Though most working professionals have not studied law, nearly all have heard about Section 80C of the Income Tax Act, 1961. What makes the Section so popular and important? The need to reduce tax outgo at the end of the financial year gives the Section the importance it commands. Under Section 80C, individuals and Hindu Undivided Families can claim a tax deduction of up to 150,000 rupees from their gross annual income for certain investments and payments. The catch is that the deduction is allowed only on specific investments. Your investments may not be taxable, the returns sometimes attract tax, so it is crucial to choose instruments with the minimum tax burden. Consider these eight tax-saving instruments.
Equity Linked Saving Scheme
Equity-linked savings schemes are mutual funds with two differentiating characteristics - they are eligible for tax benefits under Section 80C and have a three-year lock-in period. However, investors should tread with caution as market volatility can have a bearing on the returns. Ideally, investment in ELSS should be made for a tenure of five to seven years as equity schemes create wealth over long periods. Equity funds also attract 10 percent tax on long-term capital gains of over 100,000 rupees in a year. The tax liability, however, can be managed through the regular harvesting of capital gains.
National Pension Scheme
The government began this program to provide a retirement pension to professionals during their working years. Under the scheme, 60 percent of the corpus can be withdrawn after retirement, which has been made tax free. The fund is invested in equity, fixed deposits, corporate bonds and government funds among others. The quantum of equity exposure is decided by the investor. As per the latest rules, investors can allocate up to 75 percent of funds to equities. Contributions of up to 150,000 rupees in the scheme can be claimed as a deduction under the overall Section 80C. Investors can also avail an additional deduction of up to 50,000 rupees under Section 80CCD(1b). If your employer contributes 10 percent of your basic salary in the NPS, it will not be taxed.
Public Provident Fund
The contributions to the Public Provident Fund are eligible for tax deductions under Section 80C. The return in this scheme is linked to government bond yields in the secondary market. It has a maximum contribution limit of 150,000 rupees, so the entire amount can be claimed as a deduction. The interest earned through PPF is tax-free. The investment is locked-in for 15 years, with partial withdrawals allowed after seven years. A PPF account can be opened through a post office branch or a designated state-owned bank.
Senior Citizens’ Savings Scheme
This scheme is an ideal investment option for people above 60. The overall tax exemption for people above 60 is 350,000 rupees and for those above 80 is 550,000 rupees. The SCSS investment limit is 1.5 million rupees, with a tenure of five years, which can be extended by three years. The scheme pays 8.7 percent on investments, which is the highest among small savings schemes.
Sukanya Samriddhi Yojna
Investments in the Sukanya Samriddhi Yojna qualify for deductions under Section 80C. The scheme is aimed at savings for the girl child, which can be used for her education and marriage after maturity. Any guardian of a girl below 10 years can open this account. The interest earned through this scheme is tax-free, but there is an annual limit of 150,000 rupees on investments. The interest rate is linked to government bond yields and change every quarter.
Unit Linked Investment Plans
Investing in ULIPs can offer both protection and savings. The investment is eligible for deduction under Section 80C of the Income Tax Act, 1961. Besides providing insurance, it channels one's savings into various market-linked assets. ULIPs have a lock-in period of five years, but they can have a duration of 15 to 20 years or more. Income from ULIPs is tax-free. Investing in a child ULIP is a prudent option, as these schemes waive off premiums in case the parent dies and continues to invest in the policy.
National Savings Certificate
Investment(s) made in the National Savings Certificate is eligible for deduction under Section 80C. The interest earned is taxable, however, if the interest is reinvested in the scheme it qualifies for deduction under Section 80C. The scheme has a tenure of five years. The interest earned on investments in NSC is around 8 percent, similar to what other fixed-income schemes fetch.
Five Year Bank Deposit
Specially designed as tax savings schemes, these bank deposits have a lock-in period of five years. The interest earned is not as high as small savings schemes, but it is the best option for those who leave tax planning for the last minute. The investment qualifies for the deduction, but the interest earned is fully taxable.
One should start tax planning at the start of the financial year and not wait for the last minute. Starting early and making proper investments can help in achieving long-term plans. Tax saving should always be considered as an additional perk and not the primary aim for investment. To get assistance in finding the best tax saving instrument that fits well with your requirements, click here