Section 80C allows an individual to claim maximum deduction of Rs 1.5 lakh from their taxable income. By claiming this deduction, an individual’s taxable income reduces which leads to reduction in income tax liability. An individual whose total income is taxed at 30% tax rate and 4% cess, will pay Rs 46,200 as additional tax if maximum deduction is not claimed. Had the maximum deduction being claimed, then tax outgo will reduce by Rs 46,200 (including cess)
Here are some of the common options available under Section 80C, 80CCC and 80CCD (1) for saving income tax. Do note the total investments made under Section 80C, 80CCC and 80CCD (1) together must not exceed Rs 1.5 lakh in a financial year
Equity-linked Savings Scheme (ELSS): ELSS mutual funds are one of the common investment options used under Section 80C to save income tax. The maximum deduction that can be claimed is of Rs 1.5 lakh. ELSS mutual funds invest in equity and the returns earned are market-linked, making them one of the most risky investment options in the 80C basket.
ELSS mutual fund schemes have a lock-in period of three years. Thus, once invested, an individual investor cannot withdraw the money before the completion of three years from the date of investment. ELSS has the shortest lock-in period among all the other options available under Section 80C. There is no limit to the maximum amount that can be invested under ELSS mutual funds. The minimum amount varies between mutual fund houses.
The return earned in ELSS mutual fund will be taxable if the redemption is done. The capital gains will be taxable if the total equity capital gains in a financial year exceeds Rs 1 lakh.
Public Provident Fund (PPF): PPF is one of the most popular small savings schemes. This is because PPF has EEE tax status. This means that investment made in PPF is exempted from tax, the interest earned from PPF is exempted from tax and maturity amount is also exempted from tax.PPF is a debt investment, hence, they are not as risky as ELSS mutual funds. PPF is a government scheme, hence, it comes with sovereign guarantee. The interest on PPF is announced by the government in every quarter. For January – March 2023 quarter, the PPF is offering 7.1% annually. The government will review the PPF interest rate on March 31, 2023 for the April- June 2023 quarter.
PPF comes with a lock-in period of 15 years, where the lock-in period starts after the completion financial year in which initial investment is made. For instance, if an individual makes the first investment in PPF in August 2022, then lock-in period of 15 years will be calculated from April 1, 2023. Though PPF has a lock-in period of 15 years, it offers loan and partial withdrawal facilities.
The minimum and maximum investment amount in PPF is Rs 500 and Rs 1.5 lakh. An individual can open the PPF account either with a bank or a post office.
Do note that once PPF account is opened, then minimum investment must be made in the PPF account every financial year. If minimum investment in PPF account is not made in a single financial year, then PPF account will become a discontinued account.
National Pension System (NPS): Investment made in NPS is eligible for deduction under Section 80CCD (1) of the Income-tax Act. The scheme offers pension to the investor from his/her retirement age. The returns under the NPS are market-linked.
The amount of deduction that can be claimed for NPS investment under Section 80CCD(1) is 10% of salary (basic salary plus dearness allowance). The maximum deduction that can be claimed is of Rs 1.5 lakh. Hence, an individual having basic salary of Rs 10 lakh is eligible to claim deduction of Rs 1 lakh under Section 80CCD (1). To fully-utilise the benefit of Rs 1.5 lakh, he/she will have to explore other tax-saving investment options.
NPS has a lock-in period of till the age of 60 years. For example, if an individual started investing in NPS at the age of 25 years, then he/she will have a lock-in period of 35 years. NPS offers partial withdrawal facility, however, such withdrawal is allowed under specified circumstances. On maturity, an individual can withdraw maximum 60% of the corpus as lump-sum. This lump-sum will be exempted from tax. The balance 40% must be mandatorily used to buy annuity plan. The annuity/pension received will be taxable in the hands of individual.
The minimum per NPS contribution is Rs 500 but there is no maximum amount that can be invested in NPS. An individual opening NPS account must ensure that they have made minimum contribution of Rs 1,000 in a financial year to avoid making the NPS account discontinued.
Employees Provident Fund (EPF): EPF is one of the most popular tax-saving instruments for salaried individuals. If the organisation is covered under the EPF law, then a salaried individual will be making contribution to the EPF account. An individual is required to contribute 12% of basic salary to the EPF account and employer will make a matching contribution as well.
The interest rate on EPF account is announced by the government. The EPF account also has a lock-in period till retirement. However, partial withdrawal from EPF account is permitted for specific situations. Further, if an individual after quitting their job, does not find another job in two months, then he/she can completely withdraw the money from their EPF account and close the account.
