At the beginning of every financial year, employees declare their investments so that their employer deducts less tax from their salary, and there is no better way than making use of Section 80C of the Income Tax Act to save tax. In fact, Section 80C of the I-T Act offers a plethora of options to reduce your taxable income. “There are a number of tax-free investment options under the bracket of Section 80C where you can invest to save taxes up to Rs 1.5 lakh in a year. However, before you jump into it, you need to look at other options under this section where you can easily save your taxes without making any additional investment,” says Chetan Chandak, Head of Tax Research, H&R Block India.
Expenses Eligible for Deduction under Section 80C
Check out all your mandatory expenses which can help you reduce your tax outgo. Expenses like home loan repayment and payment of tuition fees of kids can be claimed as tax deduction under Section 80C.
Home loan principal repaid, stamp duty and registration charges of new house
Generally, salaried individuals prefer to buy their house through a home loan. EMIs of such a loan are very hefty. Here, “Section 80C gives you relief by making the principal component of EMI paid by you tax deductible. Not just this, but the stamp duty and registration charges paid by you are also eligible for tax deduction,” says Chandak.
Tuition fees of two children
This is another regular expense which is tax deductible under Section 80C. You can save income tax on tuition fees paid for full-time education of up to two children.
Existing Investments Eligible for Deduction under Section 80C
There are some investments which are mandatory or necessary for you. Two of them, i.e., EPF and life insurance, can also reduce your tax liability by the virtue of Section 80C.
Your EPF contribution
Your investment in EPF is mandatory and happens automatically for you. However, this investment also reduces your tax liability.
Life Insurance Premium
Many people generally have a life insurance plan these days. However, people often look at these insurance plans as a way to save their taxes under Section 80C of the I-T Act. Therefore, they often invest in ULIPs or traditional endowment insurance. “The main reason behind this is that insurance companies push these products to the people and they stop investing in them without properly analysing the benefits arising from them. It is important here to keep in mind that the primary purpose of buying an insurance plan must be the risk cover that they provide. So, it is recommended to give higher priority to term insurance plans. To enjoy the tax benefits of Section 80C, you can look into several other options,” informs Chandak.
Investment Options Eligible for Tax Deduction
Once you have analysed the tax benefits resulting from above-mentioned expenses, then you can look for other investment options available under Section 80C if you haven’t exhausted the deduction limit of Rs 1.5 lakh.
Sukanya Samriddhi Scheme
This is the most lucrative investment avenue for you but only if you are the parent or guardian to a girl child below 10 years of age. It offers higher rate of return on investment when compared to PF and PPF. For the FY 2017-18, this scheme is offering an ROI of 8.3% p.a.
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 + DA through voluntary contributions. “In such a case, your EPF becomes your VPF. VPF earns you tax free interest of 8.5%. Thus, you can increase your contribution in VPF to further optimise your deductions under Section 80C,” says Chandak.
Public Provident Fund
If VPF as an investment option is not available to you, then you can choose a similar investment option, which is PPF. It is a long-term investment plan which clubs freedom form risk with lucrative tax-free interest of 7.8%. Your investment in PPF is exempt from tax. The income that you gain from PPF, i.e. interest earned and corpus received at the time of maturity, is also exempt from tax.
In terms of pure ROI, this is the best tax-saving investment option available to you. The lock-in period is also lower than options like PPF, Sukanya Samriddhi etc. However, “investment in ELSS is linked to the performance of share market and is, therefore, risky. If you are ok with taking a bit of risk and are looking out for good ROI along with saving taxes, then you should invest in ELSS. Your investment along with dividends and long-term capital gains is free from tax net,” informs Chandak.
Section 80C also provides tax benefits on a popular retirement planning investment scheme known as NPS. Just like EPF, here you get tax deduction on both yours as well as your employer’s contribution (under Section 80CCD). Your funds are also managed at comparatively lower charges if compared to most of the ULIPs or MFs. On top of it, 40% of your maturity corpus is exempt from tax while the remaining 60% becomes tax free if invested in an annuity plan.
Senior Citizens Savings Scheme
For senior citizens, there is a great tax-saving investment scheme covered under Section 80C. If you are opting for early retirement, you can invest your retirement benefits into this scheme up to Rs 15 lakh. However, “you must do this within 1 month of receipt of such benefits. Your investment in the scheme qualifies for deduction under Section 80C. It earns you taxable interest of 8.3%, but you may end up paying no tax on it as the tax slabs for senior citizens are quite generous,” says Chandak.
Other Investment Options
Other than the options discussed earlier, there are a few more investment schemes which are covered by Section 80C. These include schemes like 5-year post office time deposits, National Savings Certificate, 5-year tax saving bank fixed deposits, and Specified Government Bonds. However, the interest that you earn from your investment in most of these schemes is taxable, thus reducing you effective return on investment.