Tax deductions are highly essential, no matter whichever side of the financial spectrum you operate in. Lowering one’s tax related liabilities is certainly a major priority, one that you should keep in mind at all times. Saving on income tax is not always the best reason to make investments. However, it always helps if you are well versed with the tax deductions that you can enjoy while deploying your hard earned money into multiple investments. Section 80C is one of the most important sections which enable individual taxpayers to claim handsome deductions. Although many investments are eligible for deductions under Section 80C, the cumulative maximum amount that you can get as a deduction is Rs. 1.5 lakh.
Under Section 80C, the following investments can be eligible for deductions on taxes-
- PPF (Public Provident Fund)
- Life Insurance Premiums
- EPF (Employees’ Provident Fund)
- NSC (National Saving Certificate) along with accrued interest
- 5-year tax-saver FDs (Fixed deposits) with banks, NHB, HUDCO and post office
- Sukanya Samriddhi Yojana (SSY)
- SCSS (Senior Citizens Savings Scheme)
- Pension Plans
- ELSS (Equity Linked Savings Scheme)
- NPS (National Pension System)
- ULIPs (Unit-Linked Insurance Plans)
- Tuition fees paid for the education of children (maximum two kids)
- Repayment of principal amount on home loans
Before you actually roll up your sleeves and get down to working out which is the best investment option for claiming maximum benefits, there are some aspects which you should keep in mind as well. These include the following:
- ULIPs have 5-year lock-in periods and you can get the tax benefits in case the sum is at least 10 times of the premium that you paid annually.
- SCSS, NSC and tax-saver FDs have 5-year lock-in periods/tenors. In case of NSC, the interest that you earn in the first 4 years is eligible for tax deduction and reinvested.
- ELSS investments come with 3-year lock-in periods.
- PPF investments have tenors of 15 years and you can extend by 5 years at a time as well. The rate that is payable is reviewed on a quarterly basis. The EPF contribution from the employee has tax benefits although the contribution of the employer is not eligible for tax benefits.
- Investment in NPS is eligible for tax deductions under Section 80CCD (1) up to Rs. 1.5 lakh. Yet, total deduction under Sections 80C, 80CCC (pension plan investment) and 80CCD for NPS cannot cross Rs. 1.5 lakh.
- Investments up to Rs. 50, 000 can be made in NPS which is eligible for deduction under Section 80CCD (1B) and this is over and above the maximum amount of Rs. 1.5 lakh which is allowed.
- Sukanya Samriddhi Yojana is for the welfare of girls and funds can be withdrawn partially once the child reaches the age of 18. The remainder can be withdrawn once she reaches 21 years of age.
- Principal repayment on the home loan is eligible for tax deductions up to Rs. 1.5 lakh in case the property is fully constructed. This benefit will be reversed in case you sell off your property within 5 years of obtaining possession.
Analysing some tax saving avenues in detail
Now, here’s taking a look at some of the best ways that you can maximize your tax benefits. Take VPF and EPF as potent examples in this regard. A part of your monthly salary will be deducted as the employee’s contribution towards EPF. The amount that is deducted annually can be claimed as the deduction while the total taxable income is being worked out. Yet, you should check with your employer/company as to the quantum of interest which is earned on this corpus for the particular financial year. Interest which is more than 9.5% is taxable in the employee’s hands. So this is something you should always check out. Also, if the employer’s contribution exceeds 12% of the salary, the excess amount is taxable in the employee’s hands.
Employees may consider increasing their contribution in case they are okay with lower take-home salary amounts. This added contribution is the VPF and this is eligible for tax benefits under Section 80C. The rules are similar to EPF in this regard. If you are confused with regard to making the right investment, you can simply increase the VPF contribution, making sure that the EPF and VPF contributions together touch the Rs. 1.5 lakh threshold. The interest which is earned and maturity amount will be exempted from taxes.
In case of PPF (Public Provident Fund), you can invest anything between Rs. 500 and Rs. 1.5 lakh annually. The interest on this is free from taxation with the maturity period being 15 years. The rates of interest are subject to change periodically on a quarterly basis. In case you wish to invest some money for the future with a 15-year tenor, you can think of PPF which offers decent rates and full tax deductions on the investment made. Life Insurance is of course a necessity and any amount paid as premium for your spouse, children and yourself can be eligible for deductions under Section 80C.
However, keep it in mind that premiums paid for parents/parents-in-law will not qualify for deductions under this section. In case you are paying premiums for multiple policies, these can be included for deductions under Section 80C. If life insurance is purchased by a HUF (Hindu Undivided Family) for any member, tax deduction can be claimed on the premium by it.
There are various ELSS investments that you can consider and these may help you get higher returns. The investments are eligible for tax deductions under Section 80C. However, the risk component is slightly higher with ELSS investments. The lock-in period is 3 years which is the lowest amongst all the investment options eligible for deductions under Section 80C. Experts usually advise customers not to keep all their eggs in one basket. Similarly, you should invest some portion in ELSS while ensuring that you have ample life insurance coverage to safeguard your family’s future. These will earn you tax deductions and so will your EPF and PPF investments which are also highly necessary.
You can also take a home loan in case you are eligible for the same and wish to own your own property. This will help you build an asset while qualifying for tax deductions on principal repayment under Section 80C and also interest repayments up to Rs. 2 lakh under Section 24.