A lot of times, people look at where their colleagues and friends have invested to save tax and just buy the same things without thinking if they are right for them.
This isn’t the right approach. After all, you are putting your hard-earned money. You should know all the options available to you and then make an informed decision and that’s what we will talk about in this article.
Let’s begin. A big component of tax savings available to every taxpayer is the provisions under Section 80C. In this article, I will also discuss what is section 80c? and 10 Best Deduction Under Section 80c.
What is Section 80c?
Let us look at what is Section 80c of the Income Tax Act 1961. According to the tax laws, you can claim a deduction of Rs 1.5 lakh from your total income under section 80C.
Basically, you can reduce up to Rs 1.5 lakh from your total taxable income by saving and investing money in the products that are listed under Section 80C towards tax benefits.
This benefit under Section 80C can be availed by individual taxpayers and Hindu Undivided Family (HUF). Having understood this far, let us dig deeper as to how exactly you could benefit from Section 80C and utilise the Rs 1.5 lakh that you can.
As mentioned before, you need to deploy this sum into products that are listed as tax savers under Section 80C and they are many such products.
Various Deduction Under Section 80c
Actually, there are over a dozen avenues through which taxpayers could use to exhaust their tax savings under Section 80C. Each of these products is unique, though they all have a common objective which is to provide tax savings on the monies that flows into them each financial year. Let us understand the basic features of each one of them.
Public Provident Fund (PPF)
The Public Provident Fund (PPF) is one of the oldest tax saving instruments in the country which was introduced in 1968.
It is a long-term retirement savings option,which functions like a savings-cum-tax savings medium. The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years as per your wish.
The amount deposited during a financial year in the account can be claimed under Section 80C deductions within the Rs 1.5 lakh limit. The current interest rate on PPF is 7.9%.
There is another advantage with PPF; the interest rate is guaranteed and the gains are tax free on redemption after maturity.
Employee Provident Fund (EPF)
Employee Provident Fund (EPF)Your contributions in EPF are eligible for tax deduction of up to Rs 1.5 lakh under Section 80C and the money that you accumulate in your EPF earns a guaranteed interest which is notified at the beginning of the financial year.
To provide flexibility to taxpayers, they can withdraw from the account after the mandatory specified period of 5 years. Like PPF, the gains from EPF are also tax free.
The current interest rate on EPF is 8.65%. National Saving Certificate (NSC)The NSC is a guaranteed income investment scheme that you can open at any post office.
The tenure of this scheme is fixed at 5 years and the interest rate is guaranteed in them. The current interest rate on NSC is 8%. However, the gains from the NSC returns are taxable as they are added to your income.
Sukanya Samriddhi Yojana (SSY)
Sukanya Samriddhi Yojana (SSY)This scheme is designed to provide a bright future for the girl child. The SSY account can be opened at the post office and designated banks for a girl child.
The account can be opened for the girl child before she turns 10 years old. The interest offered on this account is guaranteed and is currently 8.4%.
Like the PPF, the interest earned in this account is tax free. 5-year Tax Saving Fixed DepositThese are bank deposits for a 5-year term in which the savings up to Rs 1.5 lakh in a financial year qualify for tax deduction under Section 80C.
The current prevailing interest rate in such deposits is in the 6.85-7.5% range. However, like the NSC, gains from this deposit are taxable as they are added to your income.
Senior Citizens Savings Scheme (SCSS)
Senior Citizens Savings Scheme (SCSS)To address the tax savings needs of senior citizens, the SCSS was introduced by the government for those who are 60 years old or more.
The deposit matures after 5 years from the date of account opening but can be extended once by an additional 3 years. In this scheme the returns are guaranteed and currently 8.6%.
Equity Linked Saving Scheme (ELSS)
Equity Linked Saving Scheme (ELSS)The ELSS is an equity mutual fund category in which investments qualify for tax deductions under Section 80C up to the Rs 1.5 lakh limit in a financial year.
The ELSS is a market-linked product and doesn’t guarantee any returns and comes with a three year lock-in, which is the shortest among the tax savings options under Section 80C.
As the ELSS is a mutual fund, there is convenience to start an SIP with ELSS to make tax savings a regular exercise with just Rs 12,500 SIPeach month.
