Here are the parameters you need to consider:
Amount of Tax Deduction To Avail: Under Section 80C, tax can be deducted on one’s gross annual income of up to ₹1.5 lakh. The investment instruments permitted for deduction up to ₹1.5 lakh under Section 80C are:
- Unit Linked Insurance Plans (ULIPs)
- Equity Linked Savings Schemes (ELSS)
- Life or Term Insurance
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
Additionally, repayment of the principal of a home loan, and fees for your children’s tuition, among others are eligible under Section 80C for tax-deduction. Under Section 80 CCD, another ₹50,000 can be deducted over and above the cap of ₹1.5 lakhs when using the National Pension Scheme.
Type of Investment Made: Within the bracket of Section 80C, there are generally two groups of tax-saving instruments you can choose from. These are investments offering fixed returns and those offering market or unit-linked returns.
Fixed Tax-Saving Instruments: The returns are fixed, meaning they are not subject to any market risks and prioritize the security of savings. If saving and security is your goal, and your risk appetite is low, this option is for you. E.g., Fixed deposits, life insurance plans, NSC, PPF, among others.
Market-linked Tax-Saving Instruments: The returns may potentially be exceptional but are dependent upon the performance of the market, so they are not assured. If growth is your goal, and your appetite for risk is high, this option is for you. E.g., ULIP Plans, Pension Plans, NPSS, ELSS
Tenure: Another point of consideration is the tenure of the tax-saving instruments under Section 80C. The lock-in period for ELSS is the lowest among the other options at 3 years. Fixed deposits have lock-in periods of 5 years. The PPF requires a lock-in period of 15 years. Similarly, NPS cannot be accessed until one reaches retirement age. Hence, most of the tax-saving instruments have medium to long tenures.
New Investments: Before making any fresh investments, consider all the deductions from the Income Tax Act outside of Section 80C like donations, interest on loans (home, education, and health plans), section 80D deductions and others. By getting an idea of where tax is reducible, you can assess whether investing in 80C tax saving instruments is necessary.