Section 80C Deductions
Section 80C is the most popular deduction on which we can claim tax deduction. One can save tax on total contributions to various 80C investments up to 1.5 lakh per year, which translates to maximum tax savings of Rs 46,800 (considering individuals in 30% tax slab, and 4% cess) per year.
There are various types of investments which can help in tax saving under section 80C. Lets cover each of them in detail:
- Public Provident Fund (PPF): This is one of the most commonly used tax saving methods under section 80C used in India. This is a good invest for people who don’t want to take risks and want a decent return on their money. The lock-in period for PPF is 15 years. With exceptions, you can withdraw some portion of your investments after 5 years of account opening. Investments in PPF are EEE (Exempt-Exempt-Exempt), which means the contribution, return from the investment (interest on contribution), and the lumpsum withdrawal amount at the end of maturity, all of them are tax exempted. The current interest rate for PPF contribution is 7.9%, which is revised quarterly (previous interest rate was 7.6%).
- Tax-saving Fixed Deposits: This is for people looking for a fixed low risk constant return on their investment. The lock-in period for Tax Saving FD is 5 years, post which you can withdraw your money, along with the accumulated interest. The lumpsum amount which you get on maturity is non taxable, however the interest part is taxable. So, this investment method is ETE (Exempt-Taxed-Exempt). The current rate for 5-year tax saving FD is 6-7%.
- Employee contribution to PF: If you remember the Provident fund mentioned in your payslip, there are 2 components: Employee contribution and Employer contribution. The employer contribution is not considered in your taxable income. However, the employee contribution is the part which is deducted from your salary and is deposited into your EPF account. The employee contribution comes under Section 80C and is tax exempted up to the maximum limits of 80C. This type of investment is EEE and can be withdrawn post retirement (when the subscriber comes to an age of 55 years), or can be withdrawn before retirement under some exceptional conditions.
- ELSS Mutual Funds: (Equity Linked Savings Scheme) are a type of Equity mutual funds which come under section 80C. Investments done in Equity Linked Savings Scheme are tax exempted up to the maximum limit of Section 80C. The capital gain on the invested amount is tax exempted up to an amount of 1 lakh, post which the remaining capital gain is taxed as 10% (long-term capital gain). This investment has a lock-in of 3 years. Historically, ELSS funds have performed better than other instruments under 80C. You can expect an average annual return of 10-12% on this investments. However, this return is not guaranteed and is dependent on market.
- Payment towards Home Loan: If you have taken a home loan for a purchasing a home in India, you can get tax exemption for the amount paid towards the loan principal, up to the maximum limit of 80C.
- National Pension Scheme (NPS): With originally started for Government employees only, NPS was later opened to all. A contribution to NPS under the total contribution of 1.5 lakh is tax exempted under Section 80C. NPS investments can be withdrawn after an age of 60 years. However, not the full amount can be withdrawn at once, a maximum of 60% (tax exempted) of the total accumulated amount can be withdrawn. The remaining amount must be used to purchase an annuity plan for regular monthly income post retirement. You can read the complete details on NPS here.
- Life insurance payment: These are the types of investments in which the subscriber pays a regular sum (monthly or annually) for some time and gets a fixed lumpsum amount post the end of a predefined period (mentioned in the policy document) The premium paid towards life insurance up to a maximum of 10% of the sum assured at maturity is tax exempted. Any amount received at the time of maturity will be fully tax exempt. The average returns of Life insurance plans are typically very less (around 6%).
- Term insurance payment: In this policy, the individual pays a fixed amount every year and appoints a nominee, and in the case of death of the individual, the nominee is paid a fixed sum. This type of insurance is to provide financial security to your dependants in case of sudden death. The premium paid towards a term insurance is tax exempted, up to a maximum limit of 1.5 lakh for Section 80C.
- Children’s Tuition fees: Parents can claim tax deduction on the tuition fees paid towards their children’s school and college fees, up to a maximum limit of 1.5 lakh for Section 80C.
- National Savings Certificate (NSC): National Savings Certificate is a bond provided by the government, in which you get a fixed interest rate per year. It has a lock-in period of 5 years and has a return of approx 8%.
These are some of the most popular tax savings methods which you can use for tax deductions under the section 80C. Remember, even if you invest more than a total of 1.5L across multiple instruments mentioned above, only 1.5L of that will be tax exempted. Rest of the invested amount will be taxable as per your income slab. Example, if you invest 1L in PPF, 1L in ELSS mutual funds and 1L in Tax saving FD, you’d be able to save income tax on only Rs 1.5L.
You should select the suitable investment method based on your risk appetite and expected returns. I personally prefer ELSS for tax deductions under 80C, apart from the Provident fund (Employee contribution).
Please let me know in the below comments if you have any questions with any of the allowed tax deductions or suggestions for any of the content on my website. You can write to me by visiting Contact Me section of my website.