Every year most of us struggle to save taxes. While most of us have an idea about commonly known options but tax saving can be challenging for a young newly recruited employee.
The most widely used option to save income tax is section 80C of the Income Tax Act. As per this section, if an individual or Hindu Undivided Families (HUFs) invests in or spends on specified avenues then up to Rs 1.5 lakh, as per the current laws, of this investment/expenditure can be claimed as a deduction from gross total income before calculating tax payable on it in a financial year. The deduction can be claimed only from income in the financial year in which the specified investment/expenditure can be claimed as a deduction from gross total income before calculating tax payable on it in a financial year. The deduction can be claimed only from income in the financial year in which the specified investment/expenditure is made.
By claiming this deduction, a person can reduce his/her gross taxable income and thereby the total tax payable by him/her. For example, if your gross total earnings say, for a financial year is Rs 6.5 lakh and if you invest Rs 1.5 lakh in notified schemes which allows you to claim this tax benefit, then your net taxable income will come down to Rs 5 lakh and you would have to pay tax on this amount.
Apart from investment in specified avenues, certain specified expenditures also qualify as deductions from gross total income under section 80C.
There is a long list of investments, expenditures that qualify for deduction from gross total income under Section 80C. Some of them are as follows: a) Premium paid for life insurance, ULIP, annuity plan b) Contribution to provident fund such as EPF, VPF or PPF or superannuation funds c) Investment in NSC, KVP, Senior Citizen Savings Scheme (SCSS) 2004, 5-year Post Office Term deposits, 5-year bank fixed deposits. d) Investment in a notified Equity Linked Saving Scheme (ELSS) of a mutual fund. e) Repayment of principal of loan taken for the purchase or construction of house as per rules specified. For a complete list of all the specified investment/expenditure avenues available under Section 80C click here .
Points to remember about claiming deduction under section 80C are as follows.
Investments/expenditures under section 80C cannot be claimed as a deduction from the capital gains portion, if any, of your income. This means that if your income comprises only of capital gains then you cannot use Section 80C to save tax on that income.
Amount of tax saved by using section 80C depends on the tax slab in which the income was falling. For example, if the income deducted from gross total income before tax calculation was in the 30% plus 3% cess bracket then that would the amount of tax saved.
Let us say, if your gross total income for the year is say, Rs 10.5 lakh, then by taking a deduction of Rs 1.5 lakh under section 80C, you reduce your net taxable income to Rs 9 lakh. This would bring down your liability by Rs 46,350.
If a person's income is already below the minimum exemption limit, currently at Rs 2.5 lakh for individuals below 60 years of age, then he/she would not be saving any tax via investments/expenditures under section 80C as his income is not liable for any tax.
Apart from section 80C, there are two more sections i.e. Section 80CCC and Section 80CCD.
According to the section 80CCE, the maximum aggregate deduction that can be claimed under section 80C, section 80CCC and section 80CCD (1) cannot exceed more than Rs 1.5 lakhs.
Section 80CCD This section allows deduction from gross total income for contributions made to pension schemes of the Central Government. However, to avail the benefits under this section, there are certain conditions that one must satisfy.
As per section 80CCD (1), the deduction will be allowed for contributions made to notified pension scheme if the same does not exceed a) ten per cent of the salary in case of an employee, or; b) twenty per cent of the gross total income in case of self-employed
Apart from the above 2 constraints, the total amount claimed as a deduction from gross total income under both Section 80C and section 80CCD cannot exceed the notified limit of Rs 1.5 lakh.
However, there is an additional tax benefit available under this section which is over and above the limit of Rs 1.5 lakh.
As per section 80CCD (1B), an additional deduction of a maximum of Rs 50,000 from gross total income will be allowed to assessee, if he invests this in notified pension scheme(s).
Currently, these notified schemes are National Pension System and Atal Pension Yojana.
In addition to that, you can also ask your employer to make contribution to your NPS account as per section 80CCD (2). The employer's contribution cannot exceed ten per cent of the employee's salary. However, there is no upper limit in monetary terms on the amount of employer's contribution that would be exempt from tax, as per the Income Tax Act. "Salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites" as per the Act.