Section 80C an analysis for simple understanding.

[C.A. DEV KUMAR KOTHARI]

Section 80C:

Section 80 C which was re-introduced in the Income-tax Act vide the Finance Act 2005 w.e.f. 01.04.2006 is indeed one of most important and popular section because it concerns individuals and HUF's. Besides it is also required to be considered by employers while determining tax deductible from salary paid to employees (individuals). Therefore, this section is such that it require consideration by most of organizations also whether be government organization, public sector, private sector or joint sector.

I have used words re-introduced because section 80C was earlier omitted by the Finance Act 1990, w.e.f.1.4.1991. When section 88 was inserted in lieu of S. 80C to provide 'tax rebate' against tax payable. Whereas old section as well as new section 80C provides for deduction from gross total income.

Investment based incentive:

Section 80C as well as Section 88 both provided incentive for long term investment. Some expenses are also now covered, but in true sense they are also in nature of investment e.g. tuition fees- it is a personal expenditure, but it is also in nature of investment in education- the most important capital base for the child and for the nation also. Because educated child will form human resources of country in the future.

Simplicity should be adopted:

The provisions of section 80C concerns public at large. Therefore it should be very simply worded and easy to understand. However, unfortunately this section is also very complex and require serious reading to understand the same. Even for small deduction so many conditions are prescribed. For example, one has to take pains to understand to whom and in what situations a deduction can be allowed. The language used is such that it can create confusions and mis-understandings.

Analysis of section:

For easy understanding, in the following table the section is reproduced in the left column with highlights and in the right column brief remarks are made for understanding:

