In a few months time, the accounts department of your organisation will seek proof of your income-tax saving investments under Section 80C and other deductions. PPF (public provident fund), ULIP (Unit Linked Insurance Plan), ELSS mutual funds (Equity Linked Savings Schemes), National Savings Certificate (NSC), 5-year bank fixed deposits (FDs) and Sukanya Samriddhi Yojana are some of the popular investment options that offer tax benefits under Section 80C. Ideally, you should start planning your tax-saving investments from the beginning of the financial year.
Financial planners say that the choice of investments to save income tax under Section 80C should be in line with your financial goals and wealth creation, not just avenues to save tax. An assessee can claim deduction of up to ₹ 1.5 lakh under Section 80C of the Income Tax Act for investments in specified instruments.
National Pension System (NPS)
NPS is a voluntary contribution-based retirement savings scheme. Both salaried as well as self-employed persons get tax benefits on investing in NPS. Under Section 80CCD(1), investment in NPS up to ₹ 1.5 lakh qualifies for income tax deduction. But remember that the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed ₹ 1.5 lakh.
In addition, an investment up to ₹ 50,000 is deductible from taxable income under Section 80CCD (1B) of the Income Tax Act, 1961. This deduction is in addition to ₹ 1.5 lakh allowed under Section 80CCD (1).
Under current income tax laws, 40% of the amount of accumulated corpus in NPS at age 60 can be claimed as tax-exempt. The rest is taxable unless invested in purchasing an annuity plan.
NPS allows partial withdrawal of up to 25% of own contribution for specific expenses like children’s higher education or marriage, construction or purchase of the first house, and medical treatment. This withdrawal is tax-free.
A subscriber can exit NPS before the age of 60, but the subscriber must invest 80% of the corpus to buy an annuity. The 20% of corpus withdrawn is taxed according to the subscriber’s income tax slab.
Equity-Linked Savings Scheme (ELSS) mutual funds
Investment in this diversified equity fund scheme offers Section 80C tax benefits but this mutual fund scheme comes with a lock-in period of three years, which is lowest among Section 80C investments. The returns from ELSS mutual funds, which invest in a basket of stocks, are market linked. Gains from these tax-saving mutual funds are treated as long-term capital gains and taxed at 10%. But long-term capital gains from equity investments, including tax-saving mutual funds, are exempt up to ₹ 1 lakh in a financial year.
Among the fixed income category, government-backed PPF is one of the most popular Section 80C tax-saving instruments. The interest rate on PPF is revised quarterly and for the current quarter it fetches 8% per annum. PPF accounts have a maturity period of 15 years and can be extended in blocks of five years. They also come with partial withdrawal and loan facilities. The minimum investment required in PPF in a financial year is ₹ 500 and a maximum of 12 deposits are allowed in a financial year. The maturity proceeds and withdrawals are tax-free.
National Savings Certificate (NSC)
The five-year NSC or the National Savings Certificate currently fetches interest of 8%. There is no upper limit for investment in the NSC and the minimum investment required is ₹ 100. Deposits of up to ₹ 1.50 lakh in the NSC in a financial year qualifies for tax deduction under Section 80C. Interest accrued yearly on NSCs is deemed to be reinvested on behalf of the investor and qualifies for deduction under Section 80C within the total limit of ₹ 1.5 lakh. But as the final year’s or the fifth year’s interest is not reinvested, it cannot be claimed as a deduction from taxable income under Section 80C. Therefore, the last year’s interest income is added to the certificate-holder’s income and taxed accordingly.
Sukanya Samriddhi Yojana (SSY)
This popular girl child savings scheme currently fetches an interest of 8.5% (for the current quarter) compounded annually. Earlier this year, the government brought down the minimum amount required for opening a Sukanya Samriddhi account to ₹ 250, from ₹ 1,000 earlier. The minimum annual deposit requirement in Sukanya Samriddhi account every year has also been lowered to ₹ 250 from ₹ 1,000 earlier. Sukanya Samriddhi accounts mature 21 years from the date of account opening. Partial withdrawal is allowed after the girl turns 18. Contribution into Sukanya Samriddhi account up to ₹ 1.50 lakh in a financial year qualifies for income tax deduction under Section 80C of Income Tax Act. The interest earned and maturity amount is non-taxable.
Unit Linked Insurance Plan (ULIP)
ULIPs are hybrid products that offer life cover along with investment. The investment component in a Ulip works like a mutual fund, but with a different cost structure. Ulips come with a lock-in period of five years. Investors get tax benefits up to ₹ 1.5 lakh insurance premium, under Section 80C. This tax benefit is available only if the cover is 10 times the annual premium.
Tax-saving bank or post office FDs
This special category of bank fixed deposits can help you claim deductions under Section 80C of the Income Tax Act. Five-year post office term deposits also qualify for this tax benefit. But there is a minimum lock-in period of five years. SBI, for example, is offering 6.85% interest on these deposits.