Introduction

Section 80C Deductions of the Income Tax Act 1961 lowers the tax liability of a person against his taxable income as certain deductions are allowed. Tax deductions are offered to the taxpayer to save tax by investing in welfare schemes. The amount varies with the type of deduction a person is claiming.

Tax deduction limit under section 80C

The maximum amount eligible for tax deduction under Section 80C is Rs. 1.5 lakh.

Section 80C Deductions

An Individual and HUF can claim Section 80C deductions on payments being made in the following:

  • Investment in PPF (15 years lock-in period)
  • Employee’s share of EPF contribution
  • National Saving Certificates (5 years lock-in period)
  • Life Insurance Premium Payment (If premium is < 10%)
  • Children’s Tuition Fee (Eligible for 2 children)
  • Principal Repayment of Home Loan
  • Investment in SukanyaSamridhi Account (partial withdrawal is allowed for deposit of previous year)
  • Unit Linked Insurance Plans (5 years lock-in period @ 8% interest)
  • Equity Linked Savings Scheme (3 years lock-in period @12% interest)
  • Sum paid to purchase deferred annuity
  • Fixed deposit scheme (5 years lock-in period)
  • Senior Citizens Savings Scheme (Maturity period of 5 years @ 8.6% interest)
  • Subscription to notified securities/notified deposits scheme
  • Mutual Fund or UTI notified contribution to Pension Fund.
  • Contribution to Home Loan Scheme
  • Contribution to deposit scheme of a public sector or company engaged in providing housing finance
  • Contribution to notified annuity Plan of LIC ( minimum 2 years @ 5-6% interest)
  • equity shares/ debentures subscriptions
  • NABARD bonds subscription

Other Deductions

  1.  Section 80CCC

Maximum of Rs. 1,50,000 can be claimed by an individual as a tax deduction against payments made towards Pension Funds.

  1. Section 80CCD

Contributions made under Central Government notified pension schemes by an individual taxpayer can be claimed as a deduction. This deduction is available to the extent of maximum 10% of Salary (for salaried class) or 10% of Gross Total Income (for others).

  1. Section 80CCF

Investments made in Government notified long-term Infrastructure Bonds can be claimed by both Individual and HUFs. The maximum deduction of Rs. 20,000 (additional to 80C Deduction limit) can be claimed under this section.

  1. Section 80CCG

Only specified individuals can claim a deduction against investments made in Government notified Equity Schemes, a maximum benefit of Rs. 25,000 can be availed. Deduction claimed cannot be more than 50% of the invested amount.

Popular Schemes for Section 80C Deduction

Section 80C deductions are offered to investments made in a variety of instruments. Several of these are more popular than others because of different reasons. Some tax saving instruments are promoted by the government to encourage individuals to make investments.

Income Tax Deduction on Investment in PPF and Provident Funds

  • An individual can claim deductions in the name of self, spouse, and children (even if major) for deposits made in PPF accounts.
  • The maximum deduction allowed is Rs.1,50,000 for AY 2017-18.
  • An interest of 7.8% has been declared on PPF investments by the Ministry of Finance.
  • PPF has a 15-year lock-in period.
  • Partial withdrawals from the PPF account is allowed equivalent to the total of the last 3 years contribution.
  • You can also take a loan against the total available amount in the account.
  • Contribution to EPF not exceeding Rs.1,50,000 too earns tax benefit under Section 80C. 12% of the salary is invested in EPF. Currently, it is earning an interest rate of 8.65%.

Income Tax Deduction on Investment in NSC or National Savings Certificates

Deductions on NSC are allowed in the year of their purchase.

  • A maximum investment of Rs.150,000 can be made in NSC to claim Section 80C deductions.
  • NSCs have a lock-in time of 5 years and are issued by the Post Office.
  • The compound interest earned on NSC annually is taxable. For the FY 2016-17, the compound interest is calculated at 8.1% p.a.

Income Tax Deduction on Investment in Tax Saving Fixed Deposits

  • These fixed deposits have a lock-in period of 5 years and cannot be withdrawn prematurely.
  • They are eligible for Section 80C  deductions for a maximum investment of Rs.150,000.
  • The rate of interest offered is at the discretion of the bank, but it is usually between 7% to 9%.
  • FDs give us guaranteed returns with 100% capital security.

Equity Based Mutual Funds or Equity-linked savings scheme (ELSS)

  • ELSS gets a Tax deduction of Rs.1,50,000 maximum.
  • At least 65% of the ELSS funds are invested in the equity market.
  • ELSS are tax saving instruments because they offer a higher rate of returns, and also have the shortest lock-in period of 3 years amongst all tax-saving schemes.
  • Also, the returns on the ELSS funds held for more than a year are considered Capital Gains as and are therefore 100% tax-free!
  • It is recommended to invest in a diverse ELSS portfolio through SIPs.

Income Tax Deduction on Investment in NPS or National Pension Scheme

The pension system is the Government’s effort to afford pensions on retirement to working professional and those working in the unorganized sector.

  • A maximum investment of Rs.150,000 can be claimed for deduction under Section 80C.
  • As per Budget 2016, an extra Rs.50,000 can be claimed under Section 80CCD(1B) if the investment made by the individual is voluntary.

The disadvantages that NPS suffers from are:

  • NPS earnings are taxable at maturity.
  • No assurity of earnings with NPS.

Unit Linked Insurance Plans (ULIP)

  • They are also eligible for deductions on a maximum investment of Rs.150,000 under Section 80C.
  • They do not offer promised returns and suffer from lack of focus about amount investment and deductions as expenses and commission.

Income Tax Deduction on Investment in Sukanya Samriddhi Yojna

  • This scheme is specifically set up for investments made for girl child by her parent or the guardian.
  • A maximum tax deduction is Rs.150,000. Compound interest of 8.6% p.a. is the current rate of interest enjoyed by this scheme.
  • The account matures after 21 years. Partial withdrawal of 50% maximum is permitted when the girl reaches 18 years of age.

Investment in SCSS or Senior Citizen Saving Scheme

  • This scheme is for citizens over 60 or a voluntary retiree of over 55 years of age.
  • The interest of 8.6% p.a. can be earned on the maximum investment of Rs. 1,50,000 and tax benefit under Section 80C deduction.
  • Lock-in period of 5 years.

Comparison of the Popular Tax Saving Instruments 

Tax Saving Investment options Under Section 80C Risk Profile Interest (in %) Guaranteed Returns Lock-in Time (in years)
PPF Risk free 8.1 Yes 15
NSC Risk free 8.1 Yes 5
Tax Saving FDs Risk free 7 – 9 approx Yes 5
ELSS Equity oriented 12 – 15 approx No 3
NPS Equity oriented 8 – 10 approx No Up Till retirement
ULIP Equity oriented 8 -10 approx No 5
Sukanya Samriddhi Yojna Risk free 8.6 Yes 21
SCSS Risk free 8.6 Yes 5

Payments Earning Tax Benefits under Section 80C

  • Life Insurance premium paid during the FY are eligible for deductions. Life Insurance premiums paid any of the family members in case of an HUF are eligible for Section 80C deductions. Children include non-dependent adult children, including a married daughter.
  • Tuition fees paid for a maximum of 2 kids studying in India is allowed for  Section 80C deductions.
  • Repayment of the principal amount of the home loan is eligible for 80c deductions. Deductions are allowed for registration fees, transfer expenses, and stamp duty.

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