“Deductible u/s 80C.”
“Allowed as deduction from Income Tax.”
I am sure you have come across these statements when researching investments and other major expenses.
If you have not studied taxation, chances are, these are all alien for you.
But don’t worry! We are here with yet another post on financial literacy.
P.S. Knowing how your government treats your investments is a major element of financial literacy.
The government has a separate Chapter in the Income Tax Act, which provides for various allowances and deductions from your annual taxable income – which eventually reduces your tax liability.
This is to encourage savings and increasing investments by individuals in dedicated, financially secured investments.
If your money goes into the prescribed arenas, and you show the relevant proof in your Income Tax Return, the government discounts that amount from the income you have earned.
The provisions under Section 80 of the Income Tax prescribe the deductions allowed under multiple sub-sections, each dealing with a separate category.
One of the sections you would have often noticed in insurance and investment-based write-ups and schemes is 80C. That is because this section deals with investments made by individuals and HUFs.
Here is a list of what you can claim as a deduction from your taxable income.
1. LIC premium paid
2. Contribution in PPFs or super annulation funds
3. Investments of up to 5 years in fixed deposits or government bonds
4. Investments in National Savings Certificate
5. Tuition fees paid for up to two children.
6. Housing expenses
a. loan repayment (Principal)
b. Stamp duty, registration fees
7. ELSS Mutual funds eligible for deduction
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Well, just because the government allows you to invest in these with an allowance to reduce your tax by that much, you cannot keep investing to escape paying taxes!
Hence, the government has imposed a restriction of Rs. 1,50,000 on the total amount claimed under this section.
This means, combining your premium, investments in ELSS, housing loan repayment and every element under the provision, you cannot claim a deduction of more than Rs. 1,50,000.
Also read: How to reduce student loan interest?
This is an aspect which taxpayers often ignore when planning their taxes – especially if they are new to earning and paying taxes.
Various instruments have specific durations to hold, so that you can easily claim the amount invested as a deduction.
(Draft another table like this)
Moreover, under PPFs, retirement funds and pension plans, the contribution of the employer as well as the employee is counted, and a straight 10% of it is deducted from your taxable income.
Also, the maximum amount of deduction the New Pension Scheme (NPS) under Section 80CCD is Rs. 50,000, over and above the total limit of Rs. 1,50,000 of Sec 80C.
Which means, you can claim a total deduction of Rs. 2,00,000 under this.
You can only save tax under this section if you opt for the old tax regime.
Earlier this year, the government rolled out a new tax regime, which eliminates these deductions.
Have a rough idea of your total tax liability at the end of the year well before hand, since you would need to hold certain instruments for a specific period before you claim deduction.
Even if you don’t invest the entire amount allowed for deduction in the first year, you are good to go. You can always increase the investment amounts/spendings gradually.
So, how does it work?
Let us say, your total income in a financial year is ₹6,45,000. We take two scenarios – one without deductions and one with deductions.
Scenario A – no deductions under section 80C.
Since there are no deductions, your gross income itself will be the taxable income. With no deductions, it would be best to opt for the new scheme, where the slabs operate differently.
Here is how your income will be calculated based on the slabs under the new scheme:
0-2.5 lakh = NIL
2.5 lakh – 5 lakhs = 5% = 12,500
5 lakh – 7.5 lakh = 10% = 14,500
Total tax liability = 27,000
Scenario B: using deductions u/s 80C
Assuming all your investments and spending allowed under this section total up to ₹ 1.5 lakh, we reduce this amount from your gross income.
So, your taxable is now ₹ 4,95,000.
Here is how your tax liability will be calculated under the old scheme.
0-2.5 lakh = NIL
2.5 lakh –4.95 lakh = 5 % = 14,750
This saves ₹12,250 from your liability at this slab.
The investments and other deductions under section 80C save the same amount of tax as the tax rate applicable to the slab you fall in.
For example, if you fall under the 30% tax bracket, that would be the amount saved.
Before you act on this, there a few points to keep in mind.
1. You can only save tax under this section if you opt for the old tax regime. Earlier this year, the government rolled out a new tax regime, which eliminates these deductions.
Click here to read everything about the new tax regime
2. In case of any capital gains, that part of income cannot be reduced against this section.
3. If you earn less than the minimum taxable amount, i.e., ₹ 2.5 lakh, 80C does not reduce anything because you do not have any tax liability in the first place.
Opting for the old scheme to claim the deductions makes sense only when you see a benefit in your tax liability. Check your liability and compare it under the new tax regime as well as the old one and decide accordingly.