Section 80CCC: detailed

4.4

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Do you know tax saving is a trick? Well be precise it involves lots of rules which are sections in our law system.

We have learned quite some ways to do tax savings. Are there more ways in which you can avail exemption on the deductions made on your income? Let’s see!

What’s up with Beanie?

Beanie’s salary package is Rs. 11 lakhs per year. She started saving money for availing exemption from taxes. 

In a year she earned Rs. 10,000 from her savings account. She has a fixed deposit of which she gets an annual interest income of Rs.15,000. She invested Rs. 70,000 in Public Provident Fund (PPF) and also Rs. 30,000 in tax-saving mutual funds. 

She also invested in a life insurance policy for which she paid a premium of Rs. 50,000. Another investment she made is of Rs. 20,000 for retirement planning. 

From the above data, Beanie’s gross total income calculations are:

Nature of income 

Amount (in INR)

Salary 

11,00,000

Other sources 

85,000 (savings account and FD)

Gross total 

11,85,000

Her deductions are: 

Deductions

Amount (in INR)

80C

1,20,000(PPF+Premium of insurance policy)

80CCC

20,000 (Retirement+annuity plan)

80CD

40,000 (NPS + APY)

Total 

1,80,0000

In this chapter, we will learn more about section 80CCC. Section 80CCC allows a deduction for the investment you make in buying a life insurance pension plan. There are many aspects and conditions which you will have to fulfill to be eligible to claim a deduction. Let us understand these in detail.

What is Section 80CCC?

The amount you invest in a life insurance pension policy is allowed for deduction under Section 80CCC is a Section of the Income Tax Act, 1961.  While buying or renewing a life insurance pension plan which pays annuities after maturity makes you eligible for claiming the deduction on the premium you pay towards the plan under Section 80CCC. 

What are the eligibility requirements for claiming deduction under Section 80CCC?

There are certain conditions prescribed under this section which you will have to fulfill for availing of the tax benefits. These conditions include the following –

  • Only individual taxpayers are eligible for this deduction. Hindu Undivided Families (HUFs), corporates, Body of Individual (BOI), Association of Persons (AOP), or Trusts cannot claim deduction under this section.
  • The individual taxpayers have to be residents or non-residents to claim the deduction. 
  • The investment has to be done in a pension plan which pays annuity after its maturity. 
  • The pension plan must be offered by an approved insurance company that has been registered with the Insurance Regulatory and Development Authority of India (IRDAI)
 

What are the terms and conditions to avail deduction under Section 80CCC?

Other than the eligibility criteria mentioned above, you should also keep in mind the following terms and conditions when claiming a deduction under Section 80CCC – 

  • The premium which you pay should be either for buying a new pension plan or for renewing an existing pension plan. 
  • The funds which are accumulated on the pension plan should only be paid as per the provisions specified under Section 10 (23AAB).
  • Suppose the pension plan you invest in earns any bonus or interest and the same is distributed to you along with annuity payments. In that case, the bonus or interest would not be considered as a deduction. Such bonus or interest would be taxable for you.
  • The pension which you will receive from the pension plan will be considered as a taxable income.
  • If the taxpayer surrenders the pension plan, the surrender value which you will receive will be taxable.
  • Rebates offered on investments done in annuity plans before April 2006 under Section 88 will not be allowed anymore.
  • Suppose you have deposited any amount before April 2006 into a pension plan. In that case, such deposited amounts will not be eligible for deduction under Section 80CCC.

What is Section 10 (23AAB), and how is it linked to Section 80CCC?

The important part to note is that the pension plan should pay the funds in a manner specified under Section 10 (23AAB) to claim any deductions under Section 80CCC. It is essential to understand this section and how it is linked with Section 80CCC. 

Section10 (23AAB) is a subsection of Section 10 as per the Income Tax Act, 1961. If you earn income from a fund that has been established by a recognized insurance company, including LIC, then Section 10 allows exemption on it.

