Key Points
Of the 4Cs, clarity is the third most important characteristic because most imperfections cannot be seen unless under professional magnification. (Cut is the most important 4C to consider)
Clarity refers to the tiny imperfections called inclusions. Diamonds with the least and smallest inclusions receive the highest clarity grades.
To maximise your budget, choose what's called an eye-clean diamond (grades VVSI-SI1), which means it has no visible inclusions to the naked eye.
Clarity refers to the tiny, natural imperfections that that are present in all but the rarest diamonds. The less inclusions, the better the clarity. Gemmologists refer to these imperfections by a variety of technical names, including blemishes and inclusions. Because these imperfections tend to be microscopic, they do not generally affect a diamond's beauty in any discernible way.
Flawless
FL: No visible blemishes, < 1% of diamonds. Inclusions are not visible, rarest clarity grade under 10x magnification.
Internally Flawless
IF: Very slight blemishes, < 3% of diamonds. Inclusions are so small, it is difficult to see under 10x magnification.
Very, Very Slightly Included
VVS1: Inclusions in bottom-half, pavilion. Inclusions are so small, it is difficult to see under 10x magnification
Very, Very Slightly Included
VVS2: Inclusions in top-half, crown. Inclusions are so small, it is difficult to see under 10x magnification.
Very Slightly Included
VS1: Slightly less inclusions than VS2. Inclusions are minor, slightly visible under 10x magnification.
Very Slightly Included
VS2: Slightly more inclusions than VS1. Inclusions are minor, slightly visible under 10x magnification.
Slightly Included
SI1: Inclusions possibly invisible to the eye. Inclusions are noted, more visible under 10x magnification.
Slightly Included
SI2: Inclusions often visible to the eye. Inclusions are noted, more visible under 10x magnification.
Included
I1: Inclusions are obvious, visible to the eye under 10x magnification.
Heavily Included
I2-I3: Inclusions are obvious, visible to the eye under 10x magnification.