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Wednesday, February 24, 2021

Income Tax Saving Schemes: Investment instruments that are helpful in saving your tax under Section 80C

Income Tax Saving Schemes: These are the top financial instruments that can be used for saving income tax under Section 80C in this financial year 2020-21.

By: Express Web Desk | New Delhi |
Updated: January 20, 2021 12:49:37 pm
The period of January-March is mostly considered to be the tax saving quarter of the financial year since a lot of taxpayers make their investments during these three months. (Image source: Pixabay)

We have arrived in the last quarter of the financial year 2020-21 and this means that it is that time when a lot of us start making our investments for saving tax. Salaried individuals across India whose income falls under the taxable slab need to submit their actual investment proofs to their employers during the last quarter (January-March) of the fiscal year.

There are many instruments that help you in reducing your tax liabilities and most of them are available under Section 80C of the Income Tax Act. Section 80C includes multiple investments through which you can claim deductions on your total income. However, this is up to a limit of Rs 1.5 lakh in a financial year.

So, here are the top tax saving instruments that can be considered while making your tax-saving investments:

Public Provident Fund (PPF)

A Public Provident Fund or PPF is a long-term tax-saving instrument that gives a fixed rate of interest annually on the amount that you invested during the year. It has a lock-in period of 15 years.

In a PPF account, the interest you earn is tax-free and the amount that is deposited during the financial year can be claimed under Section 80C. At present, the interest rate on PPF stands at 7.1 per cent after the government kept the interest rates on small savings schemes including PPF and NSC unchanged for the January-March quarter, according to the recent circular by the Department of Economic Affairs (DEA) on December 31, 2020.

A PPF account can be opened across any of the public sector or private sector banks or post office. You can invest a minimum of Rs 500 and a maximum of Rs 1,50,000 in a financial year. Also, the deposit can be made in lump-sum or in ​installments.

National Savings Certificate (NSC)

A National Savings Certificate or NSC has a tenure of five years and comes with a fixed rate of interest. This can be opened at any of your nearby post office and in the current scenario provides a comparatively higher interest rate than a bank fixed deposit (FD).

The interest on NSC is also automatically counted towards the limit of Rs 1.5 lakh under Section 80C and is tax-deductible if no other investments are using up the limit.

Currently, the interest rate available on NSC is 6.8 per cent which is compounded annually but payable at maturity, according to the information available on India Post’s website (click here: https://www.indiapost.gov.in/Financial/pages/content/post-office-saving-schemes.aspx).

For an NSC, you need to invest a minimum of Rs 1,000 and then in multiples of Rs 100 (such as Rs 1,100, 1,200 and so on) and there is no maximum limit in this instrument.

National Pension System (NPS)

The National Pension Scheme or NPS is a type of voluntary retirement savings scheme by the government. This scheme is available for all the employees from the public, private and even the unorganised sector and allows the subscriber to make a defined contribution towards planned savings thereby securing their future in the form of pension.

NPS allows people to invest in a pension account throughout their employment till the age of retirement. On retirement, investors can withdraw a certain percentage of the total corpus. The NPS subscriber will receive the remaining amount of the corpus as a monthly pension after retirement. PFRDA is the nodal agency for the implementation and monitoring of NPS.

Anyone who applies for NPS should be aged between 18 – 65 years as on the date of submission of his/her application, according to details given in India Post. (click here: https://www.indiapost.gov.in/Financial/Pages/Content/NPS.aspx)

This particular scheme can be ported across jobs and locations and in terms of tax benefits, it provides tax deduction up to 10 per cent of Salary (Basic+DA) under Section 80 CCD(1) within the overall ceiling of Rs 1.50 lacs under Sec 80 CCE. The employee is also eligible for tax deduction up to 10 per cent of Salary (Basic+DA) contributed by the employer under Sec 80 CCD(2) over and above the limit of Rs 1.50 lacs provided under Sec 80 CCE.

ELSS Funds

Equity-linked saving schemes or ELSS are tax-saving mutual funds where a taxpayer can save up to Rs 46,800 in a financial year under Section 80C of the Income Tax Act. ELSS funds come with a lock-in period of just three years, which is the lowest lock-in period among all tax-saving financial instruments.

These funds can also generate a higher return than most other tax-saving instruments because of their exposure to equity markets. They invest a minimum of 80 per cent of their assets in the equity markets which makes them a risky investment at the same time given the unpredictability of markets.

Since it is subject to the growth of the equity markets, the returns on these funds are presently subject to Long Term Capital Gains (LTCG) tax at 10 per cent if the gains are above Rs 1 lakh.

ELSS funds are more suitable for those individuals who are open to the risk appetite and stay invested for a longer time period so as to reap its benefits.

5-Year Bank FDs

The tax saver fixed deposit (FD) is one that has a tenure of five years and carries a fixed rate of interest. By investing in a five-year FD, an individual can claim tax benefits under Section 80C up to Rs 1.5 lakh.

These FDs can be opened from any public sector or private sector bank in India but the interest rates offered varies from bank to bank. Also, it must be noted that though this financial instrument is going to provide a tax benefit to the individual, tax deducted at source (TDS) from the interest on these FDs is applicable at the time of maturity.

Given the present situation of interest rates across banks, it provides a lower return on investment when compared to other tax-saving instruments.

Unit Link Insurance Plans (ULIPs)

Unit Linked Insurance Plan or ULIP is a mix of insurance along with investment. Under a ULIP, the insurance company puts a portion of your investment towards life insurance and rest into a fund that is based on equity or debt or both and matches with your long-term goals.

ULIPs come with a lock-in period of 5 years, however, insurance being a long-term product, an investor may not really reap the benefits of the policy unless they hold it for the entire policy term which can range somewhere between 10 and 15 years. Nevertheless, an individual can claim tax benefits under Section 80C up to Rs 1.5 lakh on the premium he/she pays during a financial year.

Life Insurance Premiums

Apart from ULIPs, the premiums paid for different types of life insurance policies such as endowment policies and term insurance all provide tax benefits up to Rs 1.5 lakh under Section 80C.

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