Tax savings are crucial for every tax payer. Every penny saved, grows in the future. Depending upon the tax slab, one is entitled to specific tax deductions. A major part of tax savings can be attributed to Section 80C. Under this section of Income Tax Act, one can invest in Rs. 1.5 lakh worth tax saving solutions and the taxable annual income is reduced by the same amount.
There are several investment options to get a deduction under 80C. Tax payers are frenzied as the deadline to file income tax returns approach. In such situations, they may not be thinking clearly and make mistakes in choosing the best plan to be eligible for deduction under 80C. It is better to plan ahead and avoid last minute chaos.
Things to Look for in a Good Tax Saving Investment
Before deciding on investment plans for deduction under 80C, one should look for few salient features:
- The lock in period of the plan.
- Returns expected from the investment.
- Tax treatment of the interest earned.
- Investment limit.
- Safety and flexibility of the plan.
- Transparency and ease of investment.
Investments and Expenditures Qualifying for Deduction under 80C
The benefit of deduction under 80C can be availed by tax payer of any income tax slab. Apart from investments, certain expenditures also qualify for this benefit.
- Provident Fund (PF) and Voluntary Provident Fund (VPF):
These funds are auto-debited from the salary and constitute of contribution of both employer and employee. Only employee’s contribution is considered as 80C investment.
Public Provident Fund (PPF):
PPF is the most profitable small savings scheme that is eligible for investment under 80C.
- Premiums of Life Insurance Plans:
The total annual premium of any life insurance plan is also counted for investment under section 80C. It includes premiums paid for insurance of self, spouse or children only.
- Equity Linked Savings Scheme (ELSS):
Certain mutual fund schemes qualify for tax savings under this section.
- Home Loan Principal Repayment:
The principal portion of the Equated Monthly Installment (EMI) towards home loan is qualified for tax savings under section 80C.
- Stamp Duty and Registration Charge for a Home Purchase:
The payment done for stamp duty and registration while purchasing a home is eligible for tax savings for the year of purchase.
- Small Savings Schemes:
Investments made towards Sukanya Samriddhi Account, National Savings Certificate, Pension Funds, 5 year Fixed Deposit in banks, 5 year Post Office Time Deposit and Senior Citizens Savings Scheme are considered as investments for deduction under 80C.
- NABARD Rural Bonds:
National Bank for Agriculture and Rural Development issues Rural Bonds, which are eligible for 80C tax savings.
Issued by corporates, these bonds also enable tax savings under section 80C.
Personal or family floater health insurance policy premiums are considered as tax saving investment.
School tuition fees for maximum of two children can be availed as deduction under section 80C.
Best Investment Options to Save Tax under Section 80C
Depending on the need and risk, there are several good investment options to save tax.
Equity Linked Mutual Funds
- Only Equity Linked Savings Scheme (ELSS) is eligible for deduction under 80C, not any other kind of mutual funds.
- The lockdown period is 3 years.
- Though it is market linked, the returns are usually between 8-12%.
- Minimum investment is Rs.500 per month.
- The interest earned is tax free.
- It is less risky to invest through small SIPs rather than investing a big amount.
Public Provident Fund (PPF)
- PPF provides long term investment under small savings schemes.
- The lockdown period is 15 years.
- The interest rates are linked to G-Sec rates. Currently it is offering 7.6%.
- Minimum deposit is Rs. 500 per year and the maximum limit is Rs. 1.5 lakh.
- The interest earned is tax free.
- It is advisable to invest through online banking system to reduce hassle. In case of no internet connectivity, nearest Post Office or authorized bank is the best option.
Senior Citizens Saving Schemes (SCSS)
- This is an exclusive saving scheme for Senior Citizens only.
- The lockdown period is 5 years. It can be closed prematurely after some deductions.
- The interest rate provided by Post Offices is 8.3%, whereas banks provide 7.7% annually which is paid quarterly.
- The minimum deposit amount is Rs. 1000 and the upper limit is Rs. 15 lakh.
- The interest earned above Rs. 10000 per annum is taxed.
- Stretching the deposits over many financial years creates more savings and optimizes tax benefits.
National Pension Scheme (NPS):
- Investments in this scheme provide tax relief under three different sections of Income Tax Act. Investment up to Rs. 1.5 lakh can be claimed as deduction under 80C. Additional deduction of up to Rs. 50,000 can be claimed. If 10% of the salary is deposited by the employer in NPS, the amount remains tax free.
- It has a lockdown period of up to 60 years of age of the investor.
- Minimum deposit is Rs. 6000 per annum for Tier I and Rs. 2000 per annum for Tier II. There is no upper limit.
- Interest earned is 9.5%.
- It is not tax free.
- Sukanya Samriddhi Yojana (SSY)
- This allows long term investment for girl child below 10 years. Only one account per girl child can be created.
- It has a lock down period of the number of years until the girl is 21 years old.
- Minimum deposit is Rs. 1000 per year and it can max up to Rs. 1.5 lakh.
- Interest earned is 8.3 %.
- Returns are tax free.
- Unit Linked Investment Plans (ULIP)
- In ULIP, a part of premium is for the insurance, while the other part is invested in stock market. It provides flexibility, protection and income as low risk investment tools. Investment up to Rs. 1.5 lakhs is eligible for deduction under 80C.
- Lockdown period is 5 years.
- The premium varies with each plan.
- The returns vary with the market, but it can be anywhere between 12-14%
- The investment amount and returns are tax free.
- A smart step would be to choose liquid or debt fund and slowly transition to equity funds if the investment is big.
Other good investment plans to receive deduction under 80C are National Savings Certificates (7.6% returns), Fixed Deposits (up to 7.7%) and other Pension Plans (7-10% returns).