Section 80CCD: Deductions under Section 80CCD of Income Tax

Written by : Knowledge Centre Team

2024-08-02

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Note: Deduction under section 80CCG has been discontinued starting from 1st April 2017.

If you are investing in equities for the first time, you can deduct a portion of the invested amount from your taxable income. This deduction is allowed under section 80CCG of the Indian Income Tax Act, 1961. So, what is the meaning of section 80CCG and who is eligible to claim deduction under this section?

What is Section 80CCG?

Section 80CCG encourages first-time investors to put their money into the Indian stock market. Section 80CCG was introduced to help you develop a habit of investing in equities, the best-known asset class to generate wealth in the long run. The minimum investment period was 3 years and because there was a lock-in period to become eligible for the deduction. In any case, if you stay invested for a longer duration, you will stand to benefit from the return on investment.

Deductions Under Section 80CCG

If you are a first-time investor, you may consider investing some portion of your income into equities. In return, the government allows up to 50% of the invested amount to be deducted from your taxable income.

The scheme, under section 80CCG, named Rajiv Gandhi equity saving scheme allows deduction of up to Rs 25000 per annum. This deduction is over and above the deduction of Rs.1.5 lakh allowed under Section 80C.

For example, Mr Chandrakanth Shenoy, a first-time investor, invests Rs 50,000 in an equity scheme. Mr Shenoy is now eligible to deduct 50% of his investment, i.e., Rs 25,000, from his taxable income. His taxable income was Rs. 7,50,000 before his investment, but now his new taxable income becomes Rs 7,25,000.

Who can Benefit from Section 80CCG?

If you satisfy the following eligibility criteria of Section 80CCG of the Income Tax Act, 1961, you can avail income tax deductions:

1. You are investing in equities for the first time

2. Your gross total income is less than or equal to Rs 12 lakhs per annum.

3. You must stay invested for at least 3 years

4. You may invest in equity or equity-oriented funds

5. You may invest in stocks listed under BSE 100, public sector undertakings, ETFs and Mutual Funds

Alternatives to Section 80CCG

If you are exploring alternatives to 80CCG, there are a plethora of options to choose from. These options also have some tax benefits under different sections of the Indian Income Tax Act.

1. Mutual Funds

Mutual funds source money from different people and institutions and invest in equities. Mutual funds may be focused on specific industries or indices and you can choose the type of fund depending on your risk appetite and targeted return.

If you want guaranteed returns, you may explore mutual funds that invest in government securities, corporate debentures and bonds. Equity Linked Savings Scheme (ELSS), a type of mutual fund with a lock-in period of 3-years, is eligible for the deduction, from taxable income, under section 80C of the Indian Income Tax Act.

2. Unit Linked Insurance Plan (ULIP)

ULIPs offer life cover plus a return on investment. The best part with ULIPs is the diversified portfolio of equity and debt funds which you can change multiple times throughout the investment tenure. In case of your unfortunate demise, your nominee would receive the Sum Assured or else you will receive the fund value at the end of the policy term.

Amounts paid towards premium are deductible, from taxable income, under section 80C whereas all pay outs are exempt from tax under section 10(10D). Other features of this versatile tax-saving investment include:

ULIPs allow tax-free partial withdrawals after five years of holding
You can also schedule partial withdrawals from ULIPs like Invest 4G, from Canara HSBC Life Insurance, at specific milestones
Automatic portfolio management for equity investors to keep their market risk in check
Hold the investment plan until the age of 99. Gives you the option to save and withdraw a tax-free pension from the plan
Bonus additions for long-term investors
The premium protection option ensures an intended maturity value to your family even after your early death. This option is very useful for children’s goals

3. National Pension Scheme (NPS)

Contributions to NPS are deductible, under sections 80C and section 80CCD(1b), from taxable income. Investment of up to Rs 50,000 in an NPS Tier 1 account is deductible, under section 80CCD(1B), from taxable income. Rs 1.5 Lakhs invested in NPS can be deducted, under section 80C, from taxable income. Therefore, a total of Rs 2 Lakhs can be deducted to compute taxable income. At the time of maturity, the tax treatment is as follows:

a. Tax benefits on partial withdrawal

You may make any partial withdrawal from your NPS tier I account before the age of 60. Any amount up to 25 per cent of your contribution is exempt from tax.

b. Tax benefit on Annuity purchase

Whatever amount you invest to purchase an annuity, is 100% exempt from tax. However, annuity income/pay outs that you receive later on will be subject to income tax.

c. Tax benefit on lump sum withdrawal

When you turn 60, if you withdraw up to 40 per cent of the fund value, that amount is exempt from tax. For example: If the total fund value is Rs 10 lakhs, then 40% of the fund value works out to Rs 4 lakhs. You may withdraw Rs 4 lakhs without attracting any tax. If the balance of 60% i.e., Rs 6 lakhs is used for purchasing an annuity, you do not pay any tax upfront on that component. Only the annuity pays out the income you receive in the subsequent years will be subject to tax.

Recommended Reading - NPS withdrawal Rules

Several investment options focus on equities and thus give you inflation-beating returns in the long run. These instruments also offer tax benefits thus making them even more lucrative. You must invest in a wide variety of such options so that your investments are not only diversified but also get the best of benefits offered by each option.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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