Section 80C of Income Tax Act for tax exemption (Old Regime) – What are the limits, components, list of deductions under Section 80C for FY 2020-21? What are the various tax benefits under Section 80C for AY 2021-22?
The most popular Tax Saving instruments are the deductions under Section 80C of the Income Tax Act. Section 80C came into force on 1st April 2006, replacing the earlier Section 88 of the Income Tax Act 1961. The Section 80CCC for Pension contribution has also been merged with Section 80C.
Tax Benefits under Section 80C
There are many investments which qualify for deductions under Section 80C of the Act. Also, there are various expenditures which come under Section 80C. The overall tax benefits under Section 80C is capped at Rs. 1.5 Lakh. The limit was increased from 1 Lakh to 1.5 Lakhs in FY budget 2014-2015.
Suppose your taxable income is Rs. 8 Lakh. And, you invest Rs. 1.5 Lakh in various investments which qualify under Section 80C. In this case, your taxable income will be reduced to Rs. 6.5 Lakh. This is the main advantage of Section 80C.
Deductions Under Section 80C For FY 2020-21
What Are The Investments Under 80C? Does PF come under 80C?
Provident Fund (PF) and Voluntary Provident Fund (VPF): The amount deducted from your salary every month towards Employees’ Provident Fund will qualify for deduction under Section 80C. If you have opted for Voluntary Provident Fund (VPF), such contribution will also qualify for deduction under Section 80C.
Public Provident Fund (PPF): It is the most popular retirement planning tool that comes under Section 80C. This is a 15-year long debt instrument with an option to extend the term after 15 years. This is a government scheme with tax-free status on all the 3 stages (EEE). The total amount accumulated along with interest is tax-free on withdrawal.
You can extend the PPF account (after 15 years maturity) for a block period of 5 years throughout your life. (With or without contribution.)
National Savings Certificate (NSC): This is another government debt instrument with Section 80C tax benefits which are available for 5 years. Although the interest accrued every year is taxable but it’ll be deemed as reinvested and will qualify for Section 80C.
Life Insurance Premium: The Life Insurance premium paid towards policies for your spouse and children will qualify for deduction under Section 80C. It must be noted that the policies of LIC and private companies are eligible for this. The premium of ULIP policies will also qualify for Section 80C deduction.
Other than term insurance, you should avoid purchasing life insurance policies to save tax under Section 80C.
Also Read: 4 Unusual ways to save tax
Pension Fund: Your contribution towards Pension Fund will also qualify for deduction under Section 80C. It could be any pension policy from Life Insurance companies or Mutual Fund schemes which have been approved. At present, there are only 2 Mutual Fund schemes which qualify for deduction under Section 80C. They are – UTI Retirement Benefit Pension Fund and Templeton India Pension Plan. Both these schemes have lock-in period of 5 years.
Does Mutual Fund Investment Come Under Section 80C?
Equity Linked Savings Scheme Mutual Funds: You can also invest in tax saving mutual funds, popularly known as ELSS. These funds will allow you to enjoy tax benefits with an equity investment. You can invest in select Mutual Fund schemes designated under ELSS where there is a lock-in period of 3 years. Such schemes offer much higher returns, especially if you keep your money invested for a longer term.
Fixed Deposit Limits
5-Year Bank Deposits: Scheduled banks offer 5-Year long Fixed Deposits with Section 80C tax benefits where the interest is taxable.
5-Year Post Office Time Deposits: The 5-Year Post Office Time Deposit offers tax benefits under Section 80C. Here, the interest is taxable.
Senior Citizens Savings Scheme (SCSS): This scheme offers Section 80C tax benefits to senior citizens. However, the interest is payable on a quarterly basis and is taxable. The current interest rate is 7.40% in SCSS.
Also Read: Deduction under Section 80D
Section 80C Tax Benefits – Home Loan/ Stamp Duty/ Tuition Fee
Apart from the above-mentioned investments, certain other expenses also qualify for Section 80C tax benefits. They are as follows:
Home Loan Principal Repayment: When you are repaying your Home Loan through EMI, it contains both Principal and Interest. Interest on Home Loan can give you tax deduction under Section 24. But the Principal repayment you make will qualify for Section 80C tax benefits.
Stamp Duty and Registration Charges: The amount you spend on Stamp Duty and Registration while buying a house will qualify for Section 80C tax benefits. (In the year of purchase.)
Child Education Expenses (Tution Fee): The amount spent on children’s education will also qualify for Section 80C tax benefits. Only tuition fee is eligible for tax deduction under Section 80C.
Where to invest for good returns under Section 80C?
The investment for Section 80C tax benefits is Rs. 1.5 Lakh in a year. The mandatory PF and Children’s Education expenses itself would be enough for the majority. But, if there is a shortage, it would be better to go for ELSS under SIP mode. This option will allow you to add equity to your portfolio.
The other option is to open a PPF account because of its tax-free status on all the 3 stages (EEE).
Above all, the tax deductions under Section 80C are allowed if you have opted for the old Tax regime.