In chapter VIA of the income tax act, 1961, the most widely used option to save tax is section 80C. This section allows an individual and HUF to save tax by investing in or spend on certain specified avenues. The maximum limit up to which you can claim tax deduction under section 80C is Rs 1,50,000 for the financial year 2018-19 and 2019-20.
In this article, we will discuss certain expenses which are allowed as a deduction under section 80C before calculating tax payable on your taxable income. Before discussing please note, you can claim deduction only when you have spent money during the previous year on listed expenses.
Why claim a tax deduction
By claiming tax deduction of up to Rs 1,50,000, you reduce your taxable income by which you will be required to pay less or zero tax. For instance, if your gross total income for the financial year 2019-20 is Rs 6,50,000 and you have invested or spent money during the year on specified avenues, then after taking deduction as per your eligibility you can reduce your total taxable income to Rs 5,00,000. In such a case, you will not be liable to pay tax as you will be eligible for a tax rebate of Rs 12,500 under section 87A.
Tuition fees for children
Tuition fee paid for children qualifies for tax benefit under section 80C of the IT Act, 1961 within the overall limit of Rs 1,50,000.
Tuition fee that is paid at the time of admission or anytime during the financial year to any registered university, college, school or educational institution based in India qualifies for section 80C tax deduction. It can be a private or government institution.
However, please note only full-time education including any play school activities, pre-nursery and nursery classes are eligible. Tuition fee paid for part-time courses is not eligible for tax deduction.
Section 80C restricted the deduction for tuition fee to two children per individual. This means you can claim a tax deduction only up to two children. But if both husband and wife are paying tuition fee for their child then each of them will be eligible up to 2 children each.
Following fees paid to the registered university, college, school or educational institutions do not cover for section 80C benefits;
- Development fee
- Capitation fee
Tax deduction for principal payment of home loans
Section 80C allows repayment of the principal amount of home loan as a tax deduction up to the maximum limit of Rs 1,50,000. As discussed in the case of tuition fees, this limit is the total of all eligible deductions allowed under section 80C including contributions to public provident fund, sukanya samridhi yojana, payment of life insurance premium, 5 Years fixed deposits, equity-oriented mutual fund, NSC, senior citizen saving schemes, tuition fees etc.
Tax deduction for principal payment of the home loan is available for the amount which is paid during the financial year. It does not matter whether payments are related to earlier or future years.
Tax benefits for repayment of the principal amount of home loan are allowed only when the construction is complete and the completion certificate has been awarded. This means deduction will not be allowed under section 80C for repayment of the principal amount for those years during which the property was under construction.
In case the assessee transfers the house property on which he has claimed tax deduction under section 80C before the expiry of 5 years from the end of the financial year in which the possession has been obtained by him, then no deduction and tax benefit on the home loan shall be allowed under this section. The aggregate amount of tax deduction already claimed in respect of previous years shall be deemed to be the income of the assessee of such year in which the property has been sold. Therefore, the assessee shall be liable to pay tax on such income.
Section 80C deduction for payment of the principal amount on home loan is allowed only when the loan has been taken for purchase or construction of a new house property. It’s not allowed as a deduction if the loan has been taken for repair or renewal or reconstruction of a residential house property.
Stamp duty and registration fee for purchase or construction of a home
Amount paid towards stamp duty and registration fees for purchase or construction of home is allowed as a tax deduction under section 80C within the overall limit of Rs 1,50,000.
It’s not a regular deduction that you get every year. If you have paid, then that amount can be claimed as a tax deduction under section 80C in addition to all other eligible deductions within the limit of Rs 1,50,000.
Apart from these expenses, you can also invest in any or all of the investment options listed under section 80C to get the full benefit of section 80C. Here is a list of the 6 most important investment options listed in section 80C to get tax deduction;
- Public provident fund – PPF
- Employee provident fund – EPF
- Unit linked insurance plan – ULIP
- Life insurance plan
- Sukanya samridhi yojana – SSY
- Equity-linked saving schemes – ELSS
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