity amount is tax-free in the hands of the recipient.
Minimum and Maximum investment:
The minimum amount of investment allowed is Rs. 500 and the maximum allowed is Rs. 1.5 Lakh. The account holder can avail of a loan of up to 25% of the account balance after 3 years
6. Senior Citizens savings scheme
These are schemes that can be availed from the post office or a bank. These schemes are specifically targeted at individuals who have attained the age of 60 years or above.
This is also extended to individuals who have attained 55 years and have retired under the VRS (Voluntary Retirement Scheme) and qualify under the SCSS rules.
The scheme is subject to a lock-in of 5 years, which can be extended to an additional 3 years. The interest generated on the scheme is compounded quarterly. This scheme is regulated by the Government, the prevalent interest rate on this scheme is ~7.4% per annum.
Minimum and Maximum investment:
A maximum amount of Rs. 15 Lakh can be deposited into this account during the year. The minimum acceptable deposit amount is Rs. 1000 in a year. Premature withdrawals are allowed subject to a charge of 1.5% charge and a 1% charge of the total deposit value for withdrawals after 1 year and 2 years respectively.
The interest in excess of Rs. 50,000 (for those below 60 years it is Rs 40,000) per annum will be subject to tax at source, any amount lower than the stipulated amount is exempt from taxes.
7. NSC or National Savings Certificate:
These instruments can be availed from the nearest post office. They are issued by the Government, the interest rate is guaranteed and hence, the risk profile is considered very low.
The prevalent interest rate is 6.8% per annum, the compounding happens yearly. The tenure is 5 years,. The interest earned on NSC is taxable at normal rates under the head income from other sources. Hence, the real interest rate is lower than 4.8% (70% of the prevalent interest rate), thereby making it an unattractive investment avenue compared to others.
Minimum and Maximum investment:
The minimum investment amount is Rs. 100, the certificates are available in specific denominations such as Rs 100, Rs 500, Rs 1000, Rs 5000 & Rs 10,000. There is no provision for premature redemption/withdrawal under these instruments, they can however be pledged or sold.
8. KVP or Kisan Vikas Patra:
This is yet another instrument similar to that of NSC, these instruments can also be availed from the nearest post office, they are issued by Government. The tenure of KVPs is 124 months, the prevalent interest rate is 6.9% per annum, compounded annually. The maturity amount is taxable under the head income from other sources at normal rates.
Minimum and Maximum investment:
The minimum investment amount is Rs. 1000, there is no maximum cap on the investment allowed for this instrument. There is a tax-deductible source for interest earned at 10%, similar to that of fixed deposits. There is a provision of premature withdrawals at a cost.
Best suited for:
Both KVP and NSC are available only for resident Indians. The instrument falls under the very low-risk profile.
Additional Read – 5 income tax-saving tips that also help financial fitness
9. SSY or Sukanya Samridhi Yojana:
This was launched by the Indian Government as part of the ‘Beti padhao, Beti Bachao’ mandate. The SSY scheme can be opened by a guardian or parents of a girl child whose age is with 10 years. The girl will be able to operate the account once she attains the age of 18 years.
Minimum and Maximum investment:
The minimum and maximum deposit that is allowed under this scheme are Rs. 250 and Rs. 1.5 Lakh respectively. Tenure of SSY is 21 years from the date of opening of the account or till the marriage of the girl after she attains the age of 18 years The SSY account is transferable/portable between the post office and banks anywhere within India. There will be no charges levied for such transfer, provided there is proof of a change in residence.
The scheme is competent especially because the interest is exempt from taxes, the maturity amount remains tax-free in the hands of the recipient (girl child). The prevalent interest rate is 7.6% per annum which is compounded annually. Partial withdrawals to the extent of 50% of the amount towards higher education or marriage but only after the girl child is more than 18 years old are allowed.
Best suited for:
This is a superb investment option for parents or guardians of a girl child.
Hope this article gives you a comprehensive view of all the investment avenues which qualify for deduction under section 80C. Seek the help of professionals at TATA Capital Wealth to help you execute your tax planning effectively and efficiently.
24 February 2022
13 mins read
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