WHAT ARE THE VARIOUS TAX-SAVING OPTIONS UNDER SECTION 80C?
Whether you know much about the Income Tac Act, 1961, or not, you surely must have heard of its section 80C. This section is a favourite among taxpayers as it allows you to reduce your tax liability by making certain specified investments. If you invest in any of the section 80C tax-saving investments, you can claim a tax deduction of up to Rs. 1.5 lakh in a financial year.
While there are several tax-saving investment options under section 80C, the following are the most popular amongst investors:
- Equity-Linked Savings Scheme
Equity-Linked Savings Scheme (ELSS) is a type of equity mutual fund – the only mutual fund that comes with tax benefits. The lock-in period is three years, the shortest amongst all section 80C instruments. ELSS funds also come with the potential of earning the highest returns as they primarily invest in equity and equity-linked instruments and so the returns are market-linked.
- Five-year fixed deposit
You can open a five-year fixed deposit with banks or other financial institutions to claim the section 80C deduction. Tax-saving FDs work just like regular FDs – they come with a fixed rate of interest. The only difference is that tax-saving FDs have a lock-in period of five years before which you cannot break your FD.
- Public provident fund
The Public Provident Fund (PPF) is a central government scheme whose primary purpose is to mobilise the savings of individuals and help them earn decent returns. PPF has a 15-year lock-in period and you can make a partial withdrawal per year from the seventh year. The interest that you earn is tax-free and so are your PFF proceeds on maturity.
- National Pension System
The National Pension System (NPS) is a social security initiative by the government that helps you with retirement planning and building a retirement corpus. The lock-in period is till the age of 60; however, there are provisions for premature and partial withdrawals. NPS offers asset allocation across stocks, corporate debt, government securities, and alternative investments and you can either opt for the active investment choice or the passive investment choice. NPS offers tax benefits under sections other than 80C, such as sections 80CCD(1) and 80CCD(1).
- Unit-linked insurance plan
A Unit-Linked Insurance Plan (ULIP) is an investment product that allows you to meet three financial goals at the same time – having insurance coverage, building wealth, and saving tax. A part of the premium you pay for your ULIP policy is used towards the insurance cover while the rest is invested in equity, debt, or balanced funds as per your preference. A ULIP comes with a lock-in period of five years.
An important thing to remember here is that you do not have to pick only one section 80C investment. You can invest in multiple tax-saving instruments according to your financial goals and investment needs. For example, if you invest Rs. 50,000 in a five-year tax-saving FD and Rs 1 lakh in ELSS in a financial year, you can still claim the entire Rs. 1.5 lakh deduction under section 80C. Hence, when investing in section 80C instruments, don’t just think of saving tax but also how the investment can help you meet other goals.