NEW DELHI: Tax-saving investments should not be rushed into in the last quarter (January-March) of the financial year. However, financial discipline does not come easily to most, and therefore, it is a ritual for almost everyone to get reminded of the tax-saving investments during this time of the year.
The Income Tax Act of the country allows individual taxpayers to deduct certain ‘expenses’ from their annual income before arriving at the taxable income. The Section which talks about these expenses is Section 80, and it has different sub-sections like Section 80C, 80D etc depending on the kind of expenses one is declaring.
Section 80C deductions
The focus of this article is on Section 80C expenses eligible for income tax deduction. The total limit for claiming deduction under 80C is Rs 1.5 lakh a year – a limit that everyone hopes is increased in every budget; this year being no different.
Apart from certain investments, there are some expenses (within the limit of Rs 1.5 lakh) which qualify for deduction under Section 80 C. Anyone who is looking to avail the benefits of under Section 80 C of the Income Tax Act must first exhaust these expenses before looking at the investment options. The home loan EMI that you pay every month consists of interest and principal component. While one can claim deduction on both, principal component of the EMI is eligible for deduction under Section 80C. The tuition fee paid for children’s education is also eligible for deduction within the Rs 1.5 lakh limit.
After exhausting the options mentioned earlier, if you are still short of Rs 1.5 lakh under Section 80C, or if you do not have those expenses yet, then you can look at investment options eligible for such deductions.
There are multiple options of investment which are eligible for income tax deduction, but not all of them might be good for the health of your portfolio. We will discuss some of the better investment options under Section 80C.
Public Provident Fund: One of the most popular investment options under Section 80 C is Public Provident Fund. The features that make it one of the better investment options is higher rate of return than options like tax-saving FDs and National Savings Certificates. The interest earned is tax-free and they have sovereign guarantee, which makes them risk-free.
Though the interest rate on PPF has come down to 7.1% in line with most debt securities, it still yields better return than bank and post-office FDs. “PPF has one of the best returns, but someone needs to be able to hold for the long term (partial withdrawals are allowed after 7 yrs, thought the tenure is 15 years), says Anil Rego, founder and CEO of Rights Horizon, a financial advisory services firm.
Sukanya Samriddhi Account: Sukanya Samriddhi Account can be used by those who have a girl child and want to save for girl’s education. It can be opened only in the name of a girl. It has a longer lock-in period with option of early withdrawals.
Sukanya Samriddhi Account offers 0.50% extra returns than PPF, and the interest earned is also tax-free. That makes it one of the better investment options. In fact, Sukanya Samriddhi Account offers one of the highest interest rates in the small savings scheme category.
Senior Citizen Savings Scheme: An option available only for retired or senior citizens, this SCSS offers better returns than PPF and FDs of most tenures. However, the interest income is not tax-free as in the case of PPF and Sukanya Samriddhi Scheme. Yet it can be used by senior citizens for higher regular interest income.
Tax Saving funds: One of the best investment options in the Section 80C category, these are equity mutual funds that offer market-linked returns. Also called equity-linked savings scheme (ELSS), they have a lock-in period of three years and have in the past given double-digit returns. The capital gains from tax saving funds are tax-free up to Rs 1 lakh, but if it exceeds Rs 1 lakh, the whole amount is taxed at 10%. Independent financial planner Pankaj Mathpal says ELSS is the best choice as it offers an opportunity for wealth creation along with tax saving.
According to Anil Rego of Rights Horizon, ELSS is good for younger investors and those with higher risk appetite.One can avoid any other options under section 80C as they either do not help in better wealth creation or don’t offer sufficient insurance cover.