Tax saving investments under section 80C plays an important role in your financial well being. Both individuals and HUFs are eligible to claim deductions under section 80C of an aggregate capped 1.50 lakhs per year.
Tax saving investments under section 80C has enough water capacity to behave like carbohydrates to ensure hydration and add nutritional value to your long-distance financial marathon.
As an investor you should look for investment options that not only help save tax but also generate tax-free income in order to sustain the accumulated fortune. Choosing the right tax-saving vehicle rests primarily on four things:
- Kind of tax-saving instrument
- Current portfolio Asset allocation
- Income tax slab
- Investment tenure
There are mainly two types of investment products under the Income Tax Act, 1961
- Deductions – Investments that can reduce your tax obligation from your gross taxable income. Tax deduction varies in amount as different incomes are treated differently under various sections of income tax act.
- Exemptions – There are few types of specified incomes on which you can get an exemption from paying tax, ergo at the time of calculating income tax certain incomes will not be added.
Ideally, the choice of investments to save income tax under Section 80C should be in line with your financial goals for long term wealth creation. The various investment products under section 80C can be debt oriented or Equity oriented.
Debt oriented investment in section 80C.
- Public Provident Fund (PPF): PPF is one of the best retirement tools. It gives triple tax benefits. First, you can claim deduction under Section 80C for contributions. Second, the interest income is tax-free. Third, the lump sum received at the end of the tenure is also tax-free.
- National savings certificate (NSC): NSC is eligible for deductions in the year they are purchased and interest accrued on such certificates is eligible for tax deductions each year under section 80C, but becomes taxable at the time of maturity.
- Tax – Saving fixed deposit: Interest earned on fixed deposits with tenure of not less than five years are eligible for deduction. For senior citizens, tax exempted interest income on deposits with banks has been increased from Rs. 10,000 to Rs. 50,000.
- Life insurance policy: You can claim a deduction for the premium paid for a life insurance policy as per the income tax act.
- Contribution to employee provident fund: Employees’ Provident Fund (EPF) is another avenue that helps a salaried individual not only to save tax through involuntary savings but also accumulate tax-free corpus.
- Sukanya Samriddhi Yojana (SSY): The scheme encourages parents to build a fund for the future education and marriage expenses for their female child. The scheme currently provides an interest rate of 8.5%. Till a girl attains an age of 10 years, this account can be opened under her name. You have to pay in this scheme for 14 years. The maturity duration of the account is 21 years from the date of opening the account.
- Senior Citizen Saving Scheme: Post office senior citizen savings account (SCSS) can be opened by an individual of 60 years or above. SCSS earns an interest rate of 8.7 per cent per annum. There can be only one deposit in the account in multiple of Rs. 1,000 where the maximum amount must not exceed Rs. 15 lakhs. The maturity period of senior citizen savings account is 5 years.
Equity oriented investment in section 80C.
- Equity oriented mutual funds: Equity-linked savings schemes (ELSS) are diversified equity mutual funds, which can invest across large and midcap category with two differentiating features – one, investment amount in them qualifies for tax benefit under Section 80C and secondly, the amount invested has a lock-in period of 3 years.
An exclusive tax benefit is available for NPS subscribers under section 80CCD. As per income tax act, Tier 1 account holder gets an additional deduction for investment up to Rs. 50, 000 in NPS. This deduction is over and above the deduction of Rs. 1.5 lakh available under section 80C of IT Act, 1961.
Other than investment there are certain expenses that get qualified under sec 80C
- Repayment of principal on housing loan: you can claim a tax deduction on the principal amount paid for home loan under section 80C.
- Tuition Fees: Deduction will only be applicable in case the fees in paid by cheque and for maximum two dependent children.
Common mistakes made in 80C
As we enter the last quarter of the financial year, a large number of individuals rush to meet their tax saving obligations. This is a folly as decisions made in haste often lead to erroneous investments. You need to start investing in tax-saving schemes at the beginning of the financial year to reap maximum benefits of long term wealth creation.
Do not put all the eggs in a single basket. To begin with, do not think of tax planning in isolation. Tax planning should be part of your overall financial planning. Plan your tax-saving portfolio and align them with your long-term goals like a child’s education or wedding or your own retirement. Doing this will allow you to get the dual benefit of these investments–saving taxes and meeting long-term objectives.