Section 80C of the Income Tax Act allows a deduction of certain investments and expenditures up to a maximum of Rs 1,50,000 from your gross total income in a given financial year. So, if your total investment is say Rs 2,50,000 in a financial year, you can claim tax deduction up to Rs 1,50,000 under Section 80C.
This deduction is provided by the government to encourage household savings. The benefit of Section 80C tax deduction is applicable to individuals (service, profession and business) and the Hindu Undivided Family (HUF).
Tax Savings Under Section 80C
|Taxable Income||Tax Saving Up to|
|2,50,000 - 5,00,000||15,450|
Here are the top tax-saving instruments of 2015 - if they've somehow slipped under your radar, perhaps you can resolve to give them a try in 2016.
1. Public Provident Fund (PPF)
PPF is considered to be one of the safest tax saving instruments for those who have a conservative risk appetite. The interest rate is linked to the Government of India bond, and hence fluctuates every year. Presently, PPF offers an annual interest of 8.70% compounded annually. Any individual can open a PPF account in any nationalised bank, notified private sector bank or post office for a period of 15 years. You can deposit a minimum of Rs 500 to a maximum of Rs 1,50,000 yearly. Loans can also be availed against PPF after the third year, excluding the year of deposit. Interest earned on PPF during the financial year is also tax free. You can partially withdraw money from the sixth year of the date of opening the account.
2. National Saving Certificates (NSC)
This again is a safe investment instrument as the interest is linked to the government bond yield. NSC can be purchased at any post office for a period of five years or 10 years. Minimum amount of Rs 500 can be invested in NSC to earn an annual interest of 8.5% and 8.75%, if purchased for five years and 10 years respectively. Interest on NSC is taxable, but since the interest in reinvested in NSC, it's eligible for deduction under Section 80C. There are penalty charges if you withdraw funds before the expiry of the duration of the certificate. However, you can avail loans against NSC.
3. Tax-saving fixed deposits
One of the most popular investment options among conservative investors in the lowest tax bracket are tax-saving fixed deposits. These are similar to regular fixed deposits, except for one thing. There is a lock-in period of five years on tax-saving FDs. They can be opened with any scheduled bank. There is no premature exit option, but loans can be availed against these FDs. The interest earned on these deposits is taxable as regular income of the individual.
4. National Pension Scheme (NPS)
NPS is a government backed investment plan managed by Pension Fund Regulatory Development Authority, which aims to provide post-retirement income to all Indian citizens. NPS can be availed by employees of government, private institution, organised and unorganised sector. The contributory amount is invested in the markets. At the time of retirement, investors get a lump sum amount depending on the performance of the fund. While NPS contribution has tax benefits under Section 80C, the annuity amount is taxable.
5. Life Insurance Plans
The premium paid for life insurance plans is eligible for deduction under Section 80C. Life insurance plans provide a security to the family members of the insured person. It makes sure that they have an inheritance in case of death of the insured person. One can have more than one insurance policy and the aggregate premium paid on all the policies paid during the financial year, including premium paid on policies taken for spouse and children (dependent or not) is eligible for deduction. The maturity amount is also tax free.
6. Home loans
The tax saving on buying a property is available on two components -- principal and interest amount. While Section 80C gives a deduction on repayment of principal, Section 24 gives a deduction on the interest. First- time buyers can claim an additional deduction of Rs 1,00,000.
7. Equity-Linked Saving Scheme (ELSS)
ELSS is a kind of mutual fund that is especially designed for the purpose of tax saving. These funds have a lock-in period of three years, which is less than all the other investment options eligible for 80C. These funds are suitable for investors with a high risk-tolerance to market volatility. These funds beat inflation and provide higher returns in the long term, but there is no premature withdrawal option until you pay an exit load.
8. Unit Linked Insurance Plans (ULIPs)
ULIPs are a category of goal-based financial solutions that combine the safety of insurance protection with strong wealth creation opportunities. A ULIP can be referred to a hybrid insurance plan that combines the benefit of insurance as well as investment. The premium is divided into two parts -- one goes towards life cover and the other is invested in market-linked funds of your choice. For taxation purposes, unit-linked insurance plans are considered as life insurance policies. At the time of investment, there is a deduction of tax that is available on premium paid on life insurance policies under Section 80C. Even the maturity and death benefit amount is tax free under Section 10 (10D).
ULIPs tend to give higher returns in comparison to other fixed-income investments For companies like ICICI Prudential, close to 96% of their ULIP funds have outperformed respective benchmarks since inception, across debt, equity and balanced funds. In addition, investors can make partial withdrawals of up to 20% the fund value every year from the sixth year onwards. They can also make unlimited fund switches based on market fluctuations or investment goals.
A snapshot summary
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