Tax-saving investments have cap on short-term withdrawals, which in turn inculcates a habit of savings and investments among taxpayers over a long-term investment period.
Tax-saving investments benefit you in two ways – proving the return on investments during the investment tenure, which is available at maturity, and the amount of taxes saved, which is an instant return available through lower amount of Tax Deducted at Source (TDS) or through tax refund that may be claimed by filing Income Tax Return (ITR) at the end of a financial year.
As the return through the taxes saved is instant and more visible, it creates an urge to make tax-saving investments.
Moreover, the government provides tax benefits only on long-term investments, so that investors don’t invest just to get the tax benefits and subsequently withdraw the amount once the benefit is availed. So, tax-saving investments have cap on short-term withdrawals, which in turn inculcates a habit of savings and investments among taxpayers over a long-term investment period.
Although, the main motive for investments should be to meet the future financial goals and hence the mode of investments and amounts to be invested should be decided accordingly, but amount of tax saved is also provide a big motivation as a taxpayer gets considerable return in the same year.
For example, Rs 30,000 saved by investing Rs 1.5 lakh means 20 per cent return and that too within a year of investment, which amounts to huge return if converted to annual return.
Now, let’s see how much tax can be saved by people in different income tax bracket by fully utilising the 80C limit of Rs 1.5 lakh per financial year.
In the Assessment Year (AY) 2020-21 (Financial Year 2019-20) people up to taxable income of Rs 5 lakh will get full rebate in tax payable up to Rs 12,500 (i.e. zero per cent on Rs 2.5 lakh and 5 per cent of Rs 2.5 lakh) and have to pay no tax. So, it will be indifferent for people having total income up to Rs 5 lakh to avail 80C benefits for the purpose of saving taxes.
Now, take example of an assessee having total income of Rs 6.5 lakh without availing 80C benefits. If the person don’t avail 80C benefits, he/she will have to pay income tax of Rs 42,500 (i.e. zero per cent on Rs 2.5 lakh + 5 per cent on Rs 2.5 lakh + 20 per cent of Rs 1.5 lakh) and Health and Education Cess of Rs 1,700 (i.e. 4 per cent on Rs 42,500) or total of Rs 44,200.
However, if the person fully utilise the 80C benefits of Rs 1.5 lakh, his/her taxable income will fall to Rs 5 lakh and he/she will be able to get full rebate in tax payable and no tax has to be paid. So, a person with total income of Rs 6.5 lahk will be able to save Rs 44,200 by investing Rs 1.5 lakh in tax-saving instrument as per section 80C of the Income Tax Act.
Similarly, a person with total income of Rs 10 lakh would be able to save Rs 31,200 and a person with total income of Rs 12.5 lakh or more (say Rs 15 lakh) would be able to save Rs 46,800 by fulling utilising the 80C limit of Rs 1.5 lakh.