Deductions Under Section 80C of Income Tax Act

Last Updated on Sep 7, 2017

Section 80C is an important section for taxpayers, as this section enables them to reduce their taxable income and thus save on taxes every financial year.

What is deduction under section 80C?

This section comprises various investments and expenses that are eligible for a tax deduction. A taxpayer can claim maximum tax deduction of Rs1.5 lakh for a particular financial year (FY) from his/her taxable income through investments made by him/her under section 80C of the Income Tax Act, 1961.

Who are eligible for deductions under 80C?

An individual or a Hindu Undivided Family (HUF) is eligible for claiming tax deduction under section 80C.

Investments eligible for deductions under Section 80C of Income Tax Act

The below mentioned investments are eligible for deductions u/s 80C, an investor can choose to either invest in all the available tax-saving instruments or in some of them:

Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF)

EPF is a retirement benefit scheme that is available to all salaried employees. Employer and employee both have to contribute equally (12% of basic salary) to provident fund account of an employee. An employee can contribute a higher sum of money through voluntary contributions (VPF). Employee’s own contribution to provident fund qualifies for 80C deduction.

  • Eligibility: If the employee’s basic salary exceeds Rs15,000 per month, he has an option to join the scheme, otherwise he/she has to compulsorily contribute towards provident fund.

  • Liquidity: A person cannot withdraw the PF balance till he/she continues to work except for some exception reasons (flat, construction, marriage/education of children etc.). In case, he/she quits the job and does not take up employment within two months with an employer covered by PF Act, then he/she can withdraw the entire balance.

  • Rate of Interest (ROI):The current rate of interest is 8.65% p.a. to be realigned on quarterly basis.

  • Investment Limit: Both employer and employee has to contribute minimum 12% of Basic Pay + D.A. Employee can voluntarily increase his own contribution up to 100% of Basic Pay + D.A.

  • Tax Treatment: The EPF falls under EEE (Exempt, Exempt, Exempt) category. Employer’s contribution to PF account up to 12% of salary is tax exempt. Employee’s own contribution qualify for deduction under section 80C. Entire accumulated balance (including interest) of PF is tax exempt if withdrawn after continuous service of 5 years

Public Provident Fund (PPF)

PPF scheme is a long term investment option backed by Government of India.

  • Eligibility: PPF account can be opened by Resident Indian individuals either in their own name or in the name of minor child. It can be opened by both salaried and non-salaried individuals. An HUF cannot open a PPF account.

  • Liquidity: Maturity period of a PPF account is 15 years, but can be further extended by 5 yeaRs Partial withdrawals are allowed after 7 yeaRs Premature closure is allowed after 5 years

  • Rate of Interest (ROI): Current interest rate is 7.9% p.a. (compounded yearly) to be realigned on quarterly basis.

  • Investment Limit: Minimum and maximum investment limit is Rs500 and Rs1.5 lakh respectively.

  • Tax Treatment: PPF qualifies for EEE (Exempt, exempt, exempt) category.

National Savings Certificate (NSC)

NSC is a postal department’s saving scheme ranked as ‘highly secured’ in the class of Investments.

  • Eligibility: Non-residents, Trust and HUF cannot invest in this scheme.

  • Liquidity: NSC comes with a lock-in period of 5 & 10 years

  • Rate of Interest (ROI): Interest rate is 7.9% compounded annually for 5 year NSC VIII Issue.

  • Investment Limit: Minimum investment limit is Rs100. There is no maximum investment limit.

  • Tax Treatment: Interest accrued on the amount invested in NSC is taxable but it is counted as fresh investment and hence qualifies for 80C deduction. The investment is eligible for deduction under 80C and maturity amount is tax-free.

5 Year Post Office Time Deposit

5 year fixed deposits can be opened with any branch of Indian Post Office.

  • Eligibility: Account may be opened by any individual.

  • Liquidity: Maturity period is 5 years

  • Rate of Interest (ROI): Rate of interest is 7.7% calculated quarterly and payable annually.

  • Investment Limit: Minimum investment limit is Rs200. There is no upper limit to investment.

  • Tax Treatment: Interest earned under this scheme is fully taxable. The investment is eligible for deduction under 80C and maturity amount is exempt from tax.

