No one likes paying tax and it prompts everyone to look for options that may reduce their tax liability. There are many provisions to do this and one of the most common options is the tax deductions under Section 80 C of the Income Tax Act. There are various investing options under 80 C that enable you to reduce your taxable income up to a maximum limit of Rs 1 lakh.
The eligible deductions that everyone might be aware of are contributions to Employee Provident Fund, Payment of tuition fee or repayment on home loan. In addition there are investment avenues that are eligible for tax deduction about which you might have little knowledge.
Investing in Government Securities
For those who seek absolute protection of their capital, Investing in Postal Saving schemes such as NSC or putting money in PPF (Public provident fund) is an option.
Public Provident Fund (PPF)
PPF offers interest income in the range of 8% with annual compounding. However, the maximum amount that can be invested in PPF is Rs.70,000 and money cannot be withdrawn before the completion of 6 years. Those who look at PPF in terms of their retirement corpus and feel that their current PF deduction is not sufficient, may consider this option.
National Savings Certificate
Another popular avenue investing – NSC also offers a return of 8% on half yearly compounding basis. Another feature is that interest accrued on NSC is also eligible for Section 80 C benefit. The interest on NSC investment, except in the sixth year, is not paid but credited to the investor’s account. So, the interest that accumulates is treated as invested in NSC and the accumulated interest thereby qualifies for tax deduction. The duration of NSC is for 6 years with an option of premature encashment after 3 years. However, that would reduce the net yield from NSC.
Tax saving FD’s
This is a relatively new kid on the block. Tax saver fixed deposits are issued by banks for a tenure of 5 years and premature withdrawal is not permissible. It generates interest income of 8% with quarterly compounding. The interest income is taxable. If we compare tax saving FD’s to NSC, Tax saving FD’s have an edge on lock in period which is lesser by one year. However NSC have an edge from the fact that interest accrued is also eligible for 80 C limit for the first five year.
Investment in Equity linked Saving Scheme(ELSS)
ELSS are funds invested primarily in equity shares of companies. They have been in limelight for their superior performance in the recent past and are a popular tax saving investment. Due to their tax saving nature, they are also known as tax saving mutual fund schemes. Like all investment avenues under Section 80C, ELSS funds also involve a certain lock in. In this case the lock in is for three years which means that they cannot be withdrawn for a period of three years from the date of investment. The ELSS Fund manager basically invest 80% of the total amount in the equity shares and the remaining 20% is invested in other instruments like bonds, debentures, government securities and others.
However the basic risk with ELSS scheme is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital. At the same time, ELSS can also be seen as a way to long term investing in equity markets and with India growth story unfolding and fundamentals looking intact, investment experts anticipate that equities would continue to outperform other investing avenues for at least next 5-7 years. Investing in ELSS provides dual benefit of capitalizing on superior returns as well as tax saving. With the current market turmoil avoid this instrument unless you are looking for a long term investment. If that is the case look for good fund managers with stellar tax records.
Life Insurance and Tax savings
As far as life insurance is concerned, endowment plans (money back plans) have been a popular source of investing.There are various long term life insurance policies which give you good returns, tax savings under 80C and an insurance cover as well.
ULIP’s have taken a center stage now since they offer insurance as well as market related returns in a single product. However, investors should understand the underlying structure of ULIP carefully since these offerings have a substantial charge towards expense in the initial years and is advisable only for investors with a large investing horizon. Avoid ULIPs if you do not like to risk money. Also invest in ULIPs with a long term horizon of a minimum of 10 years.
Another avenue within insurance domain is Pension plans. Pension plans have got a boost in last finance bill with the overall limit raised from Rs. 10,000 to Rs. 100,000. Senior Citizen Saving Scheme 2004 and Post Office Time Deposit Account have also been included in Section 80 C.
However some people may be biased towards other investing options as compared to Life Insurance products since they may prefer insurance and investments separately.
Infrastructure development Bonds
With a return in the range of 5-6% this is the last avenue a tax saver would resort to. The dismal returns provided by these bonds have resulted in the investors shying away from these bonds. The return is hardly good enough to fight inflation, leave alone wealth creation.
So investing in any of the above avenues would help you reduce your taxable income by a maximum of Rs 1 lakh, irrespective of how much you earn and under which tax bracket you fall.
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