When it comes to tax planning, the first thing that often comes to mind is Section 80C of the Income Tax Act. It is one of the most popular sections that individuals use to reduce their income tax liability. While many people are aware of common deductions like Equity Linked Savings Schemes (ELSS), Life Insurance Premiums, and Unit Linked Insurance Plans (ULIPs), there are several other options available to effectively utilise the deduction limit of ₹1.5 lakh each financial year. Let’s explore these options with a practical example.
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Employee Provident Fund (EPF)
This scheme encourages employees to save a portion of their salary for retirement. Both the employee and the employer contribute 12% of the employee’s basic salary and dearness allowance, if any, to the Employee Provident Fund (EPF) scheme each month.
The employee’s contribution to the EPF is eligible for a deduction under Section 80C, which reduces the taxable income.
Benefits of EPF:
- Automatically deducted from salary.
- Long-term retirement savings.
- The total amount can be withdrawn at the time of retirement and it is also Tax-free (subject to conditions).
- Public Provident Fund (PPF)
It is a secure investment option backed by the Government of India, available to all individuals, whether salaried or not. It offers a completely tax-free benefit, as contributions are eligible for deductions under Section 80C, the interest earned is tax-free, and the maturity proceeds are fully exempt from tax.
Benefits of PPF:
- Returns are guaranteed with no market risk.
- The interest earned and maturity proceeds are tax-free.
Lock-in period:
15 years (partial withdrawal allowed after 5 years).
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Equity Linked Savings Scheme (ELSS)
It is a type of mutual fund that combines the benefits of equity investment with tax deductions under Section 80C. If you invest in ELSS schemes, then you can avail tax exemption of the invested amount up to a limit of Rs. ₹1.5 lakh.
Benefits of ELSS:
- Short Lock-in Period: ELSS has a mandatory lock-in period of 3 years, the shortest among 80C options. After the lock-in, Long Term Capital Gains (LTCG) apply, where gains over ₹1.25 lakh are taxed at a lower rate.
- Higher Return Potential: ELSS primarily invests in equities and equity-linked securities of companies with strong growth potential, offering opportunities for higher returns.
- Life Insurance Premiums
If you have paid the premium for a term life insurance policy to cover your own life, your spouse, or your child, these payments qualify for a deduction under Section 80C of the Income Tax Act. This deduction applies regardless of whether your child is dependent, independent, minor, major, married, or unmarried.
Benefits of Life Insurance:
- Financial Protection: It provides financial security to your family in case of an untimely death.
- Maturity Benefits: Certain policies, like endowment plans or ULIPs, offer maturity benefits, unlike term insurance, which is purely for risk coverage.
Lock-in Period:
- Typically, some policies have a lock-in period of 5 years, but term insurance doesn’t offer maturity and has no lock-in.
- 5-Year Fixed Deposit (FD)
A low-risk and safe tax-saving option available to individuals is the 5-Year Fixed Deposit (FD). These are bank-based investment options regulated by the RBI, offering a higher return compared to savings accounts. The principal amount invested in a 5-year FD is eligible for a deduction under Section 80C of the Income Tax Act. However, the interest earned is fully taxable.
Benefits of 5-Year FD:
- Safe Investment: Guaranteed returns with minimal risk.
- Suitable for Conservative Investors: Offers stability and security.
Lock-in Period:
- 5 years, during which the funds cannot be withdrawn.
- Principal Repayment on Home Loan
You can claim a deduction of up to ₹1.5 lakh annually on the principal repayment of a home loan, whether for a self-occupied property or a let-out property. Additionally, stamp duty and registration charges can be claimed under this limit, but only in the year these expenses are incurred.
Conditions to Claim Deduction:
- The construction of the property must be completed and the completion certificate is issued.
- You must hold the property for at least 5 years from the date of possession. If you sell the property before this period, the deductions claimed will be reversed in the year of sale.
Benefits of Home Loan Repayment:
- Encourages Homeownership: Supports individuals in acquiring their own homes.
