Employees are required to declare their investments at the beginning of every financial year so that their employer deducts minimum tax from their salary. There is no better way to save tax than making use of Section 80C of the Income Tax Act. Section 80C of the I-T Act offers a plethora of options that can help you reduce your tax liability on your taxable income. You can find many tax-free investment options under the Section 80C bracket where you can invest up to Rs 1.5 lakh in a year to save taxes. However, before you jump into the details of how much you should invest to save maximum taxes, you need to consider other options under this section where you can save your taxes easily without making the additional investment.
Eligible Expenses for Deduction under Section 80C
Check all your mandatory expenses that can help you reduce your tax output. Expenses such as repayment of home loan instalment and tuition fees payment of kids can be claimed as a deduction under Section 80C.
Home loan principal repayment, stamp duty and registration charges
Usually, salaried individuals prefer to buy their house via a home loan. EMIs of such loans are very high. In this case, Section 80C gives you relief by making the principal component tax deductible for the EMI paid by you. Not only this, but the registration charges and stamp duty that you have paid are also eligible for a tax deduction.
This is another regular expense for which you can claim deduction under Section 80C. You can save income tax for the tuition fees that you pay for your child’s full-time education. You can claim a deduction for tuition fees of up to two children.
Existing Investments Eligible for Deduction under Section 80C
Some existing investments are either mandatory or necessary for you. EPF and life insurance are two such investment options which can help reduce your tax liability under Section 80C.
Your investment in EPF is mandatory and happens automatically for you through your employment. This investment also reduces your tax liability.
Life Insurance Premium
Almost everybody has a life insurance plan these days. Most people often look at these insurance plans to save their taxes under Section 80C of the Income Tax Act. Therefore, they usually invest in ULIPs or traditional endowment insurance plans. The main reason behind this investment is that the insurance companies push these products to people and they end up investing in them without properly analysing the benefits received from them. It is essential for people to understand that the main purpose of purchasing an insurance plan is to cover the costs of different kind of risks that we usually take. Therefore, it is highly recommended that you give high priority to term insurance plans.
You can consider several other options if you want to claim tax deduction under Section 80C.
Investment Options Eligible for Tax Deduction
Once you have analysed the tax benefits you can obtain from your must-have expenses mentioned above, you can look for other investment options available under Section 80C. However, you can make use of such investments only if you haven’t exhausted the deduction limit of Rs 1.5 lakh.
Sukanya Samriddhi Scheme
If you are a parent or guardian of a girl child and if she is below the age of 10 years, this scheme is one of the most lucrative investment avenues for you. It offers a higher rate of return on investment as compared to PF & PPF. This scheme is offering a rate of interest (ROI) of 8.1% pa, for the FY2017-18.
Voluntary Provident Fund
12% of your basic salary goes as a mandatory investment in your EPF. However, you can choose to invest more (up to 100%) of your basic salary + DA through voluntary contributions. In case you choose to invest more, your EPF becomes your VPF. VPF earns you tax-free interest of 8.4%. Therefore, you can increase your contributions in VPF to get the most out of your deductions under Section 80C.
Public Provident Fund
If VPF is not available to you as an investment option, you can choose a similar investment option, i.e. PPF. PPF is a long-term investment plan which clubs freedom from risk with the lucrative tax-free interest of 7.6%. Your investment in PPF is exempt from tax. The interest earned and a corpus that you gain from PPF at the time of maturity is also exempt from tax.
Section 80C also provides tax benefits on a retirement planning investment scheme known as NPS. Just like EPF, you get a tax deduction on both yours as well as your employer’s contribution (under Section 80CCD) in NPS. Your funds are also managed at comparatively lower charges as compared to most of the MFs or ULIPs. If you have already exhausted your 80C bracket of Rs 1.5 lakh, you can claim additional deduction of up to Rs. 50K u/s 80CCD(1B) for your contribution in NPS scheme.
To top it, 40% of your maturity corpus is exempt from tax, and the remaining 60% becomes tax-free if invested in an annuity plan.
Regarding pure ROI, ELSS is the best tax-saving investment option that you can go for. The 3-year lock-in period is also lower than other options like Sukanya Samriddhi, PPF, etc. However, investment in ELSS is linked to the performance of share market, thus making it risky. If you are fine with taking a bit of risk and are looking out for good ROI along with saving taxes, then ELSS is perfect for you. Your investment along with dividends and long-term capital gains is free from the tax net.
Senior Citizens Savings Scheme
There is a great tax-saving investment scheme for senior citizens which is covered under Section 80C. If you are opting for early retirement, you can invest up to Rs 15 lakh of your retirement benefits into this scheme. However, you must invest in this scheme within one month of receipt of retirement benefits. Your investment in this scheme qualifies for deduction under Section 80C. Though it earns you a taxable interest of 8.3%, you may end up paying no tax on it as the basic exemption limit for senior citizens is quite high of up to Rs 3 lakh.
Other Investment Options
Other than the options discussed above, there are a few more investment schemes which are covered by Section 80C. These include schemes like five-year post office time deposits, five-year tax saving bank fixed deposits, National Savings Certificate, Specified Government Bonds. However, the interest that you earn from your investment in most of these schemes is taxable, in turn reducing your effective return on investment.
(By Chetan Chandak, Head of Tax Research, H&R Block India)