B.—Deductions in respect of certain payments	Heading of sub-chapter of Chapter VIA
Provision	Brief	Remarks
[Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc.	Heading of section
80C. (1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not exceed one lakh rupees.	Apply to: individual and HUF Maximum deduction is Rs. One lakh in any year	All investment/ payment options are not open to HUF. See various clauses and schemes carefully.
(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the previous year by the assessee-
(i) to effect or to keep in force an insurance on the life of persons specified in sub-section (4);	Individual -LIP of individual, wife, husband and any child of individual. HUF- LIP of any member of HUF
(ii) to effect or to keep in force a contract for a deferred annuity, not being an annuity plan referred to in clause (xii), on the life of persons specified in sub-section (4): Provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity;	Only by individual - for individual, wife, husband and any child of individual for deferred annuity...
(iii) by way of deduction from the salary payable by or on behalf of the Government to any individual being a sum deducted in accordance with the conditions of his service, for the purpose of securing to him a deferred annuity or making provision for his spouse or children, in so far as the sum so deducted does not exceed one-fifth of the salary;	Deduction from salary of Government employees for deferred annuity up to 20% of salary.	Deduction from salary paid by government.
(iv) as a contribution by an individual to any provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies;	EPF Only for individual and his own a/c
(v) as a contribution to any provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette, where such contribution is to an account standing in the name of any person specified in sub-section (4);	PPF- By individual - in a/c of individual, wife, husband and any child. By HUF in a/c of any member of HUF
(vi) as a contribution by an employee to a recognised provident fund;	RPF by employee.	Deduction from salary to RPF
(vii) as a contribution by an employee to an approved superannuation fund;	SAF by employee
(viii) as subscription to any such security of the Central Government or any such deposit scheme as that Government may, by notification in the Official Gazette, specify in this behalf;	Subscription to GOI security of deposit schemes. For individual and HUF if schemes so permit.
(ix) as subscription to any such savings certificate as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), as the Central Government may, by notification in the Official Gazette, specify in this behalf;	Subscription to saving certificates- for individuals and HUF if the scheme so permit.
(x) as a contribution, in the name of any person specified in sub-section (4), for participation in the Unit-linked Insurance Plan, 1971 (hereafter in this section referred to as the Unit-linked Insurance Plan) specified in Schedule II of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);	ULIP of UTI Individual - a/c of individual, wife, husband and any child. HUF- a/c of any member of HUF
(xi) as a contribution in the name of any person specified in sub-section (4) for participation in any such unit-linked insurance plan of the LIC Mutual Fund 73[referred to in] clause (23D) of section 10, as the Central Government may, by notification74 in the Official Gazette, specify in this behalf;	ULIP of LICI - Individual - a/c of individual, wife, husband and any child. HUF- a/c of any member of HUF	There seems some drafting mistake. All mutual funds specified in S. 10(23D) must be eligible.
(xii) to effect or to keep in force a contract for such annuity plan of the Life Insurance Corporation or any other insurer as the Central Government may, by notification in the Official Gazette, specify;	Deferred annuity plan of life insurers.
(xiii) as subscription to any units of any Mutual Fund [referred to in] clause (23D) of section 10 or from the Administrator or the specified company under any plan formulated in accordance with such scheme as the Central Government may, by notification77 in the Official Gazette, specify in this behalf;	Subscription to units of MF which have been notified.
(xiv) as a contribution by an individual to any pension fund set up by any Mutual Fund [referred to in] clause (23D) of section 10 or by the Administrator or the specified company, as the Central Government may, by notification79 in the Official Gazette, specify in this behalf;	Only for individuals for pension funds of notified mutual funds.
(xv) as subscription to any such deposit scheme of, or as a contribution to any such pension fund set up by, the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987) (hereafter in this section referred to as the National Housing Bank), as the Central Government may, by notification in the Official Gazette, specify in this behalf;	NHB- subscription to deposit scheme or any pension funds
(xvi) as subscription to any such deposit scheme of— (a) a public sector company which is engaged in providing long-term finance for construction or purchase of houses in India for residential purposes; or (b) any authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both, as the Central Government may, by notification in the Official Gazette, specify in this behalf;	PSU HOUSIGN FIN. CO. HOUSING FIN. AUTHORITY
(xvii) as tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether at the time of admission or thereafter,- (a) to any university, college, school or other educational institution situated within India; (b) for the purpose of full-time education of any of the persons specified in sub-section (4);	For individual only- only for two children of individual will be eligible. So maximum tuition fee paid in respect of two children can be considered.
(xviii) for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head "Income from house property" (or which would, if it had not been used for the assessee's own residence, have been chargeable to tax under that head), where such payments are made towards or by way of-	Individual and HUF Residential house property
(a) any instalment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or	Installments in self financing scheme
(b) any instalment or part payment of the amount due to any company or co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; or	Installment of cost to co-op society/
(c) repayment of the amount borrowed by the assessee from— (1) the Central Government or any State Government, or (2) any bank, including a co-operative bank, or (3) the Life Insurance Corporation, or (4) the National Housing Bank, or (5) any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes which is eligible for deduction under clause (viii) of sub-section (1) of section 36, or (6) any company in which the public are substantially interested or any co-operative society, where such company or co-operative society is engaged in the business of financing the construction of houses, or (7) the assessee's employer where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act, or (8) the assessee's employer where such employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society; or	Repayment of housing loans to specified persons.
(d) stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee, but shall not include any payment towards or by way of- (A) the admission fee, cost of share and initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming such shareholder or member; or (B) the cost of any addition or alteration to, or renovation or repair of, the house property which is carried out after the issue of the completion certificate in respect of the house property by the authority competent to issue such certificate or after the house property or any part thereof has either been occupied by the assessee or any other person on his behalf or been let out; or (C) any expenditure in respect of which deduction is allowable under the provisions of section 24;	Stamp duty etc. of res. House.
