Tax saving options under Indian Income Tax Section 80C

Section 80C under the Income Tax act of India provides several avenues to save tax. You can get tax exemption up to Rs. 150,000 (1.5 Lac) by investing in these tax saving instruments. Overall investment across these instruments can be more than this tax-free limit of Rs. 1.5 Lac. (Subject to individual limits in each of these instruments). This can eventfully lead to good tax saving in India as well as good returns too! 

Suppose your total taxable income is Rs. 5 Lac. and you invest Rs. 1.5 Lac across these instruments. In this case, you will need to pay a tax on Rs. 3.5 lac income only.

What are some avenues you can use to save taxes?

We’ll discuss this in rest of this article.

Tax saving options under section Indian Income Tax Section 80C

Tax saving in India under Income Tax Section 80C – Investments that can help you save taxes

  • Provident Fund (PF) – Most of the salaried employees have PF a part of their salary. They contribute a certain amount (12%) of their basic salary towards PF. And employer contributes  some amount (usually an equivalent amount, but not necessary). You can contribute more towards PF voluntarily via VPF . (Voluntary Provident Fund). Currently the rate of interest it earns is 8.65%. After a certain point of time, the returns can be tax-free. One thing to be noted is that the tax exemption part is relevant to the employee contribution only. 
  • Public Provident Fund (PPF) – If you are not employed in a company which offers PF (usually company of over 20+ employees offer PF.) or are self employed (or even if you have PF as part of your salary), you can still invest in provident fund. This is via public provident fund. PPF falls under EEE (Exempt, Exempt, Exempt) category. This means – apart from initial contribution being exempt from taxes, the interest earned and the withdrawals are also tax free. Currently, PPF offers an interest rate of 8%. (This is reviewed and updated regularly.)
  • Equity linked savings Scheme – ELSS is a mutual fund investment. It has a 3 year lock-in – minimum among the instruments under Section 80C. While there are no guaranteed rate of returns, they have historically given good returns over a long term horizon. (Most of them have given 12%+ anualized  returns in long run)
  • National Savings Certificate – NSC – It is a government backed saving scheme, aimed towards encouraging small savers. (But without obligation of continuing investment every year – unlike a PPF). You can invest in NSC and get 8 percent rate of interest (current rate). You can choose maturity period of 5 years or 10 years. One drawback of this is that the interest earned is taxable.
  • Tax saving Fixed Deposits – Most of the banks offer tax saving tax deposits. (Tenure of 5 years). While it is still quite popular, it is not quite efficient in terms of interest rates. (Most other instruments offer better rates). The taxable nature of returns make it further more inefficient as a tax saving instrument.
  • Unit Linked Insurance Plan – ULIP is a mix of insurance and mutual funds. They give returns based upon market conditions (in lines of mutual funds) and also provide a certain life insurance. (Usually less than what a typical term plan can cover). However, they have been quite notorious for having high distributor commission and more inefficient vis a vis taking a term insurance & mutual fund separately.
  • Sukanya Samriddhi Yojna – SSY – This is an account which can be opened under in the name of girl child (for the purpose of funding her education/ marriage). Currently it offers a rate of interest of 8.5% & the maturity amount is tax-free.
  • Others – Other tax saving instruments include post office time deposits, senior citizen’s deposit scheme, NPS (National Pension Scheme, though partially) etc. One can evaluate them also as tax saving options.

Tax saving in India under Income Tax Section 80C – Expenses that can help you save taxes

  • Insurance premium payments – Your premium payments towards your term insurance (or any other life insurance payment or ULIP) plan can be claimed for tax exemption.
  • Child’s education – You can aim tax exemption on tuition fees of up to 2 children. (This is for tuition fees only.)
  • Amount paid towards home loan principal repayment.
  • Stamp duty paid while purchasing a home (one time).

 

The fine print (lock-in period, withdrawal rules, tax liability on withdrawal, risk & returns, premature closure rules etc.)  varies across the different investment categories. It is important to understand these fine points before investing in these schemes.

(I hope to have posts on most of these instruments individually in future)

In addition, I would also suggest to evaluate these tax saving options in India from perspective of getting good returns (and not just tax savings). E.g. You may utilize your entire limit of Section 80C deductions via PF contribution, insurance premium payment and child’s tuition fees. But that shouldn’t prevent you from evaluating (and maybe contributing to!) voluntary provident fund or PPF. Some of them can be good addition to your overall portfolio, irrespective of tax benefits.

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Update: I have evaluated these options & tried to come up with pros and cons of each. This can help deice where to actually invest, when spoilt for choices.  

Link to the post – Best tax saving investment options in India

 

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