Article

Beginner's Guide to 80C Tax Saving Instruments

21 Apr 2017 Nutan Gupta

New Page 1

Section 80C of the Income Tax Act deals with exemptions made on investments. It allows a tax deduction of up to Rs. 1,50,000 on investments made in instruments that qualify in this category. This is to encourage long-term savings among people. However, all the instruments that qualify for a tax deduction under Section 80C have a lock-in period of few years.

Instruments

Lock-in Period

Where it invests

National Savings Certificate (NSC)

5 years

Forms a part of Govt borrowings and deployed as per Govt. requirements

Equity Linked Savings Scheme (ELSS)

3 years

Stock markets

Bank Fixed Deposits

5 years

Deployed as bank sees fit

Public Provident Fund (PPF)

15 years

Forms a part of Govt borrowings and deployed as per Govt. requirements.

Life Insurance Policy

-

-

National Pension System (NPS)

Until the age of 60

Combination of stocks, corporate debt, and government debt, depending on individual choice.

Employee provident fund/ Voluntary provident fund

15 years (employer contribution), or for period of employment (employee share)

Government and PSU bonds

An individual can invest a maximum of Rs. 1.5 lakh in all the above instruments altogether and the entire amount of Rs. 1.5 lakh will be deducted from the individual’s taxable income. The returns generated by all these investments are not fixed.

Suppose an individual earns an annual income of Rs. 12 lakh. If he fails to invest Rs. 1.5 lakhs in 80C instruments, his taxable income would be Rs. 12 lakhs. However, if he manages to invest Rs. 1.5 lakh in tax saving instruments, his income will be taxed on Rs. 10.5 lakh as per the tax slab rates of that particular financial year.

How can one decide which investment is good for them?

Investment depends on one’s risk appetite. If an individual has a high risk-appetite, he can invest in ELSS. The returns of ELSS depend on market fluctuations. However, it gives higher return as compared to any other instrument under section 80C. If an individual has a low risk appetite, he can invest in PPF and Bank FD which gives fixed returns.

The original investment remains tax-free at the time of withdrawal. The taxability of gains differs based on the products one has invested in. The returns earned from PPF are tax-free even on maturity. However, the interest earned on a bank FD and NSC are taxable.

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Beginner's Corner

Beginner's Guide to 80C Tax Saving Instruments

21 Apr 2017 Nutan Gupta

New Page 1

Section 80C of the Income Tax Act deals with exemptions made on investments. It allows a tax deduction of up to Rs. 1,50,000 on investments made in instruments that qualify in this category. This is to encourage long-term savings among people. However, all the instruments that qualify for a tax deduction under Section 80C have a lock-in period of few years.

Instruments

Lock-in Period

Where it invests

National Savings Certificate (NSC)

5 years

Forms a part of Govt borrowings and deployed as per Govt. requirements

Equity Linked Savings Scheme (ELSS)

3 years

Stock markets

Bank Fixed Deposits

5 years

Deployed as bank sees fit

Public Provident Fund (PPF)

15 years

Forms a part of Govt borrowings and deployed as per Govt. requirements.

Life Insurance Policy

-

-

National Pension System (NPS)

Until the age of 60

Combination of stocks, corporate debt, and government debt, depending on individual choice.

Employee provident fund/ Voluntary provident fund

15 years (employer contribution), or for period of employment (employee share)

Government and PSU bonds

An individual can invest a maximum of Rs. 1.5 lakh in all the above instruments altogether and the entire amount of Rs. 1.5 lakh will be deducted from the individual’s taxable income. The returns generated by all these investments are not fixed.

Suppose an individual earns an annual income of Rs. 12 lakh. If he fails to invest Rs. 1.5 lakhs in 80C instruments, his taxable income would be Rs. 12 lakhs. However, if he manages to invest Rs. 1.5 lakh in tax saving instruments, his income will be taxed on Rs. 10.5 lakh as per the tax slab rates of that particular financial year.

How can one decide which investment is good for them?

Investment depends on one’s risk appetite. If an individual has a high risk-appetite, he can invest in ELSS. The returns of ELSS depend on market fluctuations. However, it gives higher return as compared to any other instrument under section 80C. If an individual has a low risk appetite, he can invest in PPF and Bank FD which gives fixed returns.

The original investment remains tax-free at the time of withdrawal. The taxability of gains differs based on the products one has invested in. The returns earned from PPF are tax-free even on maturity. However, the interest earned on a bank FD and NSC are taxable.