(xix) as subscription to equity shares or debentures forming part of any eligible issue of capital approved by the Board on an application made by a public company or as subscription to any eligible issue of capital by any public financial institution in the prescribed form 81. Explanation.- For the purposes of this clause,- (i) "eligible issue of capital" means an issue made by a public company formed and registered in India or a public financial institution and the entire proceeds of the issue are utilised wholly and exclusively for the purposes of any business referred to in sub-section (4) of section 80-IA; (ii) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); (iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (xx) as subscription to any units of any mutual fund referred to in clause (23D) of section 10 and approved by the Board on an application made by such mutual fund in the prescribed form 84: Provided that this clause shall apply if the amount of subscription to such units is subscribed only in the eligible issue of capital of any company. Explanation.- For the purposes of this clause "eligible issue of capital" means an issue referred to in clause (i) of the Explanation to clause (xix) of sub-section (2);	Some equity shares , debentures in eligible public issue
[(xxi) as term deposit- (a) for a fixed period of not less than five years with a scheduled bank; and (b) which is in accordance with a scheme framed and notified, by the Central Government, in the Official Gazette for the purposes of this clause. Explanation.- For the purposes of this clause, "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank, being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);]	Five years term deposit of scheduled banks specified in the scheme framed in terms of this section.
[(xxii) as subscription to such 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;]	NABARD Bonds
[(xxiii) in an account under the Senior Citizens Savings Scheme Rules, 2004;	Senior citizen saving scheme. Five years lock-in-period- see sub section (6A)
(xxiv) as five year time deposit in an account under the Post Office Time Deposit Rules, 1981.]	Five years time deposit with Post Ofices. Five years lock-in-period- see sub section (6A)
(3) The provisions of sub-section (2) shall apply only to so much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in excess of twenty per cent of the actual capital sum assured. Explanation. - In calculating any such actual capital sum assured, no account shall be taken- (i) of the value of any premiums agreed to be returned, or (ii) of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.	Premium or other payments only up to 20% of sum assured is eligible.
(4) The persons referred to in sub-section (2) shall be the following, namely:- (a) for the purposes of clauses (i), (v), (x) and (xi) of that sub-section, - (i) in the case of an individual, the individual, the wife or husband and any child of such individual, and (ii) in the case of a Hindu undivided family, any member thereof;	(i)- LIP, (v)- Notified PF, (x)- ULIP. (xi) ULIP of LIC
(b) for the purposes of clause (ii) of that sub-section, in the case of an individual, the individual, the wife or husband and any child of such individual;	(ii) - Deferred annuity plans -
(c) for the purposes of clause (xvii) of that sub-section, in the case of an individual, any two children of such individual.	(xvii) - tuition fees.
(5) Where, in any previous year, an assessee- (i) terminates his contract of insurance referred to in clause (i) of sub-section (2), by notice to that effect or where the contract ceases to be in force by reason of failure to pay any premium, by not reviving contract of insurance,— (a) in case of any single premium policy, within two years after the date of commencement of insurance; or (b) in any other case, before premiums have been paid for two years; or (ii) terminates his participation in any unit-linked insurance plan referred to in clause (x) or clause (xi) of sub-section (2), by notice to that effect or where he ceases to participate by reason of failure to pay any contribution, by not reviving his participation, before contributions in respect of such participation have been paid for five years; or (iii) transfers the house property referred to in clause (xviii) of sub-section (2) before the expiry of five years from the end of the financial year in which possession of such property is obtained by him, or receives back, whether by way of refund or otherwise, any sum specified in that clause, then,- (a) no deduction shall be allowed to the assessee under sub-section (1) with reference to any of the sums, referred to in clauses (i), (x), (xi) and (xviii) of sub-section (2), paid in such previous year; and (b) the aggregate amount of the deductions of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year.	Withdrawals and consequences.
(6) If any equity shares or debentures, with reference to the cost of which a deduction is allowed under sub-section (1), are sold or otherwise transferred by the assessee to any person at any time within a period of three years from the date of their acquisition, the aggregate amount of the deductions of income so allowed in respect of such equity shares or debentures in the previous year or years preceding the previous year in which such sale or transfer has taken place shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year. Explanation. -A person shall be treated as having acquired any shares or debentures on the date on which his name is entered in relation to those shares or debentures in the register of members or of debenture-holders, as the case may be, of the public company.	Sale of eligible issue shares or debentures within three years will attract tax.
[(6A) If any amount, including interest accrued thereon, is withdrawn by the assessee from his account referred to in clause (xxiii) or clause (xxiv) of sub-section (2), before the expiry of the period of five years from the date of its deposit, the amount so withdrawn shall be deemed to be the income of the assessee of the previous year in which the amount is withdrawn and shall be liable to tax in the assessment year relevant to such previous year: Provided that the amount liable to tax shall not include the following amounts, namely:- (i) any amount of interest, relating to deposits referred to in clause (xxiii) or clause (xxiv) of sub-section (2), which has been included in the total income of the assessee of the previous year or years preceding such previous year; and (ii) any amount received by the nominee or legal heir of the assessee, on the death of such assessee, other than interest, if any, accrued thereon, which was not included in the total income of the assessee for the previous year or years preceding such previous year.]	Withdrawal of term deposit within five years will attract tax.
(7) For the purposes of this section,— (a) the insurance, deferred annuity, provident fund and superannuation fund referred to in clauses (i) to (vii); (b) unit-linked insurance plan and annuity plan referred to in clauses (xii) to (xiiia); (c) pension fund and subscription to deposit scheme referred to in clauses (xiiic) to (xiva); (d) amount borrowed for purchase or construction of a residential house referred to in clause (xv), of sub-section (2) of section 88 shall be eligible for deduction under the corres-ponding provisions of this section and the deduction shall be allowed in accordance with the provisions of this section.	Reference of similar investments earlier eligible for tax rebate u/s 88
(8) In this section,- (i) "Administrator" means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); (ii) "contribution" to any fund shall not include any sums in repayment of loan; (iii) "insurance" shall include— (a) a policy of insurance on the life of an individual or the spouse or the child of such individual or a member of a Hindu undivided family securing the payment of specified sum on the stipulated date of maturity, if such person is alive on such date notwithstanding that the policy of insurance provides only for the return of premiums paid (with or without any interest thereon) in the event of such person dying before the said stipulated date; (b) a policy of insurance effected by an individual or a member of a Hindu undivided family for the benefit of a minor with the object of enabling the minor, after he has attained majority to secure insurance on his own life by adopting the policy and on his being alive on a date (after such adoption) specified in the policy in this behalf; (iv) "Life Insurance Corporation" means the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956); (v) "public company" shall have the same meaning as in section 392 of the Companies Act, 1956 (1 of 1956); (vi) "security" means a Government security as defined in clause (2) of section 293 of the Public Debt Act, 1944 (18 of 1944); (vii) "specified company" means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); (viii) "transfer" shall be deemed to include also the transactions referred to in clause (f) of section 269UA.]	Some relevant definitions.

