The top tax saving instruments under sections 80C and 80CCD
When you earn a promotion, and obtain a hike in your salary, it’s always a reason for celebration. However, as your income grows, it’s also accompanied by a higher tax liability. Fortunately, the Income Tax Act offers a number of provisions to reduce the impact of higher taxes. By getting to know these provisions better, the average taxpayer can take advantage of the many tax-saving investments mentioned in the Act. Read More
Investment under 80C and 80CCD is one of the easiest ways to minimize your tax burden. The investments that qualify under these sections are also excellent instruments to help your money grow over the years. If you’re keen on taking advantage of these provisions by making an investment under 80C or 80CCD, here are the best tax-saving investments given in the Income Tax Act.
- Tax-saving investments under 80C
Section 80C offers you plenty of options to reduce your total taxable income by up to Rs. 1.5 lakhs. Briefly explained below are some of the best tax-saving investments that are covered by 80C.
Tax-Saving Fixed Deposits
Investing in tax-saving fixed deposits is by far one of the safest options for a taxpayer. Tax-saving fixed deposits are very similar to regular fixed deposits. However, the only difference lies in the lock-in period. Tax-saving FDs come with a fixed lock-in period of 5 years, which effectively means that you cannot liquidate the fixed deposit before the tenure ends. The principal amount that you lock into a tax-saving FD is not taxable and the interest earned from the deposit is taxable, depending on the slab in which your income falls.
Public Provident Fund (PPF)
Public Provident Fund is a great investment option for taxpayers looking to save up funds for the long-term. All of the deposits made into the PPF are backed by the Government of India, making this fund one of the safest options for investment under 80C. You also get a very attractive interest rate on your deposits, which is revised from time to time. Listed below are some of the points that you should know about PPF.
- A PPF account can only be opened by a resident individual (this includes both salaried and non-salaried individuals).
- The lock-in period for a PPF is 15 years. After this tenure, the period can be further extended by another 5 years.
- Partial withdrawals from a PPF account are possible only after the lapse of 7 years from the date of creation of the account.
- The interest earned from the deposits is completely tax-free.
Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Scheme (ELSS) is a specially crafted mutual fund scheme that invests your deposits in the equity market. This makes it a relatively high-risk option when compared with other 80C investments. Correspondingly, the rewards are also likely to be higher because ELSS has the ability to earn much higher returns. This makes ELSS the perfect investment option for the risk-aggressive investor who is interested in reducing the impact of tax. ELSS also has one of the lowest lock-in periods among 80C investment options. You only need to remain invested for 3 years to ensure that your tax benefits do not lapse.
Investing in a term insurance plan is a great way to reduce your tax liability as well as obtain a life cover. The premiums paid towards term insurance plans can be claimed as a deduction under 80C. Additionally, the tax benefits offered by term insurance plans are available to both individuals as well as HUFs. You can claim a deduction as long as the premium paid does not exceed 10% of the sum assured by the insurance policy. In case the premium paid exceeds the notified level, the deduction will be limited to 10% of the Sum Assured.
In addition to the above, the maturity benefits of a term insurance plan are also exempt from tax, owing to the provisions of section 10(10)D of the Income Tax Act. You can learn more about Life Insurance by browsing the website for the various Term Plans offered by PNB MetLife.
- Tax-saving investments under 80CCD
Section 80CCD of the Income Tax Act also allows you to claim a deduction to reduce your overall taxable income. NPS, which is one of the best tax-saving investments covered under section 80CCD(1), is explained below.
National Pension Scheme (NPS)
Set up by the Government of India, the National Pension Scheme allows taxpayers to receive a monthly pension after their retirement. Any citizen of India aged between 18 and 60 years is eligible to subscribe to the National Pension Scheme. The deposits into the NPS are locked till you attain 60 years of age.
However, partial withdrawals are still possible for specific reasons and after a specified period of time from the date of investment.
Furthermore, section 80CCD(1B) of the Income Tax Act allows you to claim an additional Rs. 50,000, over and above the Rs. 1.5 Lakh limit granted under section 80C and 80CCD. This additional deduction is available only for contributions made to Atal Pension Yojana and Tier-1 account of NPS.
So, these are some of the best tax-saving investments under sections 80C and 80CCD. By parking your funds in these instruments, you can enjoy multiple benefits under the income tax act. Also, depending on the investments you choose, your funds grow over the years or your future is secured by a protective insurance cover. So, make sure to consider these options as part of your tax planning exercise.
The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities. *Tax benefits are subject to conditions and other provisions of the Indian tax laws and are subject to amendments made thereto from time to time.
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