Best Tax Saving Investment options under Section 80C
Section 80c of Income Tax Act, 1961 allows individuals and Hindu Undivided Families (HUFs) to claim a tax deduction upto an amount of Rs.1,50,000 annually on their total income. There are many options available to taxpayers for saving their taxes in the form of certain investments and payments.
In this article we have listed out the popular options available under Section 80C to individuals for tax saving purposes.
1. Equity Linked Saving Schemes or Tax Saving Mutual Fund Investments
ELSS schemes are the only mutual fund investments on which investors can claim tax deduction upto a maximum amount of Rs. 1,50,000 in a financial year. These investments have a lock-in period of 3 years, which is the lowest among all options available under section 80C. ELSS has the potential to give higher returns than other investments of section 80C, and hence carry a higher risk than other investments.
Long Term Gains (holding period of more than 1 year) is charged an LTCG tax of 10%, for gains over Rs. 1 lakh in a financial year. For holding periods of less than one year, the short term gains are taxed at a rate of 15% STCG tax.
2. Tax Saving Fixed Deposits
These are the Fixed Deposits (FD) with the banks or post offices. These tax saving Fixed Deposits come with a lock-in period of 5 years. They are very low in risks and give around 6-7% interest p.a.(varies from bank to bank). An individual can claim a tax deduction for investing in a tax saving FD to the extent of Rs. 1,50,000.
Interests earned on the FDs annually are taxed at the hands of the individual as per his tax slab. A TDS (tax deducted at source) of 10% will be deducted if the interest income exceeds Rs. 40,000 for the year.
Also Read: Best Low-Risk Investment Options
3. Public Provident Fund (PPF) Investments
PPF is a government-backed investment product. A PPF comes with a lock-in period of 15 years and can further be extended for another 5 years. They are considered amongst the safest investment products because their proceeds are guaranteed by the central government. The maximum investment allowed per year is Rs.1,50,000 and one can claim tax deductions upto this amount under section 80C. Interest on PPF is determined by the government every quarter. The interest for the first quarter of FY 20-21 has been set at 7.10%.
On the tax front, PPF comes under the category of E-E-E, i.e. Exempt-Exempt-Exempt. The PPF investments are exempted from taxes for all the investment, interest earned and on redemption.
4. Employee Provident Fund (EPF)
EPF is an investment scheme where both the employer and employee contribute some fixed amount of the basic salary every month into the investment account. The contribution to EPF by the employee is eligible for deductions under section 80C.
Contribution to EPF and interest earned are tax free unless withdrawn before 5 years of service.
5. Investments in Senior Citizens Savings Scheme
Senior Citizens Savings Scheme is an initiative by the government of India for ensuring the financial security of senior citizens. It can be started by anyone above the age of 60 years and comes with a lock-in of 5 years. Premature withdrawals are allowed in case of emergencies. Its proceeds and interest are guaranteed by the central government, and hence are risk-free. Interests on the scheme are higher than most other small savings schemes. For the first quarter of the financial year 2020-21, this had been set at 7.40% and is paid quarterly to the investors.
Investment amounts are eligible for tax deduction up to 1.5 lacs under section 80C and interest on SCSS is fully taxable at the hands of the investor as per his tax slab.
6. Investments in Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana is a scheme specially customized for a girl child. Parents can open an account anytime before their girl turns 10. The scheme is applicable for 21 years after the opening of the account or till she gets married after turning 18. The minimum deposit required to be made is Rs.250 and a maximum of Rs.1.5lacs in a financial year.
Investments made on SSY are eligible for claiming tax deduction up to 1.5 lacs under section 80C and the interest earned on the account is tax-free. The interest rate on SSY is 7.60% currently.
7. Investments in National Savings Certificate
Investments in national saving certificates can be made in post offices. They come with the guarantee of principal and interest by the government. Tenure of NSC is 5 years and 10 years.
Investment amount of NSC and the interest (added back to the investment for calculation) earned on them is also eligible for tax deduction upto 1.5 Lakhs.
8. Investments in Unit Linked Insurance Plan(ULIPs)
ULIP is a mix of insurance and investment and has a lock-in period of 5 years. Here some amount of the premium goes to cover insurance and the balance is invested in equity, debt or based on the risk profile of the plan holder.
Premium paid on ULIPs are eligible for claiming tax deduction upto an amount of 1.5 lacs under section 80C and the amount received as proceeds on maturity is exempt from tax under section 10(10D).
Also Read: Difference between ELSS and ULIP
Comparison among tax saving investment options under Section 80c
| Investment | Returns(p.a.) | Risk | Lock-in Period |
| Equity Linked Saving Schemes | 12-15% (Expected) | High Risk | 3 Years |
| Tax Saving Fixed Deposits | 6-7% | Risk Free | 5 Years |
| Public Provident Fund | 7.10% | Risk Free | 15 Years |
| Senior Citizens Savings Scheme | 7.40% | Risk Free | 5 Years |
| Employee Provident Fund | 8.50% | Risk Free | 5 Years |
| Sukanya Samriddhi Yojana | 7.60% | Risk Free | 21 Years |
| National Savings Certificate | 6.80% | Risk Free | 5 Years |
| Unit Linked Insurance Plan(ULIPs) | Equity- 9-11% Debt- 6-8% (Expected) | Moderate Risk | 5 Years |
Payments eligible for deductions under Section 80C
9. Payment of Life Insurance Premium
Annual premium paid for getting life insurance is also eligible for deductions under section 80C. It is only applicable for exemption if the amount of premium is less than 10 times of the total sum assured.