National Pension System (NPS)
National Pension System (NPS)The NPS is a voluntary retirement scheme through which you can create a retirement corpus or your old age pension and available to all Indian citizens (resident or non-resident)between 18 and 65 years old.
The investments under Tier I of the NPS qualify for tax deductions under Section 80C up to the Rs 1.5 lakh limit in a financial year. There is an added advantage of saving additional tax with the NPS.
NPS subscribers can claim an additional deduction for investment up to Rs 50,000 in a financial year under Section 80CCD (1B) over and above the Rs 1.5 lakh deduction under Section 80C. The gains from NPS investments as well as the final corpus are full tax free.
Life Insurance Premium, pension plans and ULIPs
You can claim premiums paid for life insurances for self, children or your spouse under Section 80C.
The gains from these savings and investments are tax free under Section 10(10)D if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.
However, if the sum assured is less than 10times the premium, you can claim a deduction under Section 80C only up to 10% of the sum assured.
Repayment of Home Loan
There is something for home buyers servicing a home loan. If you are repaying the principal component of a home loan, then that amount is eligible for deduction under Section 80C.
This tax exemption also includes payments made towards stamp duty and registration.
Tuition Fees Deduction Under Section 80c
If you are a parent, you can claim fees paid for admission of your child in schools, colleges or universities in India for full-time courses only.
The tax exemption under Section 80C can be claimed for up to two children for that particular financial year.
Infrastructure bonds Within the Section 80C, sub Section 80CCF is a deduction available for taxpayers who prefer to invest in the government approved bonds.
The deduction limit is up to Rs 20,000 per year and applicable on long-term bonds having a minimum tenure of 10 years with a lock-in period of 5 years.
While the interest rate is fixed with these bonds, the gains on maturity are taxable. Having seen how each of the products in which savings and investments qualify for tax deductions under Section 80C, you can decide on those that meet your needs.
You should also know that to claim the tax deductions under Section 80C, you need to produce proof of savings and investments inthe products that you choose.
The tax savings options within Section 80C is exhaustive and overwhelming that many forget how much income tax they actually save.
For instance, at the highest 30% tax bracket,a taxpayer who exhausts the entire Rs 1.5 lakh deduction under Section 80C can save Rs 46,800 including 4 per cent cess.
In the 20% tax slab, the savings works toRs 31,200 and at 5% tax slab it is Rs 7,800. As we said in the beginning, it is our belief that tax savings should be done with some planning and thinking.
You should not get into the herd mentality of saving tax in an instrument just because your father does it or a friend thinks it is good.
I mean, just because you can save tax on insurance policy, doesn’t mean you take a policy to save tax. Think if you need insurance cover and take an adequate cover with tax savings as an additional benefit.
Another aspect that you should be watchful of is the tax savings on home loan repayment. Just because there is a tax saving window,do not go into taking a home loan to purchase a house.
But, when you do buy a house on a loan, use the available tax benefits under Section 80C towards loan repayment. We think there are essentially three must have tax saving products that every taxpayer should consider.
You need life insurance, especially a term life policy to make sure your dependents live comfortably in your absence. A term insurance policy provides pure life cover which is very affordable compared to other life insurance covers.
For instance, a 30-year old healthy male will need to pay about Rs 20,000 annually for a Rs 1 crore term insurance plan. At less than Rs 2,000 a month not only do you get peace of mind, you also get the tax benefit under Section 80C.
The second product which will work for you and help you to build a retirement corpus is the National Pension System (NPS). Retirement is a financial goal that everyone one needs to plan for.
The NPS with its long term lock-in, choice of investment options and growth possibility is a powerful tax saving cum retirement planning tool.
Lastly, there is scope to create wealth and save income tax with investments in ELSS. The mutual fund structure of ELSS lets you plan and automate your investment in them for the whole year through SIPs (systematic investment plan).
You could use the ELSS as the first step towards wealth creation along with the available tax deduction that you could claim under Section 80C.
To recap; Section 80C of the income tax allows individual taxpayers and HUF to claim a deduction of Rs 1.5 lakh from the total income by saving and investing money in the products that are listed under Section 80C towards tax benefits.
And, the best way to leverage tax savings under Section 80C is to plan for it and align it smartly to your financial needs and goals. Doing so, will help you save tax and also realise your financial goals.