Section 80C

Demystifying Section 80C

To the taxpayer, Section 80C is the most important provision / section of the Income Tax. It allows you to make specific investments and exempts that amount from being included in total taxable income.

What is Section 80C?

Under the Income Tax Act, Section 80C defines a series of investments and expenses to help the taxpayer reduce his tax outgo.

Does Section 80C have a limit?

Yes, the section defines an annual limit of Rs one lakh and fifty thousand (Rs 1,50,000) across the investments and expenses. The limit has been raised from Rs 1,00,000 to Rs 1,50,000 in the Union Budget 2014.

What are the eligible investments under the section?

The key investments defined by the section include:

·        Life insurance – this includes all forms of life insurance plans like endowment, term plans, money back

·        ULIPs or unit-linked insurance plans – another form of life insurance where investments are linked to markets

·        Tax-saving mutual funds or equity-linked saving schemes (ELSS)

·        PPF or Public Provident Fund

·        NPS or New Pension Scheme

·        National Savings Certificate (NSC)

·        Fixed deposits of 5-Yr term

How Section 80C works – an illustration

Let’s take Rahul – who has gross income of Rs 600,000 (Rs 6 lakhs). He invests in various instruments with Section 80C benefits. He maximizes the available investment limit of Rs 150,000.

This is how his income is impacted:

Gross Total Income (Rs)	600,000
Deductions under Section 80C (Rs)	150,000
Net Taxable Income (Rs)	450,000
Tax on Total Income (Rs)	20,000
Less: Rebate under Section 87A(Rs)	2,000
Add: 3% education cess (Rs)	540
Total tax payable (Rs)	18,540

Rahul’s income has revised lower from Rs 600,000 to Rs 450,000 thanks to the deductions under Section 80C. His tax outgo is Rs 18,540.

Had Rahul not invested in the Section 80C related options, he would have been taxed at the Gross Total Income of Rs 600,000. His tax outgo (inclusive of education cess) would have been Rs 46,350.

Effectively, Rahul’s tax liability has reduced from Rs 46,350 to Rs 18,540 thanks to Section 80C.

Is Section 80C all about tax-saving?

Tax-saving and more. The section offers individuals the opportunity to invest towards financial goals and claim a tax benefit in the process. It allows them to marry tax-planning with financial planning, something that no other section can claim to achieve.