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There are certain investment options available to the investors that offer good returns and allow you to save taxes. You may invest in Tax-saver Fixed Deposits, Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Savings Certificate (NSC), etc., to save taxes under Section 80C. However, Section 80C is a collective tax deduction up to a maximum of Rs 1.5 lakh per year. You can invest in these investment options to exhaust the Section 80C tax deduction and save taxes.
Public Provident Fund (PPF)
PPF currently offers interest at 7.1% compounded annually. You can invest an amount starting with a minimum of Rs 500 up to Rs 1.5 lakh in the PPF account every financial year. However, it has a lock-in period of 15 years. You can extend the account for a block of five years after maturity. The investment period of five years PPF is one of the few investments that qualify for the exempt-exempt-exempt or EEE status. It is tax-deductible under Section 80C and the interest accrued and maturity amount are not taxable.
If you want to withdraw any amount in case of a financial emergency, you can do so from the seventh year. You also have the facility to take a loan against the PPF balance subject to certain conditions.
PPF gives you the triple benefits of investment for financial goals, tax-saving and a loan during a financial crisis.
National Savings Certificate (NSC)
The NSC is a post-office savings scheme, and it currently offers 6.8% interest p.a. The government revises the NSC interest rates every quarter. The amount invested in the scheme is tax-deductible under Section 80C up to Rs 1.5 lakh. The funds will get locked in for 5-year. You get the facility to avail of a loan against the balance in your NSC account up to specified limits. The interest you earn from the NSC is taxable. However, it is not paid out to you but reinvested.
Tax-Saver Fixed Deposit
You can invest in the tax saver fixed deposit at a public sector or private sector bank with a minimum of Rs 100 and a maximum of Rs 1.5 lakh per financial year. The interest rate offered by banks on tax-saver fixed deposits is similar to normal bank FDs. However, the tax saver FDs have a five year lock-in period. The investment amount in tax saver FD up to Rs 1.5 lakh per year qualifies for the Section 80C tax deduction. The interest you earn from these deposits is taxable as per applicable income tax slab rates.
Equity-Linked Savings Scheme (ELSS)
Aggressive investors can invest in the ELSS and save tax under Section 80C. It invests mainly in stocks and has the potential to offer inflation-beating returns over time. It has a lock-in period of three years, the shortest among all tax-saving investments under Section 80C. Asset Management Companies (AMCs) offer you the facility to spread your investment in the ELSS through the systematic investment plan (SIP) and average the purchase price of units over time, called rupee cost averaging. If you purchase units of the ELSS and stay invested for the long run, you benefit from the power of compounding. The ELSS is taxed as equity-oriented funds, and any long-term capital gains up to Rs 1 lakh are tax-free.
National Pension Scheme
The National Pension System or NPS is a government-sponsored pension scheme opened to all citizens of India. Salaried, self-employed or even a Non-Resident Indian or NRI can apply to NPS. Employers can also offer NPS to their employees.
Your investment in the NPS Tier-I account qualifies for a tax deduction up to Rs 1.5 lakh under Section 80C of the IT Act. An employee’s contribution towards the NPS account is tax-deductible up to 10% of salary (basic salary plus dearness allowance) under Section 80CCD(1) of the IT Act. However, the deduction is allowed within the overall ceiling of Rs 1.5 lakh permitted under Section 80C. A self-employed can contribute a maximum of 20% of their gross total income in the NPS account and claim deduction under Section 80CCD(1) of the IT Act.
Individuals can claim an additional Rs 50,000 deduction under Section 80CCD(1B).
Salaried employees can also claim tax deductions for the employer’s contribution towards NPS. Central government and state government employees can claim up to 14% of their basic salary + dearness allowance, and others can claim up to 10% of their basic salary under Section 80CCD(2) of the IT Act. The deduction for the employer’s contribution under Section 80CCD(2) is over and above the limit of Rs 1.5 lakh available under Section 80C and 80CCD(1B).
Currently, a person needs to apply for a minimum of 40% of total corpus in an annuity plan, and can withdraw the balance 60% of the total corpus as a lump sum. If the entire corpus is less than or equal to Rs 5 lakh, you can withdraw the entire amount and these withdrawals will be tax-free.
Using these investment options you can maximise your tax savings and also earn good returns from the money invested.
For any clarifications/feedback on the topic, please contact the writer at namita.shah@clear.in
I’m a chartered accountant and a functional CA writer by profession. Reading and travelling in free time enhances my creativity in work. I enjoy exploring my creative side, and so I keep myself engaged in learning new skills.
