It's that time of year again when many taxpayers are shopping for tax-saving investment products as the deadline approaches. Section 80c offers taxpayers the widest range of investment options that can help them save up to Rs 1.5 lakh of their taxable income. Given the many options, it's important that you choose the investment that best suits your financial goals and risk appetite. "Often, tax-saving tools are randomly chosen at the end of a tax year just to meet that year's requirements, which they shouldn't be. Any tax-saving options should be part of the planning," said Prableen Bajpai, founder of Finfix. Comprehensive financial, which will allow better use of the selected product.In light of this, we have listed the key characteristics (costs, safety, yield, and holding period) of the main investments available under Section 80C along with their tax rules to help you choose the best option for you.
A Public Provident Fund (PPF) is among the most popular tax-saving options because it is sovereign-guaranteed and partially tax-exempt on investment, withdrawal, and accumulation. PPF comes with a 15-year lock, after which you choose to spread your investment over a 5-year block. The current interest rate on PPF is 7.1%, which makes it better than bank fixed-term deposits (FD). However, the PPF rate is reviewed every quarter.
Although investment in a fixed 5-year tax savings deposit is deductible, the interest earned on it is fully taxable and subject to tax deduction at source (TDS). The taxable interest can offset the tax benefit available on the investment to some extent, especially for those in the 30% tax bracket. Take, for example, the after-tax yield of an FD offering an interest rate of 5.5% would be 5.2%, 4.3%, and 3.7% for the 5% tax tokens, 20 %, and 30%, respectively.
The National Savings Certificate, or NSC, offers a guaranteed return, which is reviewed quarterly by the government, with 5-year insurance and its benefits can also be claimed as a deduction under Section 80C. The interest is not paid to the investor and is instead reinvested, meaning the taxpayer can claim it as an investment below 80C. However, since the interest earned in the fifth year of ownership is not reinvested and is paid for the full amount due, it cannot be claimed as a deduction.
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Traditional Insurance Plan
Life insurance plans sold the most during the January-March period when taxpayers rush to make last-minute investments to save taxes. They promise to deduct premiums, tax-free income when due, and insurance coverage. Lovi Navlakhi, president of the Association of Registered Investment Advisers (ARIA), said individual premium policies, which many choose to exhaust the 80C limit, may not qualify for a tax break at maturity. "When claiming benefit or death, the entire product is exempt as long as the annual premium does not exceed 10% of the sum insured in any year. Normally individual insurance policies would not meet this criterion and therefore it is likely that the product is subject to tax.”
Financial planners recommend the Equity-Linked Savings Program (ELSS) as the best investment for tax savings. “ELSS helps save taxes while offering long-term wealth creation, with stocks being the primary asset with strong growth potential,” said Prableen Bajpayee.ELSS funds have the shortest 3-year insurance period among all 80°C investments and are very flexible. “The simplicity of the ELSS funds plus the clarity that these funds are 100% make them a preferred product for tax savings,” said Navlachi.
Unit-linked insurance plans (Ulips) are market-linked insurance products. The premium qualifies for deduction under Section 80c, benefit proceeds or death claim are tax-free when the annual premium does not exceed INR 2,500, and partial withdrawals after lock-in for 5 years are also tax-free if the amount withdrawn is less than 20% of fund value Of course, the policyholder also gets lifetime coverage.According to Navlakhi, by comparison, ELSS's funds outweigh those of Ulips. "Ulips doesn't offer an easy exit or transfer option in case the policyholder wants to switch to another Ulip policy or a better fund manager," she said. In ELSS, investors can switch to another fund after staying for 3 years. The advantage that Ulips has over ELSS is that investors can switch between debt and equity at little or no cost, which is useful for asset allocation management. "From anecdotal evidence, it appears that this feature is not used very often," Navlachi said.
Up to 10% of the basic salary or 20% of gross total income for salaried and self-employed taxpayers, respectively, can be claimed as deduction for investment made in NPS (national pension system) tier-1. So, for instance, if your basic salary is ₹3 lakh and you’ve 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 considered to calculate the deduction under Section 80c includes the base salary and the costly allowance. It may also include a commission set at a fixed percentage of salary," said Sandeep Sehgal, tax partner at AKM Global.For Tier 2 accounts, only government employees receive the 80C discount benefit but with a 3-year hold.
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