Suppose the fund is established as a pension scheme before August 1996 and you make any contribution to the fund with the intent to receive annuities. In that case, the income of the fund will be exempted.

Only the funds which are approved by the Controller of Insurance or by the Insurance Regulatory and Development Authority of India (IRDAI) set up under Section 3(1) of the Insurance Regulatory and Development Authority Act, 1999 are eligible.

Under Section 10 (23AAB), you are allowed to claim an exemption on the income of funds. Under Section 80CCC, you are allowed to make deductions on the contribution you make towards such funds. When the funds are accumulated, they are paid along with interest earned to you in the form of a pension. The pension is taxable.  

What is Section 10 (23AAB), and how is it linked to Section 80CCC?

The important part to note is that the pension plan should pay the funds in a manner specified under Section 10 (23AAB) to claim any deductions under Section 80CCC. It is essential to understand this section and how it is linked with Section 80CCC. 

Section10 (23AAB) is a subsection of Section 10 as per the Income Tax Act, 1961. If you earn income from a fund that has been established by a recognized insurance company, including LIC, then Section 10 allows exemption on it.

Suppose the fund is established as a pension scheme before August 1996 and you make any contribution to the fund with the intent to receive annuities. In that case, the income of the fund will be exempted.

Only the funds which are approved by the Controller of Insurance or by the Insurance Regulatory and Development Authority of India (IRDAI) set up under Section 3(1) of the Insurance Regulatory and Development Authority Act, 1999 are eligible.

Under Section 10 (23AAB), you are allowed to claim an exemption on the income of funds. Under Section 80CCC, you are allowed to make deductions on the contribution you make towards such funds. When the funds are accumulated, they are paid along with interest earned to you in the form of a pension. The pension is taxable.  

Important points to remember about Section 80CCC deduction 

  • Under the section, the deduction which is allowed is up to INR 1.5 lakhs.
  • Section 80CCC is linked with Sections 80C and 80 CCD (1). Therefore, the maximum deduction under all three Sections cannot exceed INR 1.5 lakhs. For example, if you invest Rs. 50,000 in a 10-year fixed deposit scheme or an ELSS scheme (eligible under Section 80C) and INR 2 lakh into an eligible pension plan under Section 80CCC then you will be eligible for a total deduction of INR 1.5 lakhs only. The remaining Rs. 50,000 will be a part of your taxable income.
  • The pension plan you buy should be bought from a company that is in the public sector or a private sector and is registered with IRDA.
  • While making the deduction, only the premium paid for the financial year for which the tax liability is being calculated is considered. Even if you pay the premium in advance for more than one year, the deduction allowed is only on the premium for the previous year. This is the year for which tax liability is being computed. For example, if you pay a premium of Rs 1,00,000 in the financial year 2019-20 as a premium which includes Rs. 25,000 for the year 2019-20 and Rs. 75,000 for the next three financial years then the claim which is deducted will be only Rs. 25,000 and mot the entire amount Rs 1,00,000. 
  • When you invest in a single premium pension plan, the deduction would be allowed only for the year for which the premium is paid. In the next years when you avail the benefits of the coverage, then the deduction will not be allowed.
  • You will have to contribute to a pension plan from your taxable income. Any income if earned from an undisclosed source will not be allowed as a deduction if invested in a pension plan.

Wrapping up

Now that you understand Section 80CCC in detail, it’s only logical that we move on to the next big topic - Other sections of the IT ACT. Is there any other way you can save tax? Check out the answer to this in our next chapter!

A quick recap

  1. The amount you invest in a life insurance pension policy is allowed for deduction under Section 80CCC is a Section of the Income Tax Act, 1961. 
  2. Two benefits of section 80CCC of the Income Tax Act, 1961 are:
    • It can reduce your taxable income and help you save taxes.
    • You can create a retirement compilation by investing in a life insurance pension plan.
  3. If you earn income from a fund that has been established by a recognized insurance company, including LIC, then Section 10 allows exemption on it.
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