One of the most common deductions available under the Income-tax Act, 1961 is section 80C. Before reading on, note that for Budget 2020, the Finance Minister revealed a new tax structure/regime, and gave you the option to choose one over the other.

Whichever one you avail, you have to stick with that. And if we didn’t have enough decisions to make in life! Fair enough, here are the changes:

In short, if your taxable income is above ₹15 lakh per year (₹1.25 lakh per month), you would have to really think carefully, given that with the deductions & exemptions, you could actually be paying less, given the tax rate remains at 30%. If you’re in the new 30% tax slab, then you’re no longer a common man imho.

If however, you’re still a common man, and you opted for the new tax structure, you would have to let go (forfeit) all the deductions & exemptions you used to get for a lower tax rate. For anyone claiming a tax deduction more than Rs 2.5 lakh every year (including the Rs 50,000 standard deduction) the old tax regime would be better. In short, The new income tax rate is beneficial for people with little to low investments in tax saving schemes. Another advantage of the new structure, is that your filing becomes easier (supposedly), with lower chances of error.

Having said that, I really think the new scheme would have been beneficial if they really reduced all the slabs by 50% and reduced the number of slabs.

Here’s an analysis of a not-so-easy decision:

Source: Santosh Sharma, Mint

Tax Benefit

When people say you get a “tax benefit of ₹X” - what they mean is that you can reduce your taxable income, and ultimately the tax you pay. Quite often, you will hear things like you can save ₹1.5 lakh of tax - this is wrong. To benefit from Section 80C, you have to either make an investment, or spend on certain things.

Through section 80C, an individual (or an HUF) can reduce up to a maximum of ₹1.5 lakh from their gross total income in a financial year thereby reducing their net taxable income and tax payable thereon.

When you apply the tax rate, the actual amount you save is around ₹46,800 per year (inclusive of cess at 4% & the highest tax slab bracket of 30%) – assuming you fully utilise the deduction.

When investing, there are three stages at which tax can be charged:
1. Time of investment
2. Accumulation
3. Withdrawal / Exit

Saving Schemes (eligible investments in the 80C basket)

SCHEME Liquidity Returns Risk Tax
Equity Linked Savings Scheme (ELSS) 3 year 12%-15%* M/H LTCG 10% > 1 Lakh
Public Provident Fund (PPF) 15 year 7.1% L *
National Savings Certificate (NSC) 5 year 6.8% L *
National Pension System (NPS) 5 year 8%-10% M *
Senior Citizens Saving Scheme (SCSS) * 6.5% L *
Sukanya Samriddhi Savings Scheme (SSSS) * * * *
Five Year Fixed Deposits (Bank/PO) 5 year 5.5% L *

I'll be diving into each one over time, since this is the beginning of the year, you can start afresh and plan this year out from now on.

Spending Schemes (eligible spending in the 80C basket)

  • Life Insurance Premium (Self, Spouse, Kids)
  • Unit Linked Insurance Plan (ULIP) - DON’T!
  • Home Loan Principal Repayment
  • Children School Fees (2 Kids)

Please note, that this is in no way financial or tax advise, just something I picked up after a lot of research. I would recommend you talk to your local tax or financial advisor (pls make sure he's a fixed fee advisor). The above information will change from time-to-time, and I may not be able to update it. Some information is missing, or being updated, so we will leave them with *.