Taxation Law

Deductions under Section 80C of Income Tax Act

 

Deductions under Section 80C of Income Tax Act

By

Manu Gupta

Sahil Tandon

Symbiosis Law School, NOIDA

Introduction

Most of the Income Tax payee try to save tax by saving under Section 80C of the Income Tax Act.  However, it is important to know the Section in detail so that one can make best use of the options available for exemption under income tax Act.   One important point to note here is that one can not only save tax by undertaking the specified investments, but some expenditure which you normally incur can also give you the tax exemptions.  Here are some tips for you: –

You are saving every year and while saving you normally have some goal in mind, e.g. to meet the expenditure on education of children, purchase of a vehicle or house or marriage of your children.  Therefore, you should always look at the investments from the angle whether it will meet your specific requirements on maturity. You should also try to diversify your savings in different instruments.

For instance, if you have already invested a fair portion of your money in equity (shares and mutual funds that invest in shares), avoid an ELSS. Opting for an ELSS means a huge portion of your investments will be in equity and that may not be what you want. The provision of efficient infrastructure services is essential to realize the full potential of growth in the economy. The infrastructure sector includes power, telecommunication, roads, and industrial parks as well as power generation, distribution and transmission. It has been recognized that government alone cannot fulfill all the requirements of providing infrastructure and that the private sector also needs to be actively engaged in the process by providing an appropriate policy framework which gives them adequate confidence and incentives to invest on a large scale, while simultaneously preserving adequate checks and balances through transparency, competition and regulation.

Tax incentives can be defined as any incentive that reduces the tax burden of enterprises in order to induce them to invest in particular projects or sectors or geographical areas. Tax incentives or tax preferences include reduced rates of taxes on profits, tax holiday, accelerated depreciation, deferrals, credits, etc. In developing an incentive system, the government needs to clearly list and analyze the deficiencies in the system that the incentives are designed to reduce. The costs of granting incentives can then be compared to the benefits of removing or reducing such deficiencies. Periodic review of the incentive system would help to plug revenue leakage as also appropriately modify the incentive scheme.

Apart from deductions provided by section 80C, which currently has the limit up to `100000/- ; there are deductions provided to the assesse in our income tax law other than these as well. Two significant amongst these are: Firstly, deduction on insurance premium paid on taking Medical insurance policy and Secondly, deduction on interest paid on education loans. These are two deductions as to payments. In the present era of such high technological innovation, growing world markets, shrinkage of world into a petite village, increasing tension and health risks, education and health are the two primary and basic needs which every individual needs to have access to. Health risks and diseases in our nation have now taken altogether a different form, with many novel diseases being discovered. Besides the expenditure on health today has skyrocketed with hospitals now charging equivalent to five star hotels. The current burning topic of debate between health insurance companies on cashless insurance and the big hospitals highlights the significance of the health insurance in India. Another much important sector is of Education. In our nation while with the current efforts of the government gross enrolment ratio for primary education has increased but level of higher education is still abysmally low. Thus government came up with Education loans scheme. Thus in such a scenario providing deduction from income on these two i.e. health and education is really a welfare –oriented step by the government. Let us have a detailed analysis of these two deductions provided under the Income Tax Act, 1961.
 Income tax Act allows for certain deductions from the gross annual income. Gross Total Income means the aggregate of income calculated under the various heads after giving effect to provisions as to clubbing of income and set off of losses. These deductions however are not permissible from the following under mentioned incomes although these incomes form a part of Gross Total Income. These incomes are:- 

a. Long term Capital Gains 

b. Short Term capital gain on transfer of equity shares and units of equity oriented fund through a recognized stock exchange i.e. short term capital gain covered under section 111A.c. Winnings of lotteries, races etc.

d. Incomes referred to in sections 115A, 115AB , II5AC , 115ACA , 115AD , 115BBA and 115D

The deductions basically are of two kinds: – ·

Deductions as to certain payments and investments, enumerated under sections 80C -80GGC · Deductions as to certain incomes already included under gross total income under sections 81-1A- 80U. 

Income arrived at after claiming these deductions is called as Total income or Taxable income. The total income thus arrived at should be round off to nearest `10.

Section 80C and 80D

  • Always check your forced savings/expenditure Eligible for Deduction:

Payment towards Provident Fund:

Salaried income tax payee are usually have a forced saving which are eligible for deduction under section 80C.    A fixed percentage of basic salary  (ranges from 8.33% 12%) is deducted by your employer towards the Employees Provident Fund (EPF).   Some employers allow higher deduction towards EPF.  Thus, you should first of all check the total amount that is expected to be deducted towards EPF during the financial year. The total amount deducted from your salary will be eligible for investments under Section 80C.

Interest on National Saving Certificates:

In case you have purchased NSCs during some earlier years, then the accrued interest as per the tables released by authorities is eligible for deductions under Section 80C.

