Even if you do not know much about the Income Tax Act, 1961, you would have definitely heard about its Section 80C at some point. The reason for this is that section 80C is the go-to income tax saving section for individuals and HUFs (Hindu Undivided Family) in the country. Tax benefits under section 80C allow you to deduct a maximum of Rs. 1.5 lakh from your taxable income by making certain income tax saving investments. These include the National Pension System (NPS), Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF), five-year tax-saving fixed deposits, and more. Tax benefits under section 80C go beyond income tax saving investments. For instance, you can claim the section 80C tax saving deduction for the repayment of home loan principal as well as stamp duty and registration charges.

Introduction and journey of tax benefits under Section 80C

While Section 80C is now synonymous with income tax saving, this section did not always exist – it came into effect from April 1st, 2006.

• Replacing Section 88: Before Section 80C, there was Section 88. Section 80C replaced Section 88 and it more or less continued to offer the same income tax saving benefits. However, there was a key difference – the method of providing the income tax saving benefit. Section 88 used to provide a tax rebate on the income tax payable while Section 80C allows for  deduction from the gross total income.
  
  
• Including fixed deposits: Fixed deposits were not eligible as income tax saving investments until the then finance minister, P. Chidambaram, included them as such in Budget 2006. “There is a demand that fixed deposits of certain tenure should qualify for tax exemption. I propose to include investments in fixed deposits in scheduled banks for a term of not less than five years in section 80C of the Income Tax Act.”
  
  
• Increasing the maximum limit: Until FY 2013-2014, the maximum limit for tax deduction under Section 80C was Rs. 1 lakh. However, seeing that the gross domestic savings in the country fell from 33.7% of the GDP in FY 2009-2010 to 30.1% in FY 2012-2013, the then finance minister Arun Jaitley increased this limit from FY 2014-2015. In his Budget 2014 speech, he said, “Increase in savings and their productive use leads to higher economic growth. The households are the main contributors to savings. Therefore, to encourage domestic investment in long term savings, I propose to increase the investment limit under Section 80C of the Income-tax Act from Rs. 1 lakh to Rs. 1.5 lakh.”

Removal of Section 80C in the new tax regime: Budget 2020

In Budget 2020, finance minister Nirmala Sitharaman introduced a new tax regime to simplify claiming tax benefits for taxpayers as well as the administration of the Income Tax Act by the tax authorities. “It is almost impossible for a taxpayer to comply with the income tax law without taking help from professionals. In order to provide significant relief to the individual taxpayers and to simplify the income tax law, I propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for individual taxpayers who forgo certain deductions and exemptions.”

Hence, now there is the old tax regime and the new tax regime:

• Old tax regime – Higher tax rates but eligible for tax exemptions and deductions

• New tax regime – Lower tax rates but not eligible for most of the major tax exemptions and deductions including Section 80C

Deductions under Section 80C: To opt or not to opt

The new tax regime is optional. This means you get to decide whether you want to avail tax benefits under Section 80C and other sections by continuing with the old regime or forgoing these tax benefits by opting for the new one. Depending on your income and the income tax saving investments you make, one will be more beneficial than the other. To decide this, however, you first need to closely look at the changes in the tax rates and income tax saving benefits.

1. Tax rates

2. Income tax saving benefits

When reviewing the sections offering exemptions and deductions that got incorporated in the income tax over the last several decades, the finance minister said, “It was surprising to know that currently more than one hundred exemptions and deductions of different nature are provided in the income tax act. I have removed around 70 of them in the new simplified regime. We will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate.”

Out of these 70, some of the major exemptions and deductions that are not available under the new tax regime include chapter VIA deductions such as:

• Deduction under Section 80C for income tax saving investments such as ELSS, NPS, PPF, etc.
• Deduction of health insurance premium under Section 80D
• Tax benefits for disability under Sections 80DD and 80DDB
• Deduction related to interest on deposits in savings account under Section 80TTA and 80TTB
• Deduction for interest paid on education loans for higher education under Section 80E
• Deduction for donations made to charitable institutions under Section 80G

Beyond chapter VIA, deductions such as the standard deduction of Rs. 50,000 for salaried individuals, leave travel allowance, house rent allowance, family pension deduction under Section 57, and more are also not available under the new tax regime.

There are also certain exceptions to the new tax regime. For instance, while you won’t be able to opt for the Section 80C income tax saving deduction when investing in NPS under the new tax regime, NPS deduction for employer’s contribution under Section 80CCD(2) is still available. You can have a discussion with your accountant or financial advisor to understand what works best for you.

What Budget 2022 means for Section 80C

Budget 2022 was presented on 1st February by the finance minister. The overall focus of Budget 2022 is economic expansion and growth to accelerate the country’s recovery from the pandemic. There have been no changes in either the tax slabs or Section 80C deduction limit. This means that the maximum tax deduction under Section 80C for tax-saving instruments will continue to be Rs. 1.5 lakh.

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