Investment Options Under Section 80C

As the end of financial year approaches investors are suddenly woken up to the existence of Income Tax department and they start to do their tax planning. But it is always advisable to do tax planning in advance because a wise investment will not only lessen the tax burden but will also give some good returns.

What is Section 80C?

Under section 80C of the Income Tax Act, certain investments are deductible (up to a maximum of Rs 1 lakh) from gross total income. This tax exemption is available across individual tax slabs. If you earn Rs 4 lakhs per annum and make investments of Rs 1 lakh in 80C instruments then the taxable amount will be Rs 3 lakhs.

The below chart provides the list of tax saving instrument under section 80C:

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PUBLIC PROVIDENT FUND (PPF): This is one of the oldest available investment options. PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exempt exempt-exempt) tax regime. This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax. PPF offers an interest rate of 8.6% compounded annually, with the maximum investment restricted to Rs 70,000 a year.

EMPLOYEE PROVIDENT FUND (EPF): Under the current norms, 12% of the employee's salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of Rs 1 lakh per annum. Like PPF, EPF, also falls under the EEE tax regime wherein the interest received (on retirement from service) is tax-free in the hands of the investor. The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO).

NATIONAL SAVINGS CERTIFICATE: Similar to PPF, NSC also earns a defined interest rate per annum and investment up to Rs 1 lakh is exempt from tax under section 80C. However, unlike PPF, interest received on NSC, at the time of maturity, is taxable in the hands of the investor which makes it comparatively less attractive. On the positive note, however, NSC has a relatively shorter lock-in period and the interest here is compounded half yearly.

TAX SAVING BANK FDS: Investment up to Rs 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. These fixed deposits mandate a lock-in period of five years and interest is compounded quarterly, just like any other ordinary bank fixed deposit. The drawback is taxability of interest income upon maturity.

SENIOR CITIZENS SAVING SCHEME: Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme, which offers a fairly attractive interest rate of interest, payable on quarterly basis. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor.

EQUITY LINKED SAVINGS SCHEME (ELSS): These tax saving mutual fund schemes do carry an embedded market risk and calls for investor prudence before making an investment decision. However, their returns are equally rewarding and tax free in the hands of the investor. As ELSS has a mandatory lock-in period of three years, they are positioned as long-term equity assets and thus returns are tax free in the hands of the investor. And though these schemes mandate a three year lock-in period, investors are likely to be better off if they continue to stay invested for a longer term as equities generate best returns over a longer time frame.

LIFE INSURANCE PREMIUM: Any premium payable by an investor to provide cover to his life is also eligible for deduction under Section 80C, subject to a maximum of Rs 1 lakh. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry.

UNIT LINKED INSURANCE PLANS (ULIPS): ULIPS or Unit linked insurance schemes, are also eligible for deduction under Section 80C. As these schemes provide investors the benefit of both life cover and investment in equity and debt markets, these are highly popular with investors. Investor, however, should check the premiums charged by these schemes before making an investment decision as most Ulips charge high premiums.

SECTION 80CCF DEDUCTION: A new Section 80CCF has been inserted in the Finance Bill 2010-11, which provides an additional deduction of Rs 20,000 to investors for investing in infrastructure bonds issued by notified organizations. This deduction is over and above the Rs 100,000 deduction available under Section 80C.

Section 80C benefit has been provided to encourage long term savings and investments. You should choose a combination of fixed income and market linked investments depending on your age and risk profile. For example if you are in your twenties, give a higher allocation to ELSS whereas if you are nearing retirement, concentrate more on fixed income investments. But remember that Investment is to be done keeping your overall financial situation and future goals. Tax advantage is just an add-on benefit. Never make investments just for saving tax.

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References:

http://taxmantra.com/ereturns/other/invest-tax-saving-options-80c.html http://www.caclubindia.com/forum/investment-options-to-save-tax-under-section-80c29039.asp http://taxguru.in/income-tax/investment-covered-under-section-80c-of-income-tax-act1961.html