Further analysis:

As observed earlier we find that Section 80C replaced the Section 88 with more or less the same investment opportunity to save tax as were provided in Section 88 and also as in case of old section 80 C prior to its omission. The deduction provided in section 80CCC in respect of pension scheme contributions was merged in S. 80C. The new section is on the same method as old section 80C was. It has some benefits in comparison to S. 88, as no sub-limits are provided and deduction is allowed irrespective of amount of gross total income earned.

One must plan investments well and spread it out across the various instruments specified under this section to avail maximum tax benefit. The total limit under this section is Rs 1 lakh. Included under this heading are many small savings schemes like LIP, annuity plans, NSC, PPF, pension plans, investment in certain bonds and other securities. Repayment of specified housing loans, registration expenses for residential house and tuition fees of maximum two children are also made eligible for deduction.

It is important to know the section completely so that one can make best use of the options available for deduction from taxable income. Some expenses may be in nature of compulsory expenses and necessity like tuition fees of children, or registration expenses of residential house or EMI of housing loans. Similarly some investments may be of almost compulsory nature like contribution in RPF in case of many of salaried persons. Therefore, first of all such necessary expenses and investments should be counted and then available limit for deduction can be used for other investment.

An assessee in the highest tax bracket of 30%, can save up to Rs.30000 by investing the full Rs. 1 Lakh.

A brief note of popular investments and expenses eligible for deduction:

Provident Fund (PF): PF is deducted from your salary. While employer's contribution is exempt from tax, employees contribution is eligible under section 80C for deduction. Current rate of interest is 8.5% per annum (p.a.) and is tax-free.

Public Provident Fund (PPF):

Public Provident Fund (PPF) is a long-term deposit yet it is one of the best and popular investment pattern for all and self employed persons in particular. Interest allowed is 8% and it is not taxable. Normal maturity period is 15 years. Though section 80C provides for deduction to HUF, however, new PPF accounts are not allowed for last few years. In old PPF account for HUF one can continue depositing. However, in case there is no account in name of HUF, the Karta or any member can open account in his name and invest money out of fund provided by HUF and can claim deduction against income of HUF.

Life Insurance Premiums: Life insurance premium paid for assessee his /her spouse and children is eligible for deduction. Premium paid for more than one insurance policy is also covered. Policy can be taken from Life Insurance Corporation of India (LICI) as well as from private insurance companies. The restriction is that premium up to 20% of sum assured is eligible.

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, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C.

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

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/ registration of the house.

National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%. Interest is taxable but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount that you invest in these bonds can also be included in Sec 80C deductions.

Pension Funds - Section 80CCC: Section 80CCC investment limit is clubbed with the limit of Section 80C -the total deduction available for 80CCC and 80C is Rs. 1 Lakh. This also means that your investment in pension funds upto Rs. 1 Lakh can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC can not exceed Rs.1 Lakh.

5-Yr bank fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction.

5-Yr post office time deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) - which currently offers 7.5 per cent rate of interest -qualifies for tax saving under section 80C. Effective rate works out to be 7.71% per annum (p.a.) as the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable.

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.

NABARD rural bonds: NABARD Rural Bonds qualify under section 80C.

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.

Children tuition fees:

When children are undergoing educational courses, tuition fees paid to schools, college, universities, etc. for full time courses is eligible for deduction. The provision in this regard is not very clear. On one hand it is stated that tuition fees is eligible, on other hand it is stated in bracket that it is excluding any payment towards any development fees or donation or payment of similar nature. This require interpretation. It can be said that capital contributions like donation or development charges are not eligible, however fees or charges which are in connection with regular course of education are eligible whether it be collected by school as tuition fees, session fees, lab fees, computer education fees etc. All such charges collected under different heads are recurring regular fees for imparting education. Therefore, such fees should be considered as eligible for deduction.

When to Invest?

In case of school fees, contribution to PF against salary, EMI of home loan etc. we find that payment is compulsorily and regularly made. Similarly EMI of home loans, if any is a regular payment in some cases. If these regular investment meet the target of total investment, it is fine. However, in case of other investments are also required, many of us start looking for investment during last quarter of the previous year and some time in last fortnight of the PY. So far possible, investment in regular way is best policy. At least in every quarter some investment can be made. For example suppose school fees is payable during April, July, October and January, then in other months investments in other avenue can be made.

Readers are requested to send feedback on this article to share their experience.