Tax Saving Options under Section 80C

Tax Saving Options under Section 80C

As per Income Tax Act there are various tax saving options under section 80C. As a matter of fact for many youngsters this is the very first step towards inculcating the habit to save and reduce the outgo of income tax. Since there are many options most get confused which is the best one that they should choose. To me a single product does not work it has to be a combination of different products. But your decision should depend on what are you saving for and how much risk are you willing to take for the same. Here is what you should know about some of the popular tax saving options. 

In this article we shall learn about below options. You will get to know what is the rate of interest they earn and what kind of risk they carry. 

  1. Public Provident Fund
  2. Sukanya Samriddhi Yojna
  3. Tax Saving Mutual Funds
  4. National Pension Scheme
  5. Life Insurance Policies
  6. Tax Saving FDs

Public Provident Fund:

Commonly known as PPF is one of the best tax saving option for those who are looking for safe investment as it is backed by the government. A PPF account can be opened in a PSU bank, while certain branches of private banks and post offices also provide the facility. There is a lock-in period of 15 years wherein partial withdrawal is possible from 7th year onward. The account holder  enjoys complete tax freedom as all the gains are tax free at maturity. Deposits made upto Rs 1.50 lacs qualify for deduction in Income Tax Act 1961. Rs 500 is a minimum amount to be deposited every year.

The interest is credited to the account holder’s account at the end of every year.  The interest rates are decided every quarter  The interest rate currently (Oct-Dec 2018) is 7.6% . 

This is suited to those individuals who have a low risk profile.

Sukanya Samriddhi Yojna:

To promote the welfare of the girl child, the Government of India introduced this tax saving scheme. A SSY account can be opened by a legal guardian or parent of a girl child for maximum of two daughters. The maximum age of the girl child at time of opening the account should be less than 10 years. One will have to make deposits for 14 years while maturity or withdrawal can be at 21 years or at time of marriage which ever  is earlier. A minimum of Rs 1000/- p.a. is to be deposited in a year to maintain the account in active state.  The maximum limit has been set as Rs 150000/- p.a. Partial withdrawal are possible once the girl child has completed class 10 or on attaining 18 years of age.

Like PPF, here also the gains earned are completely tax free. The current rate of interest is 8.1%.

This is suited to those who prefer taking low risk.

ELSS or Tax Saving Mutual Funds:

Over past few years Mutual Funds have been growing in popularity thanks to advertising and returns that investors have earned. An ELSS is a market linked product and hence returns are not fixed. An ELSS Fund has a lock-in period of 3 years and there are many asset management companies that are offering these types of funds. The three year category return is around 9.5% however leading funds have managed to give 12%-13% returns to its investors. 

An ELSS till recently enjoyed fully tax exempt status however in the current financial year (2018-19) the finance minister added a 10% Long Term Capital Gains Tax on gains made over Rs 1 Lac from equity funds. The LTCG tax is applicable only at time of withdrawal.

This is a high risk product and one should only invest keeping in mind long term view ideally 5 years or more.

National Pension Scheme:

NPS is government backed investment tool that helps create corpus for Retirement. This is a market linked product and hence returns are not guaranteed. Under NPS one can open an account and invest in various types of funds. These funds are primarily equity, balanced and debt funds. Since the investor has to choose the kind of fund he/she wants to invest in, therefore the returns also vary. Under tax saving NPS offers additional Rs 50,000/-  tax advantage under Sec 80CCD(1B) which is over and above Rs 1.50 lacs under Sec 80C of Income Tax Act.

The scheme has a lock-in period of upto the age of 60yrs. One may however withdraw partial amount for certain conditions. The important thing here to note is, at maturity 60%  of the accumulated can be withdrawn the investor while for remaining 40% value annuities will have to be purchased. 60% corpus withdrawn is non taxable making this a very worthy investment. This is a long term product but

The fund management charges are very low incase of NPS and hence it shall appeal to value conscious investors.

National Savings Certificate:

Popularly known as NSCs- can be availed from designated post offices. These are backed by the government and hence investors capital is always protected. The interest rates vary by the government every quarter. The interest rate for current quarter (Oct’18 – Dec ’18) is 8 %.  A NSC is issued for a period of 5 years and partial closure is not allowed, one can however take loan against NSC which in a way help bring in some liquidity to the product.

The interest earned every year is re-invested and is to be shown as accrued interest for the year while filing the income tax returns. The interest earned in the final year however is taxable as per the income slab of the investor.  

The product is suited to those who fall in low income slab and are not willing to take any kind of risk.

Life Insurance Premium:

There are few households that don’t really have a life insurance policy in India. While some using them as a saving tool other use them as tool to protect financial risk. One of the reason of their popularity is that not only the premium that you pay is tax free but also the proceeds that one would receive would also be tax free. There are number of plans and options that would be classified under two categories – a) Traditional & b) Modern.

Traditional Plans are primarily Endowment & Money Back Plans that effectively offer 5%-7% kind of return. While modern plan comprises of ULIPs where returns are market linked. In the long run a ULIPs are capable of delivering better returns than traditional plans. Investors who are looking for safety and assurance of return should buy traditional policies while those who are willing to take risk and have long term view of 10 years or more should consider ULIP.

Although the insurance premiums qualify for tax deduction there are few things to be kept in mind. If your insurance policy is bought before 31.3.2012 then the maximum amount that to qualify for deduction should not exceed 20% of Sum Assured. Incase, the policy is bought on or after 1.04.2012 then the maximum amount to qualify should not exceed 10% of sum assured.    

Tax Saving Fixed Deposits:

A tax saving FD come with a lock-in of 5 years. They can be opened in a public or a private sector banks or even a Post Office. They offer fixed rate of return which gets locked at the start of the term Senior citizens receive slightly better returns than the others. The rates of FD will vary from bank to bank and are normally in the range of 6-7%. The biggest negative of these types of FD is that the interest earned is taxable. Also liquidity is a concern as one can not prematurely close it nor can one take loan against this type of FD.

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