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What is Section 80C? All you need to know

If you pay income tax, there’s one section in the Income Tax Act about which you must be fully aware, and that’s Section 80C. Under this section, you can reduce your taxable income by Rs. 1.5 lakh in a financial year by putting your money in select investments.

You can save a considerable amount of income tax by making Section 80C investments.  For example, if your income is Rs. 10 lakh, you would be paying income tax of around Rs. 1.17 lakh. By investing in Section 80C instruments, you can reduce your taxable income to Rs. 8.5 lakh, and cut your income tax liability down to Rs. 85,800. You will thus be able to save Rs. 31,200 in income tax!

The 2020 Budget offers two options. You can either choose a higher tax rate with deductions, or a lower rate without deductions. If you choose the former, this will be relevant to you.

10 options under Section 80C

Here are 10 of the instruments which qualify for deductions under Section 80C. They differ considerably in risk, returns and maturity. So choose one that suits your needs the best.

  1. Equity Linked Saving Scheme (ELSS):

    ELSS is an equity mutual fund that invests in stocks. It involves higher risk than other Section 80C options, but offers higher returns too. It also has the lowest lock-in period of three years among the various tax saving schemes.
  2. National Pension Scheme (NPS):

    This is mostly for those seeking a safe retirement corpus as well as tax benefits. It is also the only scheme that allows you an additional Rs. 50,000 as deductions under subsection 80CCD(1B). So you can reduce your taxable income by up to Rs. 2 lakh by investing in NPS. This is a pension scheme where your money is locked in till you are 60. Even then, you can only withdraw 60 per cent of your savings; the remaining 40 per cent goes into an annuity account to get pension.
  3. Life Insurance Premiums:

    Premiums paid on life insurance policies are exempt from taxable income up to a limit of Rs. 1.5 lakh. If the policy was issued on or before March 31, 2012, annual premiums up to a maximum of 20% of the sum assured are tax-deductible. For insurance policies issued after that date, annual premiums up to a maximum of 10% of the sum assured are tax-deductible.
  4. Public Provident Fund (PPF):

    PPF is one of the few tax-saving instruments on which you can claim tax benefits on the investment, and on the interest earned as well. Interest rate as of Jan 2021 was 7.1%, and the lock-in period is 15 years.
  5. Five-Year Bank Deposit:

    Most banks offer tax saving fixed deposits which can be claimed as deductions under Section 80C. These have a 5-year lock-in and premature withdrawal is not allowed. Interest earned on this investment is taxable.
  6. Home Loan Principal Repayment:

    The principal amount of a home loan is eligible for deduction provided the construction is complete, and that you do not transfer the property before 5 years after taking possession.
  7. Stamp Duty and Registration Charges for buying property:

    This deduction can only be claimed once the construction is complete and you have legal possession. However, it can be claimed only in the year in which these expenses are incurred.
  8. Sukanya Samriddhi Yojana:

    This is a PPF-like scheme for the girl child. It can be opened by a parent or legal guardian of a girl child who has not reached the age of 10 years for her education or marriage. The accumulated amount can be withdrawn after 21 years from the date of opening or at the beneficiary’s marriage above the legal age of 18.
  9. Senior Citizens Savings Scheme:

    This government scheme is meant for those over 60 and has a five-year maturity period. It offers a good interest rate of 7.4% (as of Jan 2021). Rate of interest is defined by Ministry of Finance from time to time.
  10. National Savings Certificate:

    While investments in NSC are tax-deductible, interest earned on these instruments are taxable. These have a five-year maturity period.

Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

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