Tax-Saving Investment Options Under Section 80C

By | July 21, 2016

Tax Saving Options

Let us decode Section 80C of the Income Tax Act for you. We’ll tell you everything you need to know about the ideal returns, investment limits, benefits – it’s all simplified for you.

What is Section 80C?

Section 80C of the Income Tax Act encourages earning individuals to build savings and rewards them by providing tax benefits for investments in specific financial schemes.

Three stages of investment

It is pretty simple. The three stages of investment are:

  • Initial investment.
  • Returns earned in the accumulation phase.
  • Final withdrawal (which includes returns + initial investment) after the maturity of the investment.

Three tax categories

The three stages of investment are classified under three tax categories.

  • ETE [Exempt, Taxed, Exempt]

This category includes investments where only the returns earned are taxed while all other components are exempt from tax.

  • EET [Exempt, Exempt, Taxed]

This tax category includes investments where only the maturity amount is taxed on withdrawal.

  • EEE [Exempt, Exempt, Exempt]               

In this tax category, the entire investment is exempt from taxes.

How much can you invest under Section 80C?

The maximum investment amount allowed under Section 80C is Rs. 1,50,000 in any or all financial products combined.

What is the maximum savings you can enjoy?

If you fall under the highest income-tax bracket (30%), you can save a maximum of Rs. 45,000 in taxes.

Popular investment options under Section 80C

Read on for a quick introduction to the popular investment options under Section 80C of the Income Tax Act.

  1. Public Provident Fund

The Public Provident Fund is a tax-saving investment option in which you can make voluntary contributions of up to a maximum of Rs. 1,50,000 per year.

  • Annual rate of return: 8.1%
  • Lock-in period: 15 years
  • Tax category: EEE

On maturity of the PPF account, you can either redeem your investment or extend the duration of the investment with or without making further contributions.

  1. Employee Provident Fund

The Employee Provident Fund is a retirement-savings plan for salaried employees. In this investment option, 12% of the employee’s salary is deducted and deposited in the fund. The amount accumulated can be redeemed on retirement.

  • Annual rate of return:8%
  • Lock-in period: 5 years of service
  • Tax category: EEE

The EPF permits restricted withdrawals under specific circumstances such as marriage, education and house construction, among others.

  1. Life Insurance

A Life Insurance policy is a contract wherein you agree to pay a premium to a Life Insurance provider on a periodical basis. The insurance company agrees to pay a lump-sum amount to you or your nominees in the event of the maturity of the policy or your demise. You can avail a tax benefit of up to Rs. 1,50,000 by investing in Life Insurance. The returns from these insurance products vary.

Types of Insurance Benefits Lock-in period Tax category
Term Insurance Death benefits NA EEE
Endowment Plans Death & maturity benefits Variable EEE
Unit Linked Insurance Plans Death & maturity benefits 5 years EEE

Life Insurance products taken in the name of your spouse or children are also eligible for tax benefits under Section 80C.

Additional Reading: Don’t Believe These Life Insurance Myths

  1. Equity-Linked Savings Scheme

ELSS is a type of diversified Mutual Fund which invests primarily in equities. ELSS funds offer investors double benefits of high returns and tax deductions.

  • Annual rate of return: Variable because these funds are linked to market performance
  • Lock-in period: 3 years
  • Tax category: EEE
  1. National Savings Certificates

National Savings Certificates are Government bonds that can be purchased from Post Offices.

  • Annual rate of return (5 year tenure): 8.1%
  • Lock-in period: 5 years or 10 years
  • Tax category: ETE
  1. National Pension Scheme

The National Pension Scheme is a retirement fund investment option that is offered by the Government through certain banks. This investment option is primarily market linked.

  • Annual rate of return: The NPS is categorised into three asset classes. These are equity, government securities and corporate bond funds. Returns vary according to the allocation of investment in these different assets.
  • Lock-in period: The NPS allows investors to withdraw 60% of the investment amount after 60 years of age. The remaining 20% must mandatorily be reinvested in an annuity scheme and is converted into pensions.
  • Tax category: EET
  1. Tax-Saver Fixed Deposits

These are Fixed Deposits which give depositors tax benefits.

  • Annual rate of return: Ranges between 6.75% and 8.75% for individuals and between 7.25% and 9.25% for senior citizens.
  • Lock-in period: 5 years
  • Tax category: ETE

Additional Reading: Top 5 ELSS Funds For 2016

That’s your concise guide to Section 80C of the Income Tax Act. Why not start investing? It’s never too late!

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Category: Money Management

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