(2) Always Check the Lock-In Period of the Investments

Tax saving investments has a minimum lock-in period i.e. the period during which withdrawals are usually not allowed.  If the same are withdrawn, these will be taxable in the year of withdrawal.  For example, National Savings Certificates (NSC) have a lock-in period of five years (earlier it was six years), Public Provident Fund (PPF) has a lock-in of 15 years, Equity Linked Saving Schemes (ELSS) have a lock-in period of three years.  Insurance policies have even greater period of lock in.

(3) Always Check whether the investment you intend to make will meet your goals:

Background to Section 80C in the Income Tax Act OR KNOW EVERYTHING ABOUT SECTION 80C OF INCOME TAX ACT – INDIA:

Earlier there used to be Section 88 providing certain tax benefits.   However, now Section 80C has replaced the old Section 88.  However, the investment mix available in Section 88 has remained more or less the same. The new section 80C became effective w.e.f. 1st April 2006.   Moreover, earlier section 80CCC on pension scheme contributions has also been merged with the new 80C.     However, unlike Section 88, there are no sub-limits and is irrespective of how much you earn and under which tax bracket you fall.

Sec 80C of the Income Tax Act states that qualifying investments, up to a maximum of Rs.1 Lakh, are deductible from your income. Thus, it means actually your income gets reduced by this investment amount (up to Rs.1 Lakh), and you end up paying no tax on it at all!   Most of the lower and medium Income Tax payee try to save tax by saving under Section 80C of the Income Tax Act.

A review of the various options for savings under section indicates that you can not only save tax by investing your savings in specified investment options, but also on certain types of expenditure which you have to normally incur.   Therefore, it is necessary to understand the full section so that in case you are short of funds, you can claim tax benefits even for certain expenditure incurred by you.

There are many small savings schemes like NSC, PPF and other pension plans, which are eligible under this Section.  Moreover, the payments towards the principal amount of housing loan are also eligible for an income deduction. Similarly, there is provision wherein the payments made towards education fees for children are also eligible for an income deduction.

Section 80D of our Income tax act provides deduction to an individual assesse or taxpayer and to the HUF only, (whether resident or not) and not to any other kind of taxpayer for e.g. the company, in case any amount is contributed by any of them to keep in force the health insurance policy / mediclaim policy.

Section 80HH:

The deduction required to be allowed under the provisions of section 80HH(1) is to be calculated with reference to the amount of profits and gains derived from an industrial undertaking, computed in accordance with the provisions of the Act and forming part of the gross total income, and not with reference to the gross profits and gains derived by the assessee from such business or industrial undertaking. [Para 6]

The assessee, in the instant case, was admittedly carrying on two industries. It was urged by the revenue that, on a true import of section 80HH, profit earned in one industry must be reduced including deductions admissible under section 32AB on account of investment deposit account in oxygen plant. After giving anxious consideration to the relevant provisions of the Act, it was not possible to accept the contention.

The object of enacting the provisions would be properly served only by confining the applicability of the provisions of that section to the profits and gains of a single industry. The co-existence of two industries in the common ownership was not intended by the provision to result in the misfortune of one being visited on the other. Each industry must be considered only one industry on its own working when adjudging its title to the deduction under section 80HH. To determine the benefit under section 80HH on the basis of net result of all the industries owned by the assesse, would evidently amount to shift the focus from the industry to such assesse.

Section 80 IA and 80 IB

Section 80IA of the Income Tax Act (Act) provides the extent and scope of deductions available to undertakings involved in the business of infrastructure development. The Finance Act, 1999 substituted section 80IA with a new section

80IA and section 80IB. Section 80IA as it originally stood in the Act provided for deductions in respect of profits and gains of industrial undertaking in certain cases. With effect from 1 April 2000, deduction under section 80IA is available to the following business carried on by an undertaking:

Provision of infrastructure facility which includes roads, highway projects, water supply, water treatment projects, sanitation and sewerage systems, solid waste management systems and ports including airport, inland waterway or inland port

  • Telecommunication services
  • Industrial parks
  • Power generation, transmission and distribution.

 

Chapter VIA of the Income Tax Act, 1961 covers only deductions available to assesse under section 80 of the Income tax act, 1961. The assesse by some act as mentioned can reduce its taxable under this provision. Amongst number of sub-sections of chapter VIA, the most important is section 80-IA and 80-IB as this relates to the deductions on the profit made on infrastructures projects and also the most litigated sections. In case you claim deductions under this section, 90% chances are that AO will dispute your claim and then the process of litigation begins.  Hence, it is very important and crucial to understand this sections with the help of latest judicial decisions in this regard, which are given below. To qualify for deduction under Section 80IB(4) of the Act, one of the essential requirement is that the industrial undertaking should have begun to manufacture or produce articles or things on or before March 31, 2004. It was held that where the assesse had not even applied for a factory license before 31 March 2004, the necessary condition under Section 80IB was not fulfilled. However, where application for license was already made before 31 March 2004, but license was obtained shortly thereafter, such lapse must be viewed as purely technical. The grant of license would not relate back to the original date of application.