5 year Tax Saving Bank Fixed Deposits (FD)

As the name suggests, it is a type of fixed deposit investment.

  • Eligibility: All resident individuals can open account. Senior citizens above the age of 60 years are also eligible to open a tax saver fixed deposit account.

  • Liquidity: Maturity period is 5 years A person can’t break this FD.

  • Rate of Interest (ROI): The interest rates vary from time to time. You can check the latest interest rates with the respective bank where you intend to invest.

  • Investment Limit: Minimum investment limit is Rs1000. No upper limit for investment.

  • Tax Treatment: Interest income is taxable on maturity. The investment qualifies for deduction under 80C and maturity amount is exempt from tax.

Equity Linked Savings Scheme (ELSS)

ELSS is an open-ended Equity Mutual Fund that helps save tax, and also provides an opportunity to grow money at a comparatively faster rate. ELSS provides inflation-adjusted growth in the long-term.

  • Eligibility: Anyone with a Demat account can invest in ELSS.

  • Liquidity: Minimum lock-in period for this scheme is 3 years

  • Rate of Interest (ROI): As the return on investment is directly linked to stock market performance, in the long run ELSS has wide potential to provide you the best return on your investments. It is more suitable for the person with appetite to take a bit more risk due to market factors

  • Investment Limit: The minimum investment limit is Rs500. There is no upper limit for investment in this scheme.

  • Tax Treatment: ELSS falls under EEE category.

Unit Linked Insurance Plan (ULIP)

Unit Linked Insurance Plan is a life insurance product that is a combination of investment and insurance. That means a portion of the money invested in ULIPs will be used to provide risk cover and the balance amount will be invested in the stock market.

  • Eligibility: An investor can buy ULIP for self or spouse or child. Child can be married or unmarried, dependent or independent and minor or major.

  • Liquidity: Partial withdrawals are allowed after 5 years

  • Rate of Interest (ROI): Rate varies because it is market-linked.

  • Investment Limit: An investor can invest an amount higher than Rs1.5 lakh but deduction will be allowed only up to Rs1.5 lakhs.

  • Tax Treatment: Investment and withdrawals & maturity amount are tax-free.

Senior Citizens Savings Scheme (SCSS)

As the name suggests, this scheme is for senior citizens.

  • Eligibility: An individual aged 60 years or more is allowed to open the account. An individual of the age of 55 years or more but less than 60 years, who has retired under VRS (Voluntary Retirement Scheme) is also permitted to open account if he/she satisfies 2 conditions. First, the account is opened within 1 month of receipt of retirement benefits. Second, investment amount should not exceed the amount of retirement benefits.

  • Liquidity: Maturity period is 5 years The account can be extended for 3 more years after maturity. Premature withdrawal after 1 year is allowed on deduction of an amount equal to 1.5% of the deposit and after 2 years by deducting 1% of the deposit.

  • Rate of Interest (ROI): Interest rate offered is 8.4% per annum which is paid on quarterly basis.

  • Investment Limit: Minimum and maximum investment limit is Rs1,000 and Rs15 lakh respectively.

  • Tax Treatment: Interest income is taxable and taxes will be deducted at source if it is more than Rs10,000 p.a. Maturity amount is exempt from tax.

Sukanya Samriddhi Scheme

Sukanya Samriddhi Scheme is one of the best investment options available today.

  • Eligibility: Parents/guardians can open account in the name of a girl child till she attains the age of 10 yeaRs Maximum of two accounts can be opened by natural or legal guardian for 2 different girls. Account can be opened at public sector banks and post offices.

  • Liquidity: Deposit should be made every year till the end of 14 years from the year of opening the account. Partial withdrawal are allowed up to 50% of the balance lying in the account as at the end of previous financial year for the purpose of higher education, marriage after attaining the age of 18 years Maturity period is 21 years post opening of the account.

  • Rate of Interest (ROI): Rate of interest currently being offered is 8.4%, compounded annually.

  • Investment Limit: Minimum & maximum investment limit is Rs1,000 & Rs1.5 lakh p.a. respectively.

  • Tax Treatment: Sukanya Samriddhi Scheme comes under EEE category.

