Beginner's Guide to 80C Tax Saving Instruments
Nutan Gupta
21st April 2017
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.
Tanushree Jaiswal
Ruchit Jain