With the tax season firmly upon us, we often witness the public rushing to their financial advisors in order to avail the tax deduction benefit under section 80C of the Income Tax Act, 1961, as per which, a person can invest in certain schemes or products and as a result can claim a deduction of an amount up to Rs. 150,000. This period, near the end of every financial year, is full of chaos and panic and causes investors to make irrational decisions in haste, ignoring some important aspects before taking investment decisions such as risk profiling and reviewing product suitability. Instead, people end up buying an Endowment plan or a ULIP scheme from an insurance agent which are expensive and complex in nature. Such products are better in mitigating risk but completely fail to build significant wealth for the investors as these products can hardly produce inflation-adjusted returns post all the inherent expenses. We strongly believe that “Your tax saving should be the result of your investment planning & not vice versa”. Here, we would like to cover various tax saving instruments under section 80 C, which will not only help individual investors to save taxes but can also help to build significant wealth in the long term based on one’s risk appetite and product suitability.
Equity Linked Saving Schemes (ELSS): These are tax-saving mutual funds under which deductions can be claimed up to Rs. 150000. They have a lock-in period of 3 years and primarily invest in equity markets.
Unit Linked Insurance Plans (ULIP): ULIPs are a combination of insurance and equity investments which provide risk cover for the policyholder along with investment options to invest in various qualified investments such as stocks, bonds or mutual funds.
National Pension System (NPS): An initiative by the Indian Government, NPS is a pension scheme for the working professionals or the unorganised sector. Like the other investments mentioned above, a deduction upto 150000 can be claimed along with an additional deduction of Rs. 50000 under section 80CCD (1b)
National Savings Certificates (NSC): Another kind of investment under which deductions can be claimed are the National Savings Certificates (NSC). They were launched in order to promote saving habits amongst the working class Indians and are a part of the postal savings system of Indian Postal Service.
Tax Saving Fixed Deposits (FDs): Tax-saving FDs are like regular fixed deposits, but come with a lock-in period of 5 years and tax break under Section 80C on investments of up to Rs 1.5 lakh. Different banks offer different interest on the tax-saving FDs, which range from 7-9%.
Public Provident Fund (PPF): Deposits made in a PPF account are also eligible for tax deductions under 80C where an investor receives a guaranteed rate of interest which is fixed by the Finance Ministry of India every year.
Employee Provident Fund (EPF): Under section 80C the employer’s contribution to the EPF account can save tax up to INR 1.5 Lakh. This contribution amounts to 12% of the salary.
The above-mentioned instruments can be differentiated on the basis of several factors such as capital appreciation, regular returns, risk & liquidity factors and the tax shelter they provide.
The table below demonstrates the returns generated by these investments.
Upon review of the various options of investing in one of the tax saving schemes under the section 80C, an individual can not only save tax but can also achieve steady returns based on one’s risk appetite which in turn can also help them finance long-term goals. It is also advisable to pace one’s investments throughout the year instead of committing a bulk of his savings at one go at the end of the year.
We hope that your tax saving efforts prove to be fruitful.
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