Where to Invest for Tax Saving under section 80C?

With every New Year comes New Joys, New Wishes, New Dreams coupled with New Liabilities and New Responsibilities and also the old ones.

eye icon
clock icon
7 mins 44 secs
calendar icon
Last Updated - May 5, 2023
article image
Listen to this article
audio icon

With every New Year comes New Joys, New Wishes, and New Dreams coupled with New Liabilities and New Responsibilities as also the old ones. One such old responsibility is the Financial Planning for the family and the Tax Planning for the financial year. The tax plan has always been a concern of the last minute, be it for the service people or the business class.

Even in today’s technically savvy generation, there are loads of people who are not even aware of the basic tax planning requirements.  Let us understand the various avenues for investment where tax can be saved under section 80C.

What is 80C Tax Deduction?

Under Section 80C of the Income Tax Act, 1961, there is a total exemption limit under the section of Rs 1,00,000 which can be saved so as to avoid tax payment as per income brackets. This benefit of Rs 1,00,000 of tax-saving investment is available to everyone, irrespective of his or her income level. Thus, in the highest Tax Bracket of 30%, a total of Rs 30,000 of taxation amount can be saved by simply investing Rs 1,00,000 within the financial year ends.

However, there is a minimum lock-in of 3 years for availing of Income Tax Deduction. It simply means that if you wish to avail of Income Tax Deduction under 80C by investing in any of the following tools, you cannot withdraw the money within 3 years of investment.

What are the various tools for Tax Saving Investment?

There are many permissible investment opportunities under section 80C.

Life Insurance Premiums

All premiums paid towards Life Insurance Policies are eligible for income tax deduction under section 80C of the Indian Income Tax Act. Life Insurance Premiums paid to Rs 1,00,000 each year are eligible for 80C Tax Benefit and the same cannot be surrendered within 3 years of Policy Inception.

Under Life Insurance, one can choose to invest in

All of them qualify as Life Insurance Policies and the premiums are exempted from Income Tax Benefits.

Pension Fund

Under Section 80CCC, you can invest up to Rs. 1 lakh in a Pension Fund of LIC of India or any other private insurance company as well. Thus, any premium paid towards any Annuity Plan, whether deferred or immediate will give you tax relief in that financial year.

Contribution towards Pension Funds is under a sub-section of 80CCC which is also a part of the 80C 1 Lakh limit.

ELSS Equity Linked Saving Schemes

There are certain Mutual Funds that have a lock-in for 3 years and are formed with a basic objective of tax saving. Each Mutual Fund operates according to the Fund Objective as mentioned in the Key Operating Memorandum.

Thus, investment in certain Mutual Funds for Tax Saving Purpose is called Equity Linked Saving Schemes which qualifies for section 80C deduction. Not all Mutual Funds can provide a 90C deduction. Some common examples of ELSS funds are – SBI Magnum Tax Gain, HDFC Tax Saver, Fidelity Tax Advantage, Franklin India Index Tax Fund, etc.

Provident Fund (PPF)

Any contributions to Employee’s Provident Fund, Voluntary Provident Fund (VPF), or savings made in Public Provident Fund (PPF Account) are eligible for income tax deduction under section 80C of the Indian Income Tax Act. This limit has also been enhanced to Rs 1,00,000 of contribution per year whereas the minimum still being Rs 500. The PPF provides an interest rate of 8.8% p.a.

Bank Fixed deposits or Term deposits of 5 Years

According to the new rule for 80C deduction, any investment done in Back Fixed Deposits for a minimum tenure of 5 years is also eligible for Income Tax Deduction under section 80C. Thus, each Bank provides a special rate as well for Tax Saving Fixed Deposits since it would mandatorily remain invested for a period of 5 years.

The principal part of EMI on Housing Loan deduction under section 80C

The Principal Amount of the Home Loan would be deducted under 80C if you are paying EMI on a Home Loan. There are 2 parts to the Home Loan – the Principal Part and Interest Part. The principal part of the EMI on your housing loan is eligible for income tax deduction under section 80C. The interesting part is also eligible for a tax deduction, however not under section 80C but section 24.

Thus, a Home Loan is always a good option for tax-saving purposes. Currently, anybody with a housing loan gets a deduction up to Rs 150,000, paid as interest for the loan, from his total income, for a self-occupied property.

Tuition Fees deduction under section 80C

This is an avenue most people are not even aware of. Any amount paid as a Tuition Fee for the education of the first 2 children of the employee / Tax Payer is eligible for deduction under section 80C of the Indian Income Tax Act. Most people do not avail of this benefit because they are not aware of the same.

National Saving Certificate

NSC is a good medium-term investment option with an advantage of the NSC is that it can be pledged as security against a loan to banks/ government institutions. The minimum investment starts from Rs 100 and there is no maximum limit for the investment in a year. Thus, any investment till Rs 1 lakh is eligible for Income Tax Deduction under section 80C.

NSC provides a return of 8.6% for 5 years and 8.9% for 10 years. However, the interest that accrues every year is included in your taxable income and is liable for tax payments. To avoid tax deductions, the interest portion can also be reinvested and thus eligible for section 80C deduction again.

Other 80C deductions

There are some other avenues for investment as well for tax saving purposes under section 80C. 80C also includes 80CCC, 80CCD, 80CCF. The most common ones are listed below:

·         Under Section 80CCF, you can invest upto Rs 1 lakh in Infrastructure Bonds or Infra Bonds

·         Under Section 80CCD you can invest in the National Pension Scheme of the Central Government up to 10% of your salary. Any contribution to this scheme of more than 10% of your salary will not be eligible for a tax deduction

·         Amount paid as stamp duty and registration charges while buying a new home are eligible for income tax deductions under section 80C of the Indian Income Tax Act

· 5-Year Post Office Time Deposit or POTD- They are similar to bank fixed deposits. POTD is available for varying time duration like 1-year, 2-year2, 3-year2, and 5-year. However, only 5-Year POTD qualifies for tax savings under section 80C. The current rate of interest on the 5-year POTD is 7.50% p.a., compounded quarterly. The minimum investment amount is Rs. 200, there is no maximum investment amount. Interest on these deposits is calculated quarterly and paid out annually.

Now that you are aware of the Various Tax Saving instruments available in the market you must choose the specific investment tool which is in sync with your investment pattern, financial goals, and risk appetite. Thus, before investing, there are some basic questions that you need to ask yourself like

·         How much risk are you willing to take on the investment?

·         When would you need the money and why?

·         When do you need Liquidity?

·         For how long will you not need to use these funds, i.e. what lock-in period is suitable for you?

Once you are aware of the answers, you would know for yourself or with help what Investment Tools are best suited for you. You must choose a tool according to your requirement and not because someone close to you is suggesting it. If you do so, you may end up buying something which you would regret at a later date. Hence, re-evaluate your needs and then choose a tool as per your changing needs and requirements!

author image

Deepak Yohannan is the Founder & CEO of MyInsuranceClub. He enjoys writing on Personal Finance and focusses on explaining the basic concepts of insurance in simple language.