Investments u/s 80C Rate of Interest Lock-in Period Guaranteed Returns Risk-Profile
ELSS Market-linked 3 yrs No Risky
PPF 7.9% 5-15 yrs Yes Non-risky
NSC 7.9% for 5 year 5 yrs Yes Non-risky
FD Varies from time to time (7% SBI) 5 yrs Yes Non-risky
ULIP Market-linked 5 yrs No Risky
Sukanya Samriddhi Scheme 8.4% 21 yrs Yes Non-risky
SCSS 8.4% 5 yrs Yes Non-risky

Other Investments eligible for deductions under section 80C

If an individual has exhausted the above mentioned tax-saving instruments and still, has not reached the Rs1.5 lakh limit, then that individual can invest his/her money in the below mentioned tax-saving instruments:

Infrastructure Bonds

Infrastructure companies such as Infrastructure Development Finance Company and India Infrastructure Finance Company issue infrastructure bonds, also popularly called infra bonds that are approved by government. Amount invested in these bonds can be claimed as deduction.

NABARD Rural Bonds

NABARD (National Bank for Agriculture and Rural Development) issues two types of bonds. One is NABARD Rural Bonds and the other one is Bhavishya Nirman Bonds. Investments made in NABARD Rural Bonds are eligible for tax deductions.

Expenses eligible for deductions under 80C

Life Insurance Premium

In general, you cannot withdraw the PF balance till you continue to work.

  • Eligibility: All individuals and HUF can invest in insurance policy.

  • Liquidity: If you are invested for minimum 2 years then the withdrawals will be exempt from tax u/s 10 but, generally you will have to pay the premium for minimum 3 years before you can surrender it.

  • Rate of Interest: Average return on the life insurance policies ranges between 4.5 - 6%.

  • Investment Limit: Minimum investment amount depends on your entry age and life cover. No upper limit for investment.

  • Tax Treatment: Investment is tax-free. Maturity amount is exempt from tax u/s 10(10D).

Children’s Tuition Fees

Tuition fee of full-time education of children is eligible for deduction. Conditions for eligibility:

  • The tax deduction on tuition fee is available for two children only.

  • The development fee/capitation fee is not included under this section.

  • The education institute should be situated in India.

Repayment of Principal for Home Loan

The principal repayment of a home loan either to buy a home or to build a residential property qualifies for tax deduction.

Stamp Duty and Registration Charges for House Property

Apart from the principal repayment of home loan, expenses incurred on stamp duty and registration charges for purchase of house property also qualify for tax deduction.

Can NRIs claim tax-saving deduction u/s 80C?

Just like Indian residents, Non-resident Indians (NRIs) can also avail equal tax benefits on premiums paid on life insurance, pension schemes, etc.

When to make investments under Section 80C?

There are many investors, who start to make investments just near the end of a financial year. This is a wrong decision on the part of the investor. It has two implications:
Firstly, the investor will end up investing money without proper planning.
Secondly, the investor stands to lose the interest/appreciation for the entire year.
Therefore, the investor should evaluate different investment option carefully before taking investments decision and should start investing right from the beginning of a financial year i.e. from the month of April. This will have two implications:
Firstly, it will enable the investor to take informed decisions.
Secondly, the investor will earn the interest on investments for the entire year from April to March.

Frequently Asked Questions (FAQs)

Does the limit of Rs 1.5 lakh imply that I can invest Rs 1.5 lakh in more than one tax-saving instrument for tax benefits?

Though you can invest in different schemes maximum tax benefit that can be claimed is restricted to Rs 1.5 lakh on all the above mentioned tax-saving investments taken together.

Does investment made in National Pension System (NPS) qualify for deduction u/s 80C?

NPS is a scheme initiated by the Government of India. Investments to the tune of Rs 1.5 lakh will be eligible for deduction u/s 80C. An additional amount of Rs 50,000 can be invested in NPS for tax deduction u/s 80CCD (1B). Proceed obtained from NPS is partially taxable. NPS has no guaranteed return.

When investing in provident funds, can I claim tax deduction on investments made in both EPF and PPF?

If you are investing in EPF as well as in PPF simultaneously, then you can claim tax deduction on both the investments under section 80C subject to overall limit of Rs 1.5 lakh.

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