The amount that can be invested in the EPF account depends on the salary of an individual. However, if an individual wishes to make additional contribution to the EPF account, then same can be done via Voluntary Provident Fund (VPF). The rules of EPF and VPF accounts are same.
Do note that if the total contribution to the EPF and VPF account exceeds Rs 2.5 lakh in a financial year, then the interest earned on excess contributions will be taxable in the hands of an individual. The maturity amount received from EPF account is exempted from tax.
Tax-saving fixed deposits: A 5-year tax saving fixed deposit is another option available to individuals to save income tax in the current financial year. An individual can invest in tax-saving fixed deposit at a bank or a post office.
The interest rate on tax-saving fixed deposit varies between banks. For post office tax saving fixed deposit, interest rate is announced by the government. The interest received from tax-saving fixed deposit is taxable in the hands of the individual.
Tax-saving fixed deposit has a lock-in period of 5 years. Hence, once invested, the money cannot be withdrawn before the completion of 5 years from the date of investment.
The minimum investment amount for tax-saving fixed deposit varies between banks. The minimum investment amount for post office 5 year term deposit is Rs 500. There is no limit to the maximum amount that can be invested. However, the maximum tax benefit of Rs 1.5 lakh can be claimed.
National Savings Certificate (NSC): An individual can invest in NSC as well to save income tax. The investment in NSC can be made by visiting the nearest post office. The interest rate on the NSC is announced by the government every quarter. However, once the investment is done, the interest rate remains fixed till maturity. Currently, NSC is offering interest rate of 7% per annum.
NSC has a lock-in of 5 years. Thus, once an individual makes an investment, the money cannot be withdrawn before the completion of 5 years. The minimum amount in NSC is Rs 1000 with no limit on the maximum amount. The tax benefit is, however, restricted to Rs 1.5 lakh under Section 80C. The interest earned on NSC is re-invested and is paid at maturity. The interest earned from NSC is taxable in the hands of an individual. However, as the interest is re-invested, this makes it eligible for deduction under Section 80C.
Sukanya Samriddhi Yojana (SSY): This a savings scheme for the girl child. A parent of a girl child can invest in Sukanya Samriddhi Yojana and save tax on it. Every quarter, the government announces the interest rate for Sukanya Samriddhi Yojana. Currently, the scheme is offering interest rate of 7.6%.
An individual can open the Sukanya Samriddhi account either via bank or post office. The Sukanya Samriddhi account will mature after 21 years of opening of the account. However, the deposits are required to be made for 15 years from the date of opening of account.
The Sukanya Samriddhi account can be opened by a guardian for a girl child below the age of 10 years. Only one account can be opened in the name of a girl child either in bank or post office. This account can be opened for maximum of two girls in a family.
The minimum and maximum deposit that can be made in Sukanya Samriddhi account is Rs 250 and Rs 1.5 lakh, respectively, in a financial year. If the minimum deposit is not made in a financial year, then the account will become a defaulted account.
Sukanya Samriddhi Yojana also comes with the EEE tax status like PPF.
Senior Citizens Savings Scheme (SCSS): Only senior citizens can invest in this scheme to save income tax. The interest rate on Senior Citizens Savings Scheme is announced by the government in every quarter. Currently, the scheme is offering an interest rate 8%. Once the investment is done, the interest rate remains fixed for the tenure of the scheme. The interest is paid every quarter to the senior citizen.
The scheme has a lock-in period of 5 years. However, the scheme allows premature closure of the account. The premature closure of account invites penalty as well.
The scheme allows minimum deposit of Rs 1000 and maximum deposit of Rs 15 lakh. The Budget 2023 has proposed to hike the maximum deposit limit to Rs 30 lakh from Rs 15 lakh currently.
The interest received from scheme is taxable. However, a senior citizen can claim deduction under section 80TTB for the interest earned.
Unit-linked insurance plans (ULIP): An individual can make investment in ULIP to save tax. It is an insurance product that offers both life insurance coverage and benefit of investing equity. The returns earned from ULIP products are market-linked.
The ULIP has a lock-in period of 5 years. Once the lock-in period expires, the individual can withdraw the money.
The amount that can be invested in ULIP depends on various factors such as age of individual, sum insured, policy term. The maturity proceeds from ULIP will be taxable if premium paid for all ULIPs in a financial year exceed Rs 2.5 lakh.