Section 80C has listed out various investment options which can not only help you save taxes, but also help you grow your wealth. Find out more right here!
Rahul was sweating profusely. It was almost like he was having a panic attack. Or maybe, he actually was. What was happening to him? Well, it was time to file his returns and he was distressed about all the money he was going to pay in taxes. Well, taxes can put anyone in such a situation. But, don’t you worry! Section 80C has listed out many investment options that will not only help you save on tax, but also help you grow your wealth.
It is necessary to understand what these investments are all about if you don’t want to pay a huge chunk of money in tax every year. Remember to choose a product based on your financial goals and risk appetite. You can always get help from a financial expert for assessing the same.
Additional Reading: How Section 80C Helps You Save Tax
Let us now learn all about the most common tax-saving options under Section 80C:
ELSS Mutual Funds (ELSS)
Equity Linked Saving Schemes (ELSS) refer to open-ended equity-linked Mutual Funds. Apart from saving tax (under Section 80C), ELSS helps you grow your wealth as well. Since the investments are made in equity or stocks, ELSS can get you higher returns over the long term, when compared to traditional investments such as Fixed Deposits.
Besides the superior returns advantage, this investment instrument has the lowest lock-in period of only 3 years (as compared to other options under section 80C).
ELSS investments also allow you to contribute small monthly sums rather than a lump sum amount at one time. Make sure that you choose the right funds and do review them regularly.
Additional Reading: How To Meet Your Goals With Mutual Funds
Public Provident Fund (PPF)
Another good option to save tax under section 80C is investing in the Public Provident Fund (PPF). The interest earned as well as the maturity proceeds of your PPF investments are tax-free.
You can invest in PPF either through a bank or through a post office. The PPF investment has a lock-in period of 15 years. You can extend this by 5 years at a time. Generally, PPF accounts don’t allow you to withdraw money. However, it does offer some liquidity under certain conditions (not less than 5 years though).
Additional Reading: 7 Things You Should Know About PPF
5-Year Bank Fixed Deposits
These are similar to regular FDs except that these come with a lock-in period of 5 years. A low-risk investment option, the 5-year Bank FD offers higher interest rates than the normal FD (usually 0.25% to 0.5% higher). However, the maximum amount you can invest is limited to Rs. 1,50,000.
The downside of this investment option is that it doesn’t offer liquidity. You cannot withdraw money from your account, not even by paying a penalty. Above this, the interest you earn every year is fully taxable. Though it is a low-risk investment, the returns from a 5-year bank FD is lower as compared to other investment options.
Additional Reading: How To Use A Fixed Deposit Calculator
National Savings Certificate (NSC)
You can claim tax benefits up to Rs. 1,50,000 by investing in an NSC through your local post office. The interest rate for NSC investments is fixed every quarter and linked to government security rates. This interest rate will also vary depending on the lock-in period of your investment.
The interest earned on NSC investments is fully taxable. However, the interest earned can be re-invested. But, if the total goes beyond Rs. 1,50,000 after adding the interest post re-investment, then you’ll have to pay tax on the additional amount.
Additional Reading: Interest Rate Cuts For PPF, NSC – Impact On Investors!
National Pension System
You can avail tax benefits by investing in the National Pension System, which is the pension scheme operated by the Indian Government. Apart from being a good tax-saving investment, NPS serves as a good source of income after your retirement too. NPS offers two account options – a Tier-1 account and a Tier-2 account. You need to have an active Tier-1 account to get a Tier-2 account.
A Tier-1 account is a basic retirement pension account which is available to all citizens. It is a non-withdrawal account. A Tier-2 account is a voluntary savings account through which you can withdraw your savings.
Additional Reading: Why Investing In NPS Is A Good Idea
If you want to save money for your retirement while saving on taxes, then Pension Funds could be another investment option for you to consider. There are two types of Pension Funds – Deferred Annuity and Immediate Annuity.
- Deferred Annuity Plan – You have to invest annually until you reach retirement. After retirement, you can withdraw up to 60% of the accumulated amount. The remaining amount can be re-invested in an annuity fund which will provide a monthly pension.
- Immediate Annuity Plan – You have to invest a huge sum of money at one time. You’ll start getting your monthly pension from the subsequent month onward. This plan is ideal for investing your entire retirement corpus.
Additional Reading: Pension Planning For Retirement
Apart from these investment options, there are some pre-determined eligible expenses listed under section 80C which can also help you save on tax. These include EPF or Employee’s Provident Fund, Life Insurance Premium, Children’s Tuition Fees and Home Loan Principal Repayment.