The actual tax saved under 80C varies from Person to Person

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While doing your tax saving exercise, you should always be aware of how much tax you are going to save from all your tax saving investments.

And the first thing which comes to mind when we talk about tax saving is Section 80C under which a deduction of upto Rs. 1.5 Lakhs can be claimed.

It is important to note here that this deduction of Rs. 1.5 Lakhs is not allowed from the total tax but from the total taxable income.

In other words, this Rs. 1.5 Lakhs of investment is first reduced from the total income to arrive at the total taxable income and then tax is levied on this total taxable income arrived at after claiming deductions.

  Particulars Amount
  Total Income xxx
(Less) Deductions under Section 80C, 80D etc  xxx
  Total Taxable Income xxx
  Tax levied on Total Taxable Income as per Slab Rates  xxx

                                                                            
As this deduction for investment under 80C is allowed from the total income and not from total tax, the net tax saving would be different for everyone. The total tax saving would vary depending on the income tax slab in which the person falls.

There are various slabs of tax applicable for individuals which is as follows:-

 

 

Financial Year 2018-19

Slabs

Income

Income Tax

Cess*

Effective Tax Rate

Slab 1

Upto Rs. 2.5 Lakhs

Nil

4%

0

Slab 2

Rs. 2.5 Lakhs to Rs. 5 Lakhs

5%

4%

5.20%

Slab 3

Rs. 5 Lakhs to Rs. 10 Lakhs

20%

4%

20.80%

Slab 4

Above Rs. 10 Lakhs

30%

4%

31.20%

*Cess is always levied on the Income Tax and not on the total income.

The income tax slabs keep on changing from time to time and the above slabs are applicable for the financial year 2018-19.

As the tax slabs are different for different categories of income, therefore the tax saved is also different depending on which slab the individual is falling in.

The various slabs of income in which a person can fall and the corresponding tax saving for that slab has been shown in the below table:-

Slabs

Income

Effective Tax Rate

Amount invested

Actual Tax saving

Slab 1

Upto Rs. 2.5 Lakhs

0

1,50,000

0

Slab 2

Rs. 2.5 Lakhs to Rs. 5 Lakhs

5.20%

1,50,000

7,800

Slab 3

Rs. 5 Lakhs to Rs. 10 Lakhs

20.80%

1,50,000

31,200

Slab 4

Above Rs. 10 Lakhs

31.20%

1,50,000

46,800

 

Thus, the tax saving is higher if the individual is in a higher income slab as compared to an individual who is in a lower income slab.

The tax saving would be even higher if the total aggregate income of the individual is more than Rs. 50 Lakhs as additional surcharge of 10% is levied if the income is more than Rs. 50 Lakhs and the rate of surcharge increases to 15% if the income is more than Rs. 1 Crore.

Which is the best Investment under Section 80C?

There is no single instrument which is considered the best to be investing in and there is no standard answer for this question. The best option varies from person to person depending on the risk taking capacity of the individual.

If an individual is looking to invest in fixed interest earning instruments – he may consider investing in PPF or 5 year fixed deposit. The returns from these types of investments may be low but is an assured return.

If a person is looking for higher returns – he may think of investing in Tax Saving Mutual Funds. These are equity linked mutual funds which come with a lock-in period of 3 years.

A lot of individuals have started investing in tax saving mutual funds online itself in the lure of higher returns. However, it is important to note here the returns from tax saving mutual funds are market linked and keep varying from year to year depending on the performance of the equity markets.

Although mutual funds have been performing very well in the past few years, but this may not always be the case. Mutual Funds usually perform very well over longer periods of time. Although these tax saving mutual funds come with a lock-in period of 3 years, but it is still advisable that while investing – the investor keeps a longer time horizon and gives time to his mutual fund investments to grow.

Apart from PPF, 5 year fixed deposit and Mutual Funds – another popular instrument for which deduction is allowed under Section 80C is Life Insurance. This is one instrument which everyone should be enrolling in as this will help you safeguard your family in case of adversity. Term Life Insurance is something which should be there in everyone’s portfolio and this should not be considered as an investment wherein you are trying to measure the returns so generated but as something which will safeguard your family in case of any adversity.

Apart from the instruments discussed above, there are various other instruments as well investments in which is allowed as a deduction under Section 80C like Senior Citizens Saving Scheme, Sukanya Samriddhi Yojana, National Savings Certificate etc.

This investment of Rs. 1.5 Lakhs for the purpose of claiming benefits under Section 80C can be done in either in 1 type of instrument alone or in various types of instruments. If the investment is done in various instruments, the deduction would be allowed as aggregate of the total amount deposited in various instruments.

And it is not necessary to invest the entire Rs. 1.5 Lakhs. If an individual invests a lower amount, then the deduction allowed would be of that lower amount and not of the entire Rs. 1.5 Lakhs. But if the person invests more than Rs. 1.5 Lakhs – the deduction allowed would be Rs. 1.5 Lakhs only as this is the maximum deduction which can be claimed.

This deduction can also not be carried forward. Thus, if a person makes investment of Rs. 3 Lakhs in a single financial year, this will not entitle him to claim deduction of Rs. 1.5 Lakhs each in 2 separate years. For the purpose of claiming deduction, the investment should be made in the same year in which the deduction is being claimed.

Sources:

  1. https://www.indiabudget.gov.in/ub2019-20/fb/bill.pdf
  2. https://www.paisabazaar.com/tax/surcharge-on-income-tax/
  3. https://economictimes.indiatimes.com/news/economy/policy/arun-jaitley-proposes-4-health-education-cess/articleshow/62740275.cms

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.