PROTECTING YOUR INCOME FORM TAX: A BRIEF GUIDE TO SECTION 80C OF THE INCOME TAX ACT

25 Sep 2020

We all know that paying taxes is essential as it contributes to the country’s growth and prosperity. However, most of us like to look for options that can help us reduce our tax liability. The Income Tax has quite a few provisions that can help you save tax; the most popular is Section 80C of the Income Tax Act.

What is Section 80C?

Section 80C of the Income Tax Act may help you reduce your tax burden by allowing a deduction from the total taxable income earned in a financial year. The maximum amount of deduction allowed under this Section is Rs. 150,000 combined in all instruments put together.

In the union budget of 2020, the Indian Government has proposed some changes in the taxation scheme. Here is the comparison between the New and Old Tax Regime. 

 

     



 

Income (In Rs.)     

     Tax rates (%) as per Old Tax Regime                                   Age >=80 yearsTax rates (%) in New Tax Regime (Devoid of exemptions and deductions)     
 

      

Age <60 years Age >=60 &<80 years Age >=80 years
up to 2.5 lakh Nil Nil Nil Nil
2.5 to 3 lakh 5 Nil Nil 5
3 to 5 lakh 5 5 Nil 5
5 to 7.5 lakh 20 20 20 10
7.5 to 10 lakh 20 20 20 15
10 to 12.5 lakh 30 30 30 20
12.5 to 15 lakh 30 30 30 25
Above 15 lakh 30 30 30 30


*The tax calculated above will be subject to an applicable surcharge and 4% Health & Education Cess.

In the New Tax Regime, the income tax rates for the income group below 15 lakhs has been reduced. However, the new tax rates will be applicable after you give up exemptions and deductions provisioned under the Income-tax Act, 1961.

If you opt for New Tax Regime, you will have to give away exemptions like Leave Travel Allowance (LTA), House Rent Allowance (HRA), and so on. Also, deductions available under Section 80 will go away. You can only claim for deduction under Section 80CCD (2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for new employment].

Not only that, Standard Deduction under Section 16 [which is currently Rs 50,000] for salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed.

 

The benefits under this section 80C are available for individual taxpayers and HUF. Some of the popular investments and payments eligible for deduction under Section 80C are discussed below:

Life Insurance Premium: Life insurance premiums that are paid for policies for you, spouse, and children are eligible for deductions u/s 80C. Any amount paid as premium by you for your parents or in-laws is not eligible for deduction. If you have more than one policy, then the premium for all the policies can be included.

Equity Linked Savings Scheme (ELSS): Special mutual fund schemes are available for tax saving. The investments made in these schemes also qualify for deduction from the total earnings in a year. ELSS has a lock-in period of 3 years, which is the lowest among all the options available under section 80C.      

Repayment of Home Loan Principal: The component of your home loan EMI that goes towards repayment of the principal amount is reduced from the total income as per the provisions of Section 80 C. For availing this benefit, the construction of the property should be complete.

Public Provident Fund: Contributions made to the Public Provident Fund (PPF) also qualify for deductions. The amount invested in the PPF has a lock-in for 15 years, and partial withdrawal is allowed after 7 years.

National Savings Certificate: Nationals Savings Certificates are a popular tax-saving instrument. The interest earned on them is cumulative and taxable. However, if it is re-invested, then that amount is also eligible for deduction under section 80C.

Sukanya Samriddhi Yojana: This is a special scheme for the girl child, and investments made in this scheme also qualify as a deduction under Section 80C. Under the scheme, you can open an account for your minor daughter till the age of 10; the account can be opened for a maximum of two daughters.

Senior Citizens Savings Scheme: Investments made in the Senior Citizens Savings Scheme also qualify for the deduction. This scheme is for senior citizens and has a tenure of 5 years; those who have taken the Voluntary Retirement Scheme can start investing at the age of 55.

Stamp Duty and Registration Charges: These charges paid while buying a house can also be claimed as a deduction, but it can be claimed only if the property construction is completed and you have taken possession of the house.

Conclusion

ELSS investments help you realize equity-linked gains while providing tax benefits under Section 80C of Income Tax Act, 1961. Choose the investment route, whether lump-sum of SIP, based on your experience, current financial situation as well as risk-taking appetite. You can use the following Wealth Builder Calculator for your financial planning or seek advice by getting in touch with us.

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© Kotak Mutual Fund.2022
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
© Kotak Mutual Fund.2022
Mutual fund investments are subject to market risks, read all scheme related documents carefully.