It is always important for investors to look out for schemes which not only save tax but also generate tax-free income. The financial year is about to come to an end and we must look into income tax saving investments and deductions, once again. Section 80C of the Income Tax Act provides tax benefits through tax-saving investments.
It is possible to claim upto Rs.1.5 lakh deduction under Section 80C of Income Tax Act. There are several tax-saving deduction options you should know such as public provident fund (PPF), Unit Linked Insurance Plan (ULIP), Equity Linked Savings Scheme (ELSS), five-year bank fixed deposits, National Saving Certificate (NSC) and Sukanya Samriddhi Yojana.
Equity-linked Savings Scheme under Mutual Funds
The investment in ELSS comes with a lock-in period of three years. However, this is the lowest lock-in period considering the bank tax-free fixed deposit of five years. The capital gains which are long-term from equity investments such as tax saving mutual funds are exempt up to Rs.1 lakh in a financial year.
Public Provident Fund (PPF)
The Public Provident Fund, being government-backed is the most popular tax-saving instrument under Section 80C. The interest rate is revised periodically and can fetch up to 8% per annum. They have a maturity period of fifteen years and then can be extended for five years in blocks. As well as Employee Provident Fund, you can also partially withdraw from your PPF. The minimum investment needed under the PPF scheme is Rs.500 and one can have a maximum of twelve deposits in one financial year. All the withdrawals and proceeds after maturity are exempted from tax.
National Savings Certificate (NSC)
The National Savings Certificate, popularly known as the five-year NSC is yet another popular tax saving instrument. It can fetch interest of up to 8% per annum. The advantage here is that there is no upper limit for investment in NSC and the minimum investment required is Rs.100. You can deposit up to Rs.1.5 lakh in a financial year which you can claim for tax deduction under the Section 80C. All the interest proceeds under NSC are deemed to be reinvested and qualifies for tax exemption. However, the final year’s interest not considered reinvestment and hence, cannot be considered as a deduction from the total taxable income.
Unit Linked Insurance Plan
ULIPs offer life cover along with investment opportunities. These come under special hybrid products which work like a mutual fund with different cost structure. It has a lock-in period of five years and as an investor, you can claim tax benefit up to Rs.1.5 lakh insurance premium under Section 80C. However, this benefit can be applicable to you only if the cover is ten times the annual premium.
Sukanya Samriddhi Yojana (SSY)
Sukanya Samriddhi Yojana, a very popular savings scheme for the girl child, currently gets an interest rate of 8.5% which is compounded annually. The minimum amount currently required to open the account is Rs.250 and the same remains the requirement for the total annual deposit too. This account matures 21 years from the opening of the account. Partial withdrawal can be done after the girl child turns 18. You can contribute up to Rs.1.5 lakh in a financial year to claim tax benefit under this scheme. The interest earned is also non-taxable.
Post Office Fixed Deposits or Tax Saving Bank Deposits
A minimum lock-in period of five years is needed for these bank or post office deposits. These are a special category of fixed deposits where you can claim deductions on income tax under Section 80C.
National Pension System
This is a form of retirement savings scheme. It is a voluntary contribution where salaried and self-employed citizens can claim benefits on tax by investing here. Under section 80CCD(1), investment up to Rs.1.5 lakh can qualify for deductions under the Income Tax Act. However, it is important to remember that both, the investment in pension plan offered by the insurer or voluntarily done, should not exceed Rs.1.5 lakh. Further, investment up to Rs.50,000 can also be deductible from taxable income which is in addition to Rs.1.5 lakh. This can be claimed under Section 80CCD (1B).
The advantage of the National Pension System is that you can withdraw up to 25% of your contribution for certain specific expenses such as higher education for your kids, medical treatment or building your first home. The withdrawal is also exempted from tax.