Avenues to save tax under section 80C

Jitender Singh, Deputy Manager-Research, IIFL | Mumbai | December 03, 2017 13:38 IST

Financial year 2017-18 would end four months down the line, and most of the people are still wondering in which tax saving schemes they should invest in order to save taxes. If the investors invest in tax saving schemes matching with their risk profile, they can achieve their financial goals successfully.

Financial year 2017-18 would end four months down the line, and most of the people are still wondering in which tax saving schemes they should invest in order to save taxes. If the investors invest in tax saving schemes matching with their risk profile, they can achieve their financial goals successfully.

In a financial year, investors can get the tax deduction on Rs1.5 lakh under section 80C if they invest Rs1.5 lakh in certain tax saving schemes. Thus, investors who fall under highest tax bracket (30% tax slab) can save Rs46,350 by investing Rs1.5 lakh in tax saving schemes.

There are numerous tax saving schemes, investments in which can be claimed for tax deduction under section 80C. Each tax saving scheme has its own features. Some tax saving schemes are mentioned below

1) Equity Linked Saving Scheme (ELSS)
ELSS is the only tax saving scheme wherein investors can save tax and create wealth in long term. ELSS is a type of equity mutual fund. Therefore, the returns are market linked and varies from scheme to scheme. ELSS schemes have a lock-in period of 3 years, shortest among all tax saving schemes. Historically, ELSS scheme on an average has given higher returns than other tax saving schemes. There is plethora of ELSS schemes, therefore, investors should consult their advisors before investing in ELSS. Investors who are aggressive and can bear short term volatility can invest in ELSS.
 
2) 5 Years Term Deposit Scheme
5 years term deposit in banks and post office up to Rs1.5 lakh are eligible for tax saving under section 80C. Since it is a term deposit, returns are fixed. However, the interest earned is taxable. Investors who are conservative and satisfied with fixed returns can invest in 5 year term deposits with banks or post office. Investors can also invest in the term deposit to meet the financial goals after 5 years.
 
3) Public Provident Fund (PPF)
PPF is a government sponsored scheme to encourage investors to invest for retirement. The interest rate on PPF is fixed but they change every quarter. PPF enjoys Exempt-Exempt-Exempt (EEE) status, thus investment amount, interest earned and withdrawal amount are all tax free. Investors can invest minimum amount of Rs500 per annum and maximum amount of Rs1.5 lakh per annum. Investors can invest in a lump sum or in 12 installments in a year. PPF has a lock-in period of 15 years. Thus, investors who are not comfortable taking risk and want to accumulate funds for retirement can invest in the PPF.
 
4) National Saving Certificate (NSC)
Investments in NSC are eligible for tax deduction under section 80C. NSC is issued for 5 years and the interest rate is fixed. Investors can invest minimum of Rs100 while there is no maximum limit. However, investment up to Rs1.5 lakh are qualified for income tax deduction under section 80C. Besides, NSC can be kept as collateral security to get loan from banks. Thus, investors who are conservative, satisfied with fixed returns and may need loan can invest in NSC.
 
5) National Pension Scheme (NPS)
NPS came into existence to provide social security to citizens. Investors can invest in the scheme till the retirement age i.e. 60 years and then investors have to buy a monthly pension annuity plan of at least 40% of the corpus at 60. Investors can allocate their investment amount in equities (max 50%), corporate bonds and government bonds or they can opt for auto choice wherein allocation is based on the age of investors. Therefore, returns are not fixed, they depend upon the allocation and the market conditions.

Besides tax deduction on Rs1.5 lakh under section 80C, investors can also get an additional tax deduction on Rs50,000 under section 80CCD. Therefore, investors can save additional tax of Rs15,450 under section 80CCD. Investors can start with a minimum investment of Rs6000 per financial year in Tier I NPS account, whereas there is no upper limit. Investors can invest in lumpsum or in 12 installments in a financial year. There is no tax benefit in Tier II account. Thus, investors who are looking to accumulate corpus of their retirement can invest in NPS and can select allocation as per their risk profile.
 
6) Senior Citizen Saving Scheme (SCSS)
Senior citizens saving scheme is exclusively for senior citizens. Senior citizen can invest minimum of Rs1,000 to a max limit of Rs15 lakh. The tenor of the scheme is 5 years, which can be extended by 3 years. Investments up to Rs1.5 lakh per financial year are qualified for tax deduction under section 80C. The interest earned is fixed and can be automatically credited to savings account of the investors, if he has both the accounts in the same post office. However, the interest income is taxable. Thus, senior citizens seeking regular income and preservation of their capital can invest in the scheme.
 
7) Sukanya Samriddhi Account
Government introduced the scheme to promote savings for the girl child. Parents or a legal guardian can open an account in the name of the girl child. Account can be opened up to the age of 10 years. Parents or guardians can start with minimum investment of Rs1,000 per financial year to a maximum amount of Rs1.5 lakh and can enjoy the tax deduction on investments under section 80C. The interest rate is fixed. Partial withdrawal is allowed (maximum up to 50% of the corpus), after the girl child reaches the age of 18. Account can be closed after the girl child reaches age of 21. However, premature closure is allowed after completion of 18 years, provided that girl is married. Thus, parents or guardians who want to save for their girl child can invest in this scheme. They will also get tax benefits.

Scheme

Lock-in Period

Historical Returns

Guaranteed Returns

Tax free Return

ELSS

3 Years

10-15%*

No

Yes

5 Years Term Deposit Scheme

5 Years

6-9%

Yes

No

Public Provident Fund (PPF)

15 Years

7.80%

Yes

Yes

National Saving Certificate (NSC)

5 Years

7.80%

Yes

No

National Pension Scheme (NPS)

Till 60

9-11%*

No

No

Senior Citizen Saving Scheme (SCSS)

5-8 Years

8.30%

Yes

No

Sukanya Samriddhi Account

11-21 Years

8.30%

Yes

Yes


*Returns are historical and market linked, not guaranteed

 

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