What is Section 80C tax deduction limit after Budget?

The finance minister has not announced any change in Section 80C limit in the interim Budget 2024 budget speech. The maximum limit on investment to claim a tax break under Section 80C remains Rs 1.5 lakh as it is now i.e. for current FY2023-24. This limit will continue to apply to individuals investing to save tax under Section 80C in the upcoming FY 2024-25.

Various investments and expenditures are specified under Section 80C of the Income-tax Act. If individuals make these investments or expenditures, they can claim a maximum deduction of Rs 1.5 lakh from gross taxable income in a financial year.

Some of the specified investments under Section 80C are investment in Employees’ Provident Fund (EPF), Public Provident Fund (PPF), ELSS mutual funds, National Savings Certificate (NSC), 5-year tax saving fixed deposits with bank or post office, payment of life insurance policy premium etc.

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Do keep in mind that each of the eligible investments has its own maximum investment limit, rate of return, liquidity, and taxation rules for the returns earned. For instance, an individual cannot invest more than Rs 1.5 lakh in PPF in a financial year. However, there is no limit on the maximum amount that can be invested in ELSS mutual funds but the amount of deduction that can be claimed under section 80C cannot exceed Rs 1.5 lakh in a financial year.

If an individual is unable to make these investments, there are certain expenditures that are allowed as deduction from gross taxable income under Section 80C. Some of these are: Repayment of principal amount of home loan, tuition fees of children, payment of stamp duty, registration fees and other expenses at the time of buying a house.

From FY 2020-21, an individual, without any business income in the financial year, is required to choose between the old and new tax regimes every financial year. From FY 2023-24, the new tax regime has been made the default tax regime. Hence, an individual has to choose the old tax regime to avail tax deduction under Section 80C as this deduction is not allowed under the new tax regime.

Who can claim deduction under Section 80C?

An individual or a Hindu Undivided Family (HUF) can claim deduction under Section 80C by making any of the specified investments, expenditures. By claiming this deduction up to Rs 1.5 lakh from gross taxable income, individuals/HUFs can reduce their net taxable income and tax payable thereon in a financial year. Full utilisation of this deduction can save income tax up to Rs 46,800 (inclusive of cess at 4%) for those in the highest income tax bracket of 30%.

Here is an example to understand this. Suppose you have a taxable income of Rs 10.50 lakh and choose to be taxed under the old tax regime. After claiming the deduction of Rs 1.5 lakh under Section 80C, the net taxable income becomes Rs 9 lakh. Your tax liability will be calculated on this Rs 9 lakh. Assuming no other tax break is claimed including standard deduction of Rs 50,000, the income tax liability is Rs 96,200 (including cess). Had an individual not claimed deduction of Rs 1.5 lakh under Section 80C, the tax liability would have been Rs 1,32,600 (including cess).

By making a specified investment or expenditure of Rs 1.5 lakh under Section 80C and claiming it while filing income tax return, the individual, as per example above, can save tax of Rs 36,400 (including cess).

How to claim Section 80C deduction

To claim the deduction from gross taxable income under Section 80C, an individual is first required to invest in specified instruments and/or incur a specified expenditure in the financial year for which the deduction is to be claimed. Once the investment/expenditure is done, an individual must ensure that the amount of deduction is mentioned/claimed in the ITR form while filing tax return.

In the ITR form, the deduction is claimed after an individual has entered the income earned from all sources and has arrived at gross taxable income. From this income, deductions are claimed (subtracted) and one arrives at net taxable income. On this net taxable income, tax liability is calculated.

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William Murphy

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