Beginner's Guide to 80C Tax Saving Instruments

Nutan Gupta

21 Apr 2017

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.

Have Referral Code?

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Beginner's Guide to 80C Tax Saving Instruments

Nutan Gupta

21 Apr 2017

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.

Have Referral Code?