The quantum of deduction u/s 80 IA is not dependent upon the assessee claiming or not claiming depreciation, because u/s 80 IA the quantum of deduction has to be determined by computing total income from business after deducting allowable u/s 30 to 43D.

Interest on margin money deposits cannot be considered as income derived from the business for the purpose of granting deduction u/s 80-IB. or the purpose of determining the deduction under section 80IA, the eligible deduction in terms of section 80IA (5), has to be reduced from the total income computed under the provisions of the Act, after setting off loss in another unit and if the total income is less than the eligible amount, deduction under section 80IA has to be limited to such amount. The assessee who is involved in manufacturing activities and selling of additives on commission basis, claimed deduction under section 80IB on service income, interest on deposits interest received from employees, commission received, compensation from sundry debtors for delayed payments and income on imported materials. Though the assessee preferred appeal against all the issues the court has admitted the appeal only in respect of service income and commission received. The court held that section 80IB and 80IA are code by themselves. As the finding has been given by the Tribunal that the income is not derived from industrial undertaking, deduction under section 80IB is not eligible. Refund of Excise Duty has a direct nexus to the manufacturing activity of the assessee and hence the same qualifies for deduction under section 80-IB. Transport subsidy & Interest Subsidy-Transport & Interest Subsidies received by the assessee, cannot be said to be derived from the industrial activity and the same would not qualify for deduction under section 80-IB.

Case Laws

Chapter VIA of the Income Tax Act, 1961 covers only deductions available to assessee under section 80 of the Income tax act, 1961. The assessee by some act as mentioned can reduce its taxable under these provisions. Amongst number of sub-sections of chapter VIA, the most important is section 80-IA and 80-IB as this relates to the deductions on the profit made on infrastructures projects and also the most litigated sections. In case you claim deductions under this section, 90% chances are that AO will dispute your claim and then the process of litigation begins.  Hence, it is very important and crucial to understand this sections with the help of latest judicial decisions in this regard, which are given below.

In the case of Excel Cotspin (India) P. Ltd. v. Dy. CIT, Chennai ITAT held that The Electricity Board purchased power produced by assessee who was manufacturer of Yarn and had installed windmill for the purpose. Where electricity generated by assessee was collected by Electricity Board at lower rate and released to assessee whenever required, it was held that profits of the eligible undertaking were to be determined on the basis of the annual loading cost of electricity purchased by assessee from Electricity Board.

To qualify for deduction under Section 80IB(4) of the Act, one of the essential requirement is that the industrial undertaking should have begun to manufacture or produce articles or things on or before March 31, 2004. It was held that where the assessee had not even applied for a factory licence before 31 March 2004, the necessary condition under Section 80IB was not fulfilled. However, where application for licence was already made before 31 March 2004, but license was obtained shortly thereafter, such lapse must be viewed as purely technical. The grant of license would not relate back to the original date of application. Refer, CIT v. Jolly Polymers, 342 ITR 87 (Guj.) (High Court).

The quantum of deduction u/s 80 IA is not dependent upon the assessee claiming or not claiming depreciation, because u/s 80 IA the quantum of deduction has to be determined by computing total income from business after deducting allowable u/s 30 to 43D. Refer, Plastibends India Limited Vs Add CIT, ITA No. 1282/Mum/2007 dated 16-10-2009.

Interest on margin money deposits cannot be considered as income derived from the business for the purpose of granting deduction u/s 80-IB . Refer, Avanti Feeds Limited V DCIT, ITA Nos. 1170 & 1153/Hyd/ 04 dated 23-1-09.

Assessee having constructed Wing “E” after obtaining commencement certificate in 2002 and 2003 though similar certificates had been obtained prior to 1998, in respect of A, B, C, and D wing, Wing E was a separate housing project and same having been completed before 31st March 2005, the assessee was entitled deduction under section 80IB (10) in respect of “E” Wing. Refer, Vandana Properties vs. ACIT, 128 TTJ 89 (Mum.)(UO).

Additional income surrendered by the assessee firm having been added to the income of the business itself, it is to be considered while working the deduction under section 80IB. Refer, CIT vs. Allied Industries, 229 CTR 462.

Exchange rate difference arises out of and is directly related to sale transaction involving export of goods of the industrial undertaking and, therefore, the difference on account of exchange fluctuation is entitled to deduction under section 80IB., Refer, CIT vs. Rachna Udhyog, 230 CTR 72.

Interest received by an assessee on overdue payments from customers is eligible for deduction under section 80IA. Refer, CIT vs. Advance Detergents Ltd, 188 Taxman 15.

Initial assessment year for the purpose of section 80IA is the assessment year relevant to the previous year in which the commercial production is started and not the assessment year in which there was only a trial production. Refer, CIT vs. Nestor Pharmaceuticals Ltd, 36 DTR 200.

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