Tips on Making Investments Under Section 80C

Before investing in any product eligible for tax deductions under Section 80C of the Income Tax Act, you must check the lock-in period, return rate, minimum and maximum investment, risk, and suitability. It is not wise to invest just for saving tax.

Section 80C allows us to claim deductions from income tax payment from various small savings instruments. This includes, among others:

  • 5-year Fixed Deposit in a scheduled banks and post offices
  • Life insurance and Pradhan Mantri Suraksha Bima Yojana premiums
  • Deposit in NSC, NSS and NPS
  • Deposit in Post Office Savings Schemes
  • Investment in Equity-linked Savings Schemes
  • Payment of Unit-linked Insurance Premium
  • Investment in Mutual funds
  • Deposit in NHB scheme
  • Deposit in Public Provident Fund and Employees Provident Fund
  • Repayment of Housing Loan principal amount

The total deduction we can claim under Section 80C – the total of all investments made under this heading – is Rs. 1.5 lakh. So even if you have made a cumulative investment of Rs. 2 lakh on these instruments, your tax deduction will only be Rs. 1.5 lakh.

Before you make investment in any of these products, you need to know details such as rate or return, lock-in period, and minimum and maximum investments allowed. This will help you make an informed decision on where to put your money in order to get the most out of it. Investing in a scheme just for the sake of saving tax is an unwise strategy. Let us look at some of the prominent investment options and how beneficial they are to you:

Tax-Saving Fixed Deposits:

Term deposit of 5 years with tax-saving advantage is offered both by banks and post offices. And contribution to both of these – at least Rs. 100 – are tax-deductible under Section 80C. As the name of the scheme suggests, the lock-in period is 5 years, after which you can withdraw the amount. The interest accumulated from these deposits are subject to tax, however. You can withdraw the amount prior to maturity, at the payment of a penalty.

The rate of interest offered by some of the institutions (as on May 16, 2016) are given below:

Institution Interest offered
Post Office 7.9%
HDFC Bank 7.5%
ICICI Bank 7.5%
State Bank of India 7%
Punjab National Bank 7.25%

Employees Provident Fund (EPF):

The EPF contribution is not decided by you, but by the basic salary you earn. A normal EPF will deduct 12% of the basic salary as employee contribution towards EPF. However, you can increase your contribution amount under EPF through Voluntary Provident Fund options. You can increase your contribution up to 100% of your basic salary. The interest rate on EPF is 8.8%, which means that the returns would be higher than that of many other products.

Earlier, EPF was a completely tax-exempt product – for contribution, interest and withdrawal, but with the 2016 budget, 60% of EPF withdrawals are subject to tax, and on leaving a company, you can withdraw only your contribution and the accumulated interest, while the employer’s contribution will be locked-in until you are 58 years old. However, these proposals are still being discussed and we will have to wait to see how it goes.

Public Provident Fund (PPF):

PPFs can be opened by anyone in a scheduled bank. The minimum contribution required is Rs. 500 and the interest rate is 8.1%. PPF is a Triple E tax-exempted product, which means that there is no tax on the contribution, interest accrued and withdrawal. However, there is a lock-in period of 15 years on PPF, which means that you can withdraw the money only after 15 years. Partial withdrawal can be done from the 7th year onwards.

Equity-Linked Savings Scheme (ELSS):

ELSS is linked to the equity market and the returns are dependent on the investment portfolio chosen by you or your fund manager. The investments in ELSS are tax-deductible for income tax, and tax-free for long-term capital gains tax and dividends tax. You only have to invest a minimum of Rs. 500. The ELSS also offers flexibility in terms of the period of investment. While the lock-in period is just 3 years, premature withdrawal is not allowed except if you have not claimed any tax benefits from the investment.

National Savings Certificate (NSC):

NSC is a Post Office-based 5-year savings scheme which require a minimum investment of Rs. 100 and additional investments in multiples of Rs. 100, which makes it flexible. The current rate of returns of the NSC is 8.1%, similar to PPF. The investment can be claimed as tax deduction under Section 80C, but the interest earned is taxable. You cannot withdraw the amount before the end of the 5-year term, though.

Life Insurance:

Premium paid towards a life insurance policy for self, spouse or children, can be deducted from tax. You can take either an endowment policy, where you can receive the sum assured and other bonus payments at the end of the period, or a life policy where your nominees can get the proceeds after your death. You need to do your research to ascertain which policy suits you the best. There are also single-premium policies and regular premium policies. For you to be able to get the tax advantage, you need to hold a policy for at least 2 years. At the end of 3 years, you can surrender the policy and receive the surrender value, which will of course be lower than the amount you could get if you let it accumulate to maturity. The payout received is also exempted from taxation under Section 10(10D), subject to certain conditions.

You need to choose your investment option based on your priorities and requirements. If you like liquidity, it would be better to go for options that do not have a long lock-in period. If you are a market player, mutual funds and ELSS are a good choice. If you prefer safe methods of investment, you can go for term deposits and NSCs. Provident funds are a great choice if you have the security of your retirement life in mind.

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