It is that time of the year again when many taxpayers go shopping for tax-saving investment products as the deadline nears. Section 80C offers taxpayers the widest range of investment options that can help them save up to ₹1.5 lakh of their income from tax. Given so many options, it is important that you pick an investment best suited to your financial goals and risk-appetite. “Many times, tax saving instruments are randomly picked towards the end of the financial year just to cater to that year’s requirement, which shouldn’t be the case. Any tax saving option should be part of overall financial planning which will allow for better use of the product chosen,” said Prableen Bajpai, founder, Finfix.
In view of this, Mint has listed key features–costs, safety, returns and lock-in period–of major investments available under section 80C along with their tax rules to help you pick the best option for you.
Public Provident Fund (PPF) is among the most popular tax saving options given that it enjoys sovereign guarantee and tax exemption on investment, withdrawal and partially on accrual. PPF comes with a 15-year lock-in, after which you choose to extend your investment in a block of 5 years. Current interest rate on PPF is 7.1%, making it better than bank fixed deposits (FDs). However, the PPF rate is reviewed every quarter.
Though the investment made in a 5-year tax-saving fixed deposit is deductible, interest earned on it is fully taxable and is subject to tax deducted at source (TDS). Taxable interest can offset the tax benefit availed on the investment to an extent. especially for those in the 30% tax b. OPEN APP Take for instance, post-tax return on an FD offering 5.5% interest rate will be 5.2%, 4.3% and 3.7% for tax slabs of 5%, 20% and 30%, respectively.
NSC National Savings Certificate, or NSC,
Offers guaranteed return, which is revised quarterly by the government, comes with a lock-in of 5 years and its interest can also be claimed as deduction under Section 80C. The interest is not paid out to th investor and instead is reinvested, whicn means the taxpayer can claim it as an investment under 80C. However, since interest earned in the fifth year of holding is not reinvested and is paid out with the total accrued amount, it cannot be claimed as deduction.
Life insurance plans are sold the most during the Jan-March period when taxpayers hurry to make last-minute tax saving investments. They promise deduction on premium, tax-free income on maturity and insurance cover. Foremost, single premium policies, which many opt to exhaust the 80C limit, may not qualify for tax break at maturity pro said Lovaii Navlakhi, chairman, Association of Registered Investment Advisors (ARIA). “On maturity or death claim, the entire proceeds are exempt provided the annual premium has not exceeded 10% of the sum insured in any year. Normally, single premium policies will not fulfil this criteria and hence the proceeds are likely to be taxable,” Navlakhi said.
Moreover, insurance cover offered is insufficient and yield works out to be 2- 4%. Endowment or traditional insurance policies are probably the worst way to save tax. Safety-seeking taxpayers should look at NSCS and PPF in place of endowment plans.
Unit-linked Insurance Plans (Ulips) are market-linked insurance products. Premium qualifies for deduction under section 80C, maturity proceeds or de claim is tax-free when the annual premium does not exceed 72.5 lakh and partial withdrawals after 5-year lock-in also don’t attract tax if the amount withdrawn is less than 20% of the fund value. Of course, the policyholder also gets a life cover.
Financial planners advise Equity-linked Saving Scheme (ELSS) as the best tax- saving investment. “ELSS helps save tax while offering wealth creation over the long-term with equities as the underlying asset that have strong growth potential,” said Prableen Bajpai. ELSS funds have the shortest lock-in OPEN APP years among all 80C investments, and they score high on flexibility. “The simplicity of ELSS funds as well as the clarity that this is 100% in equity make them a preferred product for tax saving,” said Navlakhi.
As per Navlakhi, when compared, ELSS funds score over Ulips. “Ulips don’t offer easy exit or transfer option in case the policyholder wants to switch to another Ulip policy or a better fund manager,” he said. In ELSS, investors can switch to another fund after the 3-year lock-in. The advantage Ulips have over ELSS is th investors can switch between debt an. equity at low or no costs, which is helpful for managing asset allocation. “From anecdotal evidence, it seems that this feature is not used frequently,” pointed Navlakhi.
Up to 10% of the basic salary or 20% of gross total income for salaried and self- employed taxpayers, respectively, ca OPEN APP claimed as deduction for investment maue in NPS (national pension system) tier-1. So, for instance, if your basic salary is 3 lakh and you’ve invested 780,000 in NPS, only 30,000 can be deducted under 80C. However, you can claim an additional deduction of 750,000 under Section 80CCD(1B).
“Salary considered to calculate deduction under Section 80C includes basic pay and dearness allowance. It may also incly- OPEN APP commission determined at a fixed percentage of the salary,” said Sandeep Sehgal, partner- tax, AKM Global. For tier-2 accounts, only government employees are given the 80C deduction benefit but at the condition of 3-year lock- in.