Income Tax deductions under Section 80C & 80D

 Taxes are an integral component in our country, with them accounting for a major portion of the income earned by the government, income which is utilized to provide certain basic provisions to citizens. Individuals who earn more than a certain amount are expected to pay taxes, as per the existing tax slabs. While these taxes can be harsh on the bank balance of a taxpayer, the government also provides certain provisions wherein one can save tax.

Tax deduction helps in reducing your taxable income. It decreases your overall tax liabilities and helps you save tax. However, depending on the type of tax deduction you claim, the amount of deduction varies. You can claim tax deduction for amounts spent in tuition fees, medical expenses and charitable contributions. Also, you can invest in various schemes such as life insurance plans, retirement savings schemes, and national savings schemes etc. to get tax deductions. The government of India offers tax exemptions for various expenses incurred in different activities to encourage individuals and commercial institutions take part in activities having social benefits.

A number of day-to-day expenditures qualify for deductions, with information about them being crucial to help us save money. Tax deduction can be claimed on money spent for education, medical expenses, charitable contributions, investments in insurance, retirement schemes, etc. These deductions have been put in place to encourage members of the society to participate in certain useful activities, helping everyone involved in the process.

we will glance through various investment avenues available under Section 80C and 80D of “The Income-tax Act, 1961”:

A) Section 80C of the Income Tax Act provides provisions for tax deductions on a number of payments, with both individuals and Hindu Undivided Families eligible for these deductions. Eligible taxpayers can claim deductions to the tune of `1.5 lakh per year under Section 80C, with this amount being a combination of deductions available under Sections 80C & 80CCC.

Some of the popular investments which are eligible for this tax deduction are mentioned below:

 Payment made towards Life Insurance policies (for self, spouse or children).

 Payment made towards a superannuation/provident fund.

 Tuition fees paid to educate a maximum of two children.

 Payments made towards construction or purchase of a residential property.

 Payments issued towards a fixed deposit with a minimum tenure of 5 years.

This section provides for a number of additional deductions like investment in mutual funds, senior citizens saving schemes etc.

Subsections under Section 80C:

Section 80C has an exhaustive list of deductions an individual is eligible for, which have led to the creation of suitable sub-sections to provide clarity to taxpayers.

B) Section 80 CCC of the Income Tax Act provides deduction to an Individual for any amount paid or deposited in any annuity plan of LIC or any other insurer. The plan must be for receiving pension from a fund referred to in Section 10(23AAB). If the annuity is surrendered before the date of its maturity, the surrender value is taxable in the year of receipt.

Section 80 CCD: Deduction for Contribution to Pension Account

 Employee's contribution – Section 80CCD(1): Allowed to an Individual who makes deposits to his/her Pension account. Maximum deduction allowed is 10% of salary (in case of taxpayer being an employee) or 10% of gross total income (in case of tax payer being self-employed) or `1,00,000 whichever is less. The limit of `1,00,000 has been increased to `1,50,000 starting financial year 2015-16

(assessment year 2016-17).

 Deduction for self-contribution to NPS - Section 80CCD(1B): A new section 80CCD(1B) has been introduced for additional deduction for amount deposited by a taxpayer to their NPS account . Contributions to Atal Pension Yojana are also eligible. Deduction is allowed on contribution up to `50,000.

 Employer's contribution – Section 80CCD(2): Deduction is allowed for employer's contribution to employee’s pension account up to 10% of the salary of the employee. There is no monetary ceiling on this deduction.

C) Tax Deductions under Section 80D

Section 80D of the Income Tax Act permits deductions on amounts spent by an individual towards the premium of a health insurance policy.

This includes payment made on behalf of a spouse, children, parents or self to a Central Government health plan. An amount of `25,000 can be claimed as deduction when paid towards the insurance for spouse, dependent children or self, while this amount is `30,000 if the person is over the age of 60 years. Both individuals and Hindu Undivided Families are eligible for this deduction, subject to the payment being made in modes other than cash.

Subsections under Section 80D:

Section 80D is further subdivided into two sub-sections, offering clarity on the benefits available to taxpayers.

D) Section 80DD provides provisions for tax deductions in two cases, with the permitted deduction being `75,000 for normal disability and `1.25 lakh if it is a severe disability. This deduction can be claimed in case of the following expenditures.

 On payments made towards the treatment of dependents with disability.

 Amount paid as premium to purchase or maintain an insurance policy for such dependent.

E) Section 80DDB can be utilised by HUFs and resident individuals and provides provisions for deductions on the expense incurred by an individual/family towards medical treatment of certain diseases. The permitted deduction is limited to `40,000, which can be increased to `60,000 if the treatment is for a senior citizen and `80,000 in case of very senior citizen [w.e.f. assessment year 2016-17]). With effect from assessment year 2016-17, the taxpayer shall be required to obtain a prescription from a specialist doctor (not necessarily from a doctor working in a Government hospital) for availing this deduction.

