Tax Benefits under Section 80C of Income Tax Act

In a bid to entice citizens to invest in various avenues, the Government allows deductions while computing Income Tax. The most popular ones are covered under Section 80C.

An individual's gross income is calculated by adding the income he earns from various sources. Deductions, as the name suggests, are certain expenditures that can be subtracted from the gross income. This reduces the total tax liability of the individual.

The main intention for providing tax deductions is to reduce the tax liability of an individual. Moreover, certain deductions are provided in order to encourage one to save and invest more. Such a deduction is provided under Section 80C.

Section 80C

Section 80C of the Income Tax Act, 1961 includes a large spectrum of eligible items for deduction. Most of these items are in relation to the investments that one can make.

In order to ensure that every individual understands these items and get the most benefit out of it, the Income Tax Act has simplified it by categorising these items under various sub-sections. Let’s have a look at them.

Section 80C: Provident fund investments like EPF and PPF, ELSS, payment towards life insurance premium and principal repayment of housing loan, senior citizen savings scheme, etc.

Section 80 CCC: Payment towards mutual funds and pension plans.

Section 80 CCD(1): Payment towards government-backed schemes.

Section 80 CCD (1B): NPS investments of up to ₹50,000.

Section 80 CCD (2): Employer’s contribution towards NPS.

Deductions Under 80C

Now that we have a brief idea of the subsections, let’s look into them in detail. But let us make it clear that the benefits under this section can be availed only by individuals and Hindu Undivided Family (HUF). Here’re some of them:

a. Life Insurance Premium

Life insurance is one of the most crucial instruments that one is looking for. This section provides a deduction in respect of any premium paid towards life insurance policies. The policy could be for self, spouse, dependent, children, etc.  

b. Unit Linked Insurance Plans (ULIPs)

Interest Rate: 8%-10% (not fixed)

Lock-in period: 5 years.

If you aren’t already aware, ULIPs are a modified and better version of endowment plans. ULIPs did face some criticism initially but are now preferred over term life insurance policies. 

c. Tax-Saving FD

Interest rate: 7%-8% (not fixed)

Lock-in period: 5 years.

This is a special scheme provided by banks and post offices. It is to be noted that, though the contribution towards this scheme is deductible, the returns earned attract tax liability.

d. National Savings Certificate (NSC)

Interest Rate: ~7.7%

Lock-in period: 5 years

One of the safest investment avenues as the government of India backs it. The best part about this is that the investor only avails the deduction of ₹1,50,000, but the interest receivable is not subject to TDS.

How can you invest? Well, investments in national savings certificate are to be made through post offices. A resident Indian can visit a post office, fill in the required application, buy the certificate, and post certain documentation.

Bonus- one can avail loans against their NSC certificates.

e. Equity Linked Savings Scheme (ELSS)

 Interest rate: 12%-15% (not fixed)

 Lock-in period: 3 years

As the name suggests, it includes some proportion of equity, and therefore the returns on this scheme fluctuate with market changes. ELSS is the only kind of mutual fund that is covered under the ambit of Section 80. So if you are looking to invest in a mutual fund but also want a tax exemption, ELSS must not be ignored.

f. Home Loan

If you have a housing loan in your balance sheet’s liabilities, this section provides relief for the principal’s repayment. The interest payable is not included, though. Sounds vague? Worry not! Section 80C offers clear instructions with regards to the amount eligible for deduction.

1. The construction of the house must be completed to avail of this exemption.

2. The property under question must not be transferred within five years of possession of the property.

3. If the property is transferred after the stipulated period of 5 years, any amount claimed as a tax deduction will attract a tax liability in the year of such transfer.

g. Sukanya Samriddhi Yojana

Interest rate: 8.2%

Lock-in period: Till the girl turns 21 years of age.

There is an exception for the lock-in period. Partial withdrawal is allowed when the girl turns 18.

This scheme was introduced in 2015 focused on meeting the financial requirements of a girl child’s education and marriage. Parents or legal guardians of a girl child aged less than ten years can invest in this scheme and avail of the benefits. The maximum limit is two girls, with the exception of twin girls.

h. Public Provident Funds (PPF)

Interest rate: 7.1%

Lock-in period: 15 years

Available to all Indian citizens either on their own name or on behalf of a minor, contribution to PPF is eligible for deduction under section 80C. If one opens two accounts, one on their own name and the other on behalf of a minor, the combined deduction allowed is ₹1,50,000.

g. Employee Provident Fund (EPF)

This section allows a deduction of any amount, including interest receivable on the contribution made towards EPF, subject to a condition that the employee continues his service for a minimum period of 5 years. Interest rate is 8.25% for FY24.

h. Infrastructure Bonds

These long-term government-backed securities also fall under the ambit of this section’s deductions. The only condition to consider is that the exemption can be availed only for investments above ₹20,000.

i. Senior Citizen’s Savings Scheme

Interest rate: 8.20%

Lock-in period: 5 years.

Backed by the government, this senior citizen savings scheme can be availed by a senior citizen with a minimum investment of ₹1,000.

The Bottom Line 

The deductions, and even in general, the Income Tax Act is quite complex as it has to cater to the needs of a large population. If you can understand the complexities, well and good. Otherwise, it’s advisable to consult a professional who can help you manage your taxes better.

Need more insight into managing your taxes right? Check out a detailed analysis on how to do your taxes right and make sure that nothing is amiss while you file your ITR for the year.

Invest wisely!