Seven ways to get section 80C tax exemption

in view of this, Mint Listed below are the key features- cost, safety, returns and lock-in period of major investments available under section 80C. tax rules To help you choose the best option for you.

PPF

Public Provident Fund (PPF) is one of the most popular tax saving options as it offers sovereign guarantee and tax exemption on investments, withdrawals and partly accruals. PPF comes with a lock-in of 15 years, after which you choose to increase your investment in blocks of 5 years. The current interest rate on PPF is 7.1%, which makes it better than bank fixed deposits (FDs). However, the PPF rate is reviewed every quarter.

Tax Saving FD

Although investment made in 5-year tax-saving fixed deposits is deductible, the interest earned on it is fully taxable and is subject to tax deduction at source (TDS). The taxable interest can to an extent offset the tax benefit received on the investment, especially for those in the 30% tax bracket. For example, the return after tax on FDs offering 5.5% interest rate would be 5.2%, 4.3% and 3.7% for the tax slabs of 5%, 20% and 30% respectively.

NSC

National Savings Certificate, or NSC, provides guaranteed returns, which are revised quarterly by the government, comes with a lock-in of 5 years and its interest can also be claimed as a deduction under section 80C. Is. Interest is not paid to the investor and is instead reinvested, which means the taxpayer can claim it as an investment under 80C. However, since the interest earned in the fifth year of holding is not reinvested and paid along with the total earned amount, it cannot be claimed as deduction.

traditional insurance plan

Life insurance plans have the highest sales during the January-March period, when taxpayers rush to make last-minute tax saving investments. They promise deduction on premium, tax-free income on maturity and insurance cover. Most important, single premium policies, which many choose to eliminate the 80C limit on, may not qualify for tax breaks on maturity income, said Lowai Navlakhi, president of the Association of Registered Investment Advisors (ARIA). “On maturity or death claim, full income is exempted provided the annual premium does not exceed 10% of the Sum Assured in any year. Generally, single premium policies do not meet this criterion and hence the income is likely to be taxable,” Navlakhi said.

Further, the insurance cover offered is inadequate and the return works out to 2-4%. Endowment or traditional insurance policies are probably the worst way to save tax. Security-seeking taxpayers should look at NSC and PPF instead of endowment schemes.

ELSS

Financial planners recommend Equity-Linked Savings Schemes (ELSS) as the best tax-saving investment. Praleen Bajpai said, “ELSS helps in saving tax over the long term by offering wealth creation with equities, which have underlying assets that have strong growth potential.”

ELSS funds have the shortest lock-in of 3 years among all 80C investments, and they score high on flexibility. Navlakhi said, “The simplicity of ELSS funds as well as the clarity that it is 100% in equity, make them the preferred product for tax saving.”

ULIP

Unit Linked Insurance Plans (ULIPs) are market linked insurance products. Premium is eligible for deduction under section 80C, maturity income or death claim is tax free when the annual premium does not exceed 2.5 lakhs and partial withdrawals after 5 years of lock-in are also not taxable if the amount withdrawn is less than 20% of the fund value. Of course, the policyholder also gets life cover.

According to Navlakhi, when compared, ELSS funds score higher than ULIPs. “Ulips do not provide easy exit or transfer option in case the policyholder wants to switch to another ULIP policy or better fund manager,” he added. Investors in ELSS can switch to another fund after a lock-in of 3 years. The advantage of ULIPs over ELSS is that investors can switch between debt and equity at little or no cost, which is helpful for managing asset allocation. “From anecdotal evidence, it seems that this feature is not used very often,” Navlakhi said.

NPS

For salaried and self-employed taxpayers, 10% of basic salary or 20% of gross total income, respectively, can be claimed as deduction for investments made in NPS (National Pension System) Tier-1. So, for example, if your basic salary is 3 lakhs and you have invested 80,000 in NPS, only 30,000 can be deducted under 80C. However, you can claim an additional deduction of 50,000 under section 80CCD(1B).

“The salary to be considered for computing the deduction under section 80C includes basic pay and dearness allowance. This may also include fixed commission at a certain percentage of the salary,” said Sandeep Sehgal, Partner – Taxes, AKM Global.

For Tier-II accounts, only government employees are given the benefit of 80C deduction but subject to a lock-in of 3 years.