Investments which qualifies for deduction u/s. 80C

Under this section, you can invest a maximum of `1.50 lakh and if you are in the highest tax bracket of 30%, you save a tax of `46,350. The various investment options under this section include:

a) Public Provident Fund (PPF): Interest earned is fully exempt from tax without any limit. Annual contributions qualify for tax rebate under Section 80C of income tax. Contributions to PPF accounts of the spouse and children are also eligible for tax deduction. The highest amount that can be deposited is `1,50,000. Tax bracket for PPF is EEE (i.e. Exempt, Exempt, Exempt). So contribution is exempted under 80C, Interest earned is tax exempted and withdrawal is also tax exempted.

b) Life Insurance Premiums: Any amount that you pay towards Life Insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that life insurance premium paid by you for your parents (father / mother / both) or your in-laws is not eligible for deduction under Section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included. Life Insurance Policy issued by all Insurance companies recognized by IRDA enjoys these tax benefits.

c) Equity Linked Savings Scheme (ELSS): There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme (ELSS). The investments that you make in ELSS are eligible for deduction under Section 80C. ELSS of mutual funds are diversified equity funds that have a lock-in period of three years and provide tax benefit. Since a major portion of the corpus is invested in equities / equity stock markets, the earning potential is higher (though at a higher risk) as compared to other tax saving investments. Investors can invest up to Rs. 1,50,000 in an ELSS fund and deduct the investment from their taxable income u/s 80C of Income Tax Act, thereby effectively reducing their tax liability. Long-term capital gains and dividends received on these investments are tax-free in the hands of the investor as per the current tax laws.

d) Provident Fund (PF) & Voluntary Provident Fund (VPF): PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF).

e) Home Loan Principal Repayment: The Equated Monthly Installment (EMI) that you pay every month to repay your home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Section 80C. Even the interest component can save you significant income tax – but that would be under Section 24 of the Income Tax Act.

f) Stamp Duty and Registration Charges for a home: The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under Section 80C in the year of purchase of the house.

g) National Savings Certificate (NSC): National Savings Certificates popularly known as NSC is a saving bond, primarily used for small saving and income tax saving investment in India, part of the Postal savings system of Indian Postal Service (India Post). These can be purchased from a post office by an adult in his own name or in the name of a minor, a trust, two adults jointly. These are issued for five and ten year maturity and can be pledged to banks for availing loans. The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for Section 80C deduction.

h) Pension Funds – Section 80CCC: Sec 80CCC stipulates that an investment in pension funds is eligible for deduction from your income.

Section 80CCC investment limit is clubbed with the limit of Section 80C – it means that the total deduction available for 80CCC and 80C is Rs. 1.50 Lakh. This also means that your investment in pension funds upto `1.50 Lakh can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC cannot exceed `1.50 Lakh.

i) 5-Year bank Fixed Deposits (FDs): Tax-saving Fixed Deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for Section 80C deduction.

j) Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list, Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. An individual who has attained the age of 60 years or above on the date of opening of a/c or an individual who attained the age of 55 years or more and who has retired under VRS/SPL.

VRS, can open an account individually or jointly with spouse. A retired personnel of Defence Services (excluding Civil Defence Employees) can subscribe to the scheme irrespective of the age limit subject to fulfilment of specificed conditions. Account can be closed after expiry of 5 years from the date of opening of account and account can be extended for next 3 years. Premature closure is permissible after one year subject to certain conditions. Deposits qualify for deduction u/s 80-C of Income Tax Act on the deposits made in new accounts opened on or after 8th December 2007.

Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest. Interest income is chargeable to tax.

k) 5-Year Post Office Time Deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Deposits in 5 year time deposit qualify for deduction under section 80-C of Income Tax Act on the deposits made in new accounts opened on or after 8th December 2007. The Interest is entirely taxable.

l) NABARD rural bonds: The Finance Act, 2007 inserted clause (xxii) in sub-section (2) of section 80C of the Income-tax Act to provide that deposits made in bonds issued by the National Bank for Agriculture and Rural Development, as the Central Government may, by notification in the Official Gazette, specify in this behalf, shall be eligible for deduction under the said section. There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.

m) Unit Linked Insurance Plan: ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of equity investments.

They have attracted the attention of investors and tax-savers not only because they help us save tax but they also perform well to give decent returns in the long-term. You are required to make your first contribution along with the application form for opening the account to any POP - SP. 

n) Tuition Fees: Any sum paid as tuition fees to any university/college/educational institution in India for full time education. Nowadays most of income tax payee have to incur quite high payments towards the education fees of their children. The expenditure incurred on education fees is eligible for a deduction under Income Tax Act, So, if you are incurring expenditure towards education fee of your children, please check whether these are eligible for deduction under the IT Act.