Guide for investing in Tax Saving Schemes - Complete analysis of Section 80C

Guide for investing in Tax Saving Schemes – Complete analysis of Section 80C

With another financial year (2019) coming to an end, it is high time for taxpayers to look for investments which will help them in saving taxes as allowed by the government under section 80C. It is highly advised to first gather information regarding the required amount to be invested as the section also includes various payments and mandatory outflow.

Required investment for optimal Section 80C deduction

The section 80C allows a tax-payer to deduct up to Rs. 1, 50,000. These deductions include various investment options, as well as some pay-outs and compulsory expanses like payment of home loans, children’s tuition fees, contribution to provident funds or the EPF, stamp duties, registration charges on home loan property, and many more. The money which the tax-payer can invest includes the amount left in Rs. 1.50 lakh after all the mandatory expanses.

Investment Options To Choose From

A tax-payer can choose from a number of investment options available in the market. The choice of investment depends on a number of factors like investment’s liquidity, expectations, and hunger of the tax-payer.

Some of the investment options available in the market are as follows:

Unit Linked Insurance Plans (ULIPs):

ULIPs are the combination of insurance and investment. A small part of the invested money is used for insurance and the large chunk helps in generating high returns in equities and debt instruments. They come with a lock-up period of 5 years but providing a switching facility in between where if the tax-payer wants, he/she can switch between options like equity, debt, or any other balanced option within this lock-up period.

National Pension Scheme (NPS)- As the name suggests, NPS is used as an investment to provide high returns in the later phase (after 60 years of age) of life which helps with financial security and stability. The government allows an extra deduction of Rs. 50,000 under Section 80CCD (1B) apart from the Rs. 1.5 lakh range deduction available under Section 80C. Under NPS, it is mandatory for the beneficiary to use at least 40% of the corpus to buy post retirement annuity. The money received after the maturity of investment is tax free but the income gained via annuity comes under the tax slab.

In case of asset allocation, a tax-payer has two options to choose from that is, auto choice and active choice. Active choice allows the subscriber to select their own asset mix. Also, the maximum exposure to equity fund under active choice has been capped under 75%. While in the case of auto choice, the subscriber’s fund will be stretched to equity funds, corporate, and gilt. These are based on the life cycle matrix and the age of the investor.

Equity-Linked Savings Schemes (ELSS):

ELSS can be defined as diverse equity mutual funds. The lock-in period for ELSS is 3 years, shortest among all the tax saving schemes available under Section 80C. One thing to keep in mind is that ELSS includes the market risks similar to other equity funds. The scheme offers a return of around 10%, 16%, and 16.3% per annum over last 3, 5, and year period respectively.

ELSS also allows the subscribers to use SIP (systematic investment plan) which helps in disciplined investments at a periodic interval of time. The minimum amount required to invest under the scheme is Rs. 500. ELSS comes under the tax slab to 10% however; most of the investors can get tax free returns as only long term capital gains from the equity exceeding Rs. 1 lakh in a financial year in taxable.

Public Provident Fund (PPF):

Administered by the government, PPF is considered one of the safest investment schemes under Section 80C. PPF promises a return of 8% per annum annually and is reviewed every quarter by the Ministry of Finance based on the government bond yields. The return from this investment is tax free which makes it one of the best investment schemes. However; it must be known that the lock-in period for PPF is 15 years but the subscriber is allowed to withdraw some money every year after the end of 7th year. Also, PPF allows premature closure of the scheme after 5 years in case of some life threatening disease or for higher education.

Tax-saving FDs- FDs are the most common tax saving scheme among the subscribers. It comes with a lock-in period of five years but the interest can be paid quarterly, monthly, or at the end of the lock-in period depending upon the choice of the subscriber. FDs can be done in post office as well as banks. However; even the interest income is taxable under fixed deposits (FD).

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