10. Tuition Fee Payments for children
Payment for tuition fees of up to 2 children is allowed for deduction to the extent of Rs.1.5 lakhs under section 80C. This amount covers only the tuition fees component of the total fees for school, colleges & educational institutions and no other fees are applicable under this for the deduction.
11. Repayment of Home loans
An individual can claim deduction on the tax on repayment of the principal amount of loans taken for home construction or purchase under the section 80C of Income Tax Act,1961.
An individual can use any mix of the options above, depending on his needs and risk profile to claim tax deduction upto 1.5 lacs as per section 80C of the Income Tax Act.
FAQs
Q.1 What is section 80C?
Ans. Section 80C of the Income Tax Act,1961 allows an individual to claim for tax deductions for several investments & payments as specified up to the limit of Rs.1.5 lacs.
Q2. What does the limit of Rs.1.5 lacs mean?
Ans. The limit of Rs.1.5 lacs would mean that you can claim for the tax deductions only up to maximum amount of Rs.1.5 lacs while including all your investments and payments. For example- You have made an investment of Rs. 3 Lacs in tax saving instruments. However, only Rs.1.5 lacs will be eligible for claiming tax deductions and the rest of the amount will be taxed as per your applicable slab rate.
Q3. Are the interest received on Savings Account or Fixed deposit eligible for deductions?
Ans. No, interest payments from savings accounts, fixed deposits or RDs will not be eligible for tax deductions under section 80C. However, one can claim for tax deduction for the total interest incomes from all the savings accounts up to Rs.10,000 in a financial year under Section 80TTA.
Senior citizens, i.e. individuals above the age of 60 can claim a higher tax deduction on total interest incomes including from fixed deposits, RDs of up to Rs.50,000 in a financial year as per section 80TTB.
Q4. What is the best tax saving investment under section 80c?
Ans. There are many options available to investors under section 80c for tax saving purposes including Equity-linked saving schemes, 5 Year Fixed Deposits, Senior Citizen Saving Schemes, Public Provident Fund, Sukanya Samriddhi Yojana, National Saving Certificate and ULIP. Each investment product has its own features along with different returns. We advise investors to choose wisely among these products, or a mix of these options as per their needs & risk appetite.
Investments in ELSS Mutual funds have the potential to generate much higher returns over a long period, but they also carry higher risk. So, You need to understand the risk associated with the investments you are going to make.
Q5. Can I also claim deductions for my health insurance premiums?
Ans. No, you cannot claim tax deductions under section 80C for premium payments on health insurance. There is a separate section for that i.e Section 80D which allows individuals or HUFs to claim tax deductions for purchasing health insurance or mediclaim policies for the individual himself and his spouse, children, parents.
Following are the amounts which one can claim under section 80D in different cases:
| For | Maximum Deduction u/s 80D |
| Self + Spouse + Children(Below 18) | Rs. 25,000 |
| Self + Spouse + Children(Below 18) + Parents(Below 60) | Rs.25,000 + Rs.25,000 |
| Self + Spouse + Children(Below 18) + Parents(Above 60) | Rs.25,000 + Rs.50,000 |
| Self(Above 60) + Spouse + Children(Below 18) + Parents(Above 60) | Rs.50,000 + Rs.50,000 |
Q6. Is the interest earned on tax-saving Fixed Deposit taxable?
Ans. Yes, the interest earned on Fixed Deposit is taxable as per the slab rate of the investors. Only the investment amount in Fixed Deposit is eligible for claiming tax deduction under section 80C.
Q7. Can I withdraw from the Senior Citizens Savings Account before the maturity?
Ans. Yes, you can make premature withdrawals but subject to the applicable penalties. Penalty charges will depend on the time of the transaction. i.e.
Before one year- No interest will be payable
After 1 year- 1.5% penalty of the deposited amount
After 2 years- 1% penalty of the deposited amount
Q8. When can I withdraw from my EPF account?
Ans. As per the EPFO rules, you can withdraw your EPF balance for any medical emergencies, purchase of a new house, renovation of house, for the marriage of children or family members and subject to some conditions.
An individual is also allowed to withdraw up to 75% of his EPF balance if he is unemployed for more than 1 month as per the latest guidelines.
Q9. How many accounts can be opened in Sukanya Samriddhi Scheme?
Ans. Parents/ Guardians are allowed to open only one account in the name of one child and a maximum of two accounts for two girl children.
There are no limits on the number of deposits in a month or year up to the amount of total Rs.1.5 lacs in a Financial Year.
Q10. How can I invest in National Saving Certificates?
Ans. Investments in National Saving Certificates can be made by the investors in Post Offices across the country. The minimum amount required to invest is Rs.250 and there is no limit on the maximum account.
Q11. What are the top ELSS funds?
A. These are the Top ELSS Funds as per ZFunds Scores:
| ZFunds Rankings-Top ELSS Funds | ZF Score | 12 Mo (mo-end) | 3 Yr (mo-end) | 5 Yr (mo-end) | |||
| ICICI Prudential Long Term Equity Fund (Tax Saving) Growth | 7.37 | -27.35 | -5.38 | 0.28 | |||
| Axis Long Term Equity Growth | 6.7 | -11.91 | 3.74 | 4.41 | |||
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