How To Plan Tax Saving Under Section 80C?

Published On: 11-Jun-2020

Income tax laws provide for tax incentives under various sections, but the most commonly used tax benefit is the one allowed under Section 80C of the Income Tax Act, 1961. As per this section, the taxpayers can avail of a tax benefit of up to Rs. 1.50 lakhs from their total income by making certain eligible investments and payments. 

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Under this section, there are specific tax saving options that need not be planned by the taxpayer but may come naturally in the ordinary course. Such options include a contribution to Employer Provident Fund (EPF), principal repayment of home loan for residential house property, tuition fee for children, payment of Life Insurance Premium etc. However, such payments may not allow the taxpayer to avail of the full tax benefit available for the deduction of Rs. 1.50 lakh. As such, the taxpayer needs to systematically plan for the balance tax benefit under Section 80C. Here is how one can plan tax saving under Section 80C with the following four investment options:

Contribution to Public Provident Fund (PPF)

One may open a PPF account with post offices/ commercial banks and deposit the contribution amount periodically. The taxpayers can avail the tax deduction equal to the amount so deposited in PPF account, subject to the overall ceiling limit. One cannot freely withdraw the amount so deposited before 15 years of the account opening date. However, the amount can be partially withdrawn in the interim subject to the eligible reasons as allowed by the Govt. rules in this regard.

The investment in the PPF account is governed by rules notified for different Small Savings Schemes and further, the Govt. notifies the interest rate on PPF accounts on a quarterly basis at present. Such interest rate remains valid for the account balance for the respective quarter and is credited on an annual basis at the financial year-end. The presently notified rate for the quarter January-March 2020 is 7.90% per annum. The interest income on the PPF account is tax-free for investors. 

5-Year Tax Saver Fixed Deposit (FD)

This is another convenient investment option available for tax savings, wherein one can invest in 5-year Tax Saver FD with any of the scheduled commercial banks. The interest rates on such FDs are fixed by the respective banks, but such interest income is also taxable in the hands of the investor. Such FDs are subject to a five-year lock-in period from the date of investment. During the currency of such a lock-in period, the taxpayer cannot also avail a loan against such FDs, as pledge or premature withdrawals against such FDs is not possible. Further, while one may invest in such FDs on a staggered basis, managing multiple FDs, with a new FD created every time a new investment is made, maybe full of hassles. 

Investment in National Savings Certificates (NSCs)

Besides PPF, NSCs are another investment option coming from the bouquet of Small Savings Schemes notified by the Govt. of India. One may purchase NSCs through Post Offices to avail tax savings and can withdraw the funds only after the expiry of the investment period of at least five years. The Govt. of India notifies the interest rate on NSCs every quarter, which would be applicable for all the NSC investments made during that quarter. 

While the interest income of NSCs is taxable in the hands of the taxpayer, such interest income accrued and reinvested in NSCs during the year, except for the maturity year, is also eligible for tax benefit under Section 80C. However, just like the hassles of managing tax saver FDs created in a staggered manner, NSC investments made at different time intervals may also be difficult to manage, especially because they are in the form of physical certificates. 

Investment in Equity Linked Savings Schemes (ELSS)

ELSS refers to the specified category of mutual fund scheme, which invests at least 65% of their portfolio in listed shares of domestic companies. Further, being a fund category eligible for a tax benefit, such funds also carry a lock-in period of 3 years from the date of investment. However, this is the lowest lock-in period amongst all the investment options under Section 80C. 

Unlike most of the other investment options under Section 80C, the ELSS investments provide market-linked returns to the investors. For example, the ELSS category of funds has generated annualized returns of 10.96% over the last three years as on 24th January 2020. 

source – ValueResearchOnline

With the investment portfolio predominantly in equities, the investors may aim to create wealth over the long term by investing in ELSS. The tax payers are liable to pay tax on ELSS returns at a special rate of 10% without any indexation benefit. Investing in ELSS carries another convenience for the investors, for it makes saving taxes an effortless task and all that one needs to do is register a Systematic Investment Plan (SIP) to invest in ELSS on periodic intervals. Thereafter, the amounts get deducted from your bank account at regular intervals irrespective of market direction.

With different investment options available, one must endeavour to make tax-saving investments in an informed manner. 

Note: The tax provisions, as mentioned in the article, are updated as per the Finance (No. 2) Act, 2019. Contact your tax advisor for more details.