- Tax Savings: Provides tax benefits while building an asset for the future.
- Tuition Fees:
Parents can claim tax deductions for tuition fees paid for up to two children under Section 80C. This deduction applies only to full-time education in India, covering courses from primary to higher education.
Benefits of Tuition Fee Deduction:
- Reduces taxable income while supporting children’s education.
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Senior Citizen Savings Scheme (SCSS)
It is a government-backed scheme designed for individuals over 60 years of age, offering a secure investment option with regular income through quarterly interest payouts.
Benefits of SCSS:
- Provides regular income with attractive interest rates.
- Secure and ideal for conservative investors in retirement.
Lock-in Period
5 years (extendable by an additional 3 years).
- Sukanya Samriddhi Scheme
This government scheme supports the financial future of a girl child, allowing parents or legal guardians to invest until the child turns 10 years old.
Benefits of Sukanya Samriddhi Scheme:
- Offers tax-free returns and withdrawals.
- A long-term savings plan for future educational or marriage expenses.
Lock-in Period
Matures after 21 years or upon the marriage of the girl after she turns 18.
- National Pension System (NPS)
The NPS is a voluntary retirement scheme offering additional tax benefits. Although contributions under NPS are also eligible for deduction under Section 80CCD, any contributions within the limit of Section 80C (₹1.5 lakh) can be claimed.
Benefits of NPS:
- Builds a retirement corpus while offering tax-saving benefits.
- Provides additional deductions up to ₹50,000 under Section 80CCD(1B), over and above the 80C limit.
Lock-in Period
Funds are locked until retirement (with limited withdrawals allowed after three years).
Case Study: Arun’s Tax Planning Journey
Arun’s Background: Arun is a 34-year-old salaried individual earning ₹12 lakh per year. At the end of the financial year, he aims to maximize his tax savings under Section 80C by fully utilizing the ₹1.5 lakh deduction limit while balancing security and growth in his investments.
Arun’s Investment Plan:
- EPF Contribution:
- Arun’s monthly contribution to his Employee Provident Fund (EPF) is automatically deducted from his salary by his employer.
- Annual EPF Contribution: ₹60,000
- Total Contribution so far: ₹60,000
- PPF Account:
- To save for the long term, Arun decides to contribute ₹40,000 to a Public Provident Fund (PPF). Despite its 15-year lock-in period, the tax-free returns attract him for future financial stability.
- Total Contribution so far: ₹60,000 + ₹40,000 = ₹1,00,000
- ELSS Investment:
- Interested in the stock market, Arun invests ₹30,000 in an Equity Linked Savings Scheme (ELSS). He appreciates the 3-year lock-in period and the potential for higher returns compared to traditional investments.
- Total Contribution so far: ₹1,00,000 + ₹30,000 = ₹1,30,000
- Life Insurance Premium:
- Finally, Arun secures his family’s future by paying ₹20,000 in premiums for a term life insurance policy. This not only protects his loved ones financially but also helps him fully utilize the investment limit of ₹1.5 lakh.
- Total Contribution so far: ₹1,30,000 + ₹20,000 = ₹1,50,000
Result: Arun has successfully utilized the entire ₹1.5 lakh deduction under Section 80C by investing in multiple options such as EPF, PPF, ELSS, and life insurance. This action reduces his taxable income from ₹12 lakh to ₹10.5 lakh, resulting in significant tax savings.
By employing a combination of safe and growth-oriented investments, Arun effectively saves ₹45,000 in taxes (assuming he falls under the 30% tax bracket) while making provisions for his retirement, financial security, and future wealth generation.
Conclusion
Section 80C offers a variety of investment options, from secure government-backed schemes like PPF and EPF to market-linked products like ELSS. The best way to maximise your tax savings is to understand your financial goals and select a combination of instruments that are beneficial for you.
A qualified financial advisor can assist you in effective tax planning by utilising the investment options available under section 80C. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.
