Tax-Saving Investments Under Section 80C: Investments are pivotal in one’s wealth creation journey. Saving on taxes while investing helps to maximize finances and acts as an incremental delta. Section 80C of the Income Tax Act, of 1961, is one of the most popular and widely used sections for tax-saving purposes in India.
It allows individuals and Hindu Undivided Families (HUFs) to claim deductions of up to Rs 1.5 lakh per financial year from their taxable income. This section encourages savings and investments by offering tax benefits on specified financial instruments.
Sec 80 CCD(1B) is also one of the sections of the Income tax act that provides an additional tax deduction of Rs. 50,000 for investments made towards National Pension Schemes. Based on insights shared by Priyank Shah, Co-Founder and CEO of The Financialist, here’s how to effectively plan your tax-saving investments under Section 80C.
Key Investment Options under Section 80C:
Equity-Linked Savings Scheme (ELSS):
These mutual funds invest primarily in equities, offering the potential for higher returns. ELSS has a lock-in period of three years, the shortest among 80C options. This lock-in period encourages investors to adopt a long-term perspective, promoting sustained investment and potentially yielding higher returns.
National Pension System (NPS):
A government-backed retirement scheme, NPS allows investors to allocate funds between equities, government bonds, and corporate debt. It offers an additional deduction of Rs 50,000 under Section 80CCD(1B) beyond the 80C limit. Funds are generally locked-in until the age of 60, promoting long-term retirement planning.
Tax-Saving Fixed Deposits (FDs):
These are bank fixed deposits with a lock-in period of five years. They offer guaranteed returns, though typically lower than market-linked instruments. Interest earned is taxable, which can affect net returns.
Public Provident Fund (PPF):
A government-backed savings scheme with a 15-year lock-in period, offering fixed returns. While it provides tax-free interest, the returns often align with inflation, resulting in limited real growth.
Unit Linked Insurance Plans (ULIPs):
ULIPs combine insurance and investment, allocating a portion of the premium towards life cover and the remainder into market-linked instruments. They have a minimum lock-in period of five years. Moreover, the insurance cover provided is often inadequate.
Life Insurance Policies:
These include term, endowment and money-back policies offering fixed returns with life cover. They typically have long lock-in periods and provide lower returns, often failing to keep pace with inflation. Additionally, the insurance coverage is usually insufficient compared to pure term insurance plans.
Evaluating Investment Options Under Sec 80C
Returns: ELSS and NPS, with equity exposure, can deliver returns similar to equities, with ELSS offering 12-15% and NPS varying by asset allocation. Tax-Saving FDs offer fixed 5-7% returns, often below inflation. PPF provides tax-free returns aligned with inflation, while ULIPs and traditional policies usually yield lower, inflation-lagging returns.
Lock-in & Liquidity: ELSS has a 3-year lock-in, offering quicker access. NPS is locked until retirement, promoting long-term savings. Tax-Saving FDs have a 5-year lock-in, while PPF has a 15-year lock-in with limited early withdrawals. ULIPs and traditional policies have 5+ year lock-ins, with early exits incurring penalties.
Inflation Impact: ELSS and NPS can outpace inflation due to equity exposure, unlike PPF, ULIPs, and traditional policies, which often yield inflation-matching or lower returns.
Insurance Coverage: ULIPs and traditional policies combine insurance and investment but offer lower life cover compared to term plans, which provide higher coverage at lower premiums.
Important considerations for investors:
Mind 80C Limit:
The Rs 1.5 lakh deduction under Section 80C includes EPF contributions. If your EPF contribution is ₹50,000, you can invest Rs 1 lakh more in other eligible instruments. Exceeding this limit offers no extra tax benefit, so account for EPF contributions when planning 80C investments.
Avoid Unnecessary Insurance:
Prioritize term insurance for risk coverage instead of ULIPs or traditional policies. Term plans offer higher life cover at lower premiums, ensuring financial security without tying up funds in low-return investments.
Align with Goals & Liquidity:
Match investments to financial goals and liquidity needs. ELSS suits medium-term goals with a 3-year lock-in, while NPS supports retirement planning with a long-term lock-in.
Conclusion:
Section 80C offers several tax-saving options, with ELSS and NPS standing out for inflation-beating returns. Stay within the Rs 1.5 lakh limit and avoid ULIPs and traditional policies, which often provide low returns and inadequate insurance.
Opt for term insurance for cost-effective risk coverage. Consider lock-in periods, liquidity, risk tolerance, and financial goals to diversify investments, balance risk, and maximize tax benefits.
