Before the introduction of section 80c by the Finance Act 2005, section 88 was there to provide exemption to investors. However, section 88 was replaced by the Finance Act 2005 and it was applicable from 1st april 2006. There was no flat deduction of Rs 100000 u/s 88 as rebate of 20% was provided on the amount of investments. For example if someone had invested Rs 50000, he used to get Rs 10000 as tax rebate under section 88. In the earlier section 88 the overall limit of investment was Rs 60000 and an additional Rs 10000 for power, telecom and infra sector. However exemption limit is enhanced to Rs 100000.Section 80c deduction limit is flat for all and no distinction is made between assessee falling into different tax slabs. This section has become one of the most powerful and the most popular section in the entire Income Tax Act 1961, mainly because the eligible assesses under section 80c are Individual tax payer and HUFs.
What are the eligible instruments?
The most commonly used eligible instruments towards the 80C deductions are:
- Life insurance premium, including premium for a unit-linked insurance plan (ULIP)
- Contribution to Public Provident Fund or Provident Fund
- Investment in pension plans
- Investment in Equity Linked Savings Schemes (ELSS) of mutual funds
- Home loan principal repayment
- Investment in Infrastructure Bonds, National Savings Certificates
- Payment of tuition fees to for full-time education of any 2 children of an individual
- Fixed deposit with any scheduled bank or post office for 5 years
- Senior citizens savings scheme
Section Particulars Maximum Deduction 80C
- Â Life Insurance Premium on Life Policy(*): (Maximum Premium eligible limited to 20% of sum assured)
- Contribution to Statutory or Recognized PROVIDENT FUND.
- Contribution to 15 yr PPF (public provident fund) (*). (Maximum Rs. 70000/-)
- NSC VIII issue (Including Accrued Interest for Ist Five Yr)
- Contribution to ULIP of UTI or LIC Mutual Fund
- Contribution to Notified units of MUTUAL FUND or UTI
- Contribution to Notified pension fund set up by Mutual Fund or UTI, TUITION FEES: paid to University, College or Educational Inst. In India Max. 2 Children for FULL TIME education. (Excluding Development Fees, Donation etc.)
- Payment towards PURCHASE OR CONSTRUCTION of residential house property including repayment of Loan taken for the same.
- Investment in approved Debenture or equity share of Public Company or Units of Mutual funds, engaged in infrastructure development.
- Subscription to Notified BOND of NABARD.
- Fixed Deposit for 5 or more years in Sch. Bank in accordance with the scheme framed and notified by Central Govt.
- Deposit in Senior Citizens Saving Scheme.
- Deposit in 5 yr TIME DEPOSIT scheme in Post office
Why the limit should be enhanced to Rs 300000?
The numbers of investments that are eligible for deduction from taxable income under Section 80C are many but the overall limit is only Rs 100000 which is just not enough. For many professionals, this limit is exhausted by investments like EPF, life insurance premiums and principal component of a home loan. There is very little scope of saving tax through other investments like ELSS, PPF, bonds etc.
Income from house property is one of the important heads of income under the Income Tax Act. The tax payers have been, in particular, keen to know about the exemption and deductions available to them on repayment of interest and principal of the loan obtained to purchase the house property, if that house property is let out or self-occupied. According to individuals the limit should be enhanced to Rs 300000 or the treatment of principal component of housing loan should be separated from treatment of deduction u/s 80C.
With a constant decline in the percentage of individual savings, it is expected that the exemption limit available under section 80CÂ be enhanced to Rs3 lakh from the current limit of Rs1 lakh, to boost savings. This can be done by introducing a separate limit of Rs2 lakh for specified long-term investments such as life insurance and annuity, investments in Rajiv Gandhi Equity Savings Scheme and employee contribution to New Pension Scheme, within the ambit of section 80C.
With increasing financial literacy, investors have started investing in mutual funds. ELSS was one of the routes and the reason people started investing in mutual fund. Also the Nifty and Sensex gave annual return of around 26% in calendar year 2012. So, this can attract investors to invest in equity market. I feel instead of continuing RGESS, if the deduction under 80C is increased, people may invest more in ELSS funds, since ELSS is the only scheme u/s 80C which has shortest lock-in period and can provide highest return in the long term.
The EPF is a scheme intended to help employees from both private and non-pensionable public sectors save a fraction of their salary every month in a savings scheme, to be used in an event that the employee is temporarily or no longer fit to work or upon retirement.
An employee can withdraw full amount at the credit in the fund on retirement from service after attaining the age of 55 year. EPF is automatically deducted from salary. Both employee and employer contribute to it. Employeeâ€™s contribution is counted towards Section 80C investments. Employees also have the option to contribute additional amounts through voluntary contributions (VPF).
Also, after increase in the limit in maximum amount of deposit in Public Provident Fund (PPF) has increased to Rs.1 lakh and so has the current rate of rate of interest to 8.80% p.a., conservative investors are willing to invest more in PPF for taking the benefit by investing in PPF.
The education cost is also increasing day-by-day. The people must benefit from the deduction as the education expense (school fees) for their children is very high. So the available deduction under 80C must increase.
We have seen real-estate prices have risen. Since the prices of residential houses have increased, so has the amount of home loans people are taking. So eventually, the principal amount, which is being repaid, has also increased. Also the increasing stamp duty and registration cost due to increase in real estate prices can be availed for deduction.