Section 80C of the Income Tax Act, 1961 is well known and also a favorite amongst taxpayers. Under 80C investors can claim a tax deduction of up to 1.5 Lakh from their gross annual income for certain investments and payments.
Why is Section 80C so popular and important?
Tax saving is a prime tool for many investors to safeguard the total income generated and to reduce tax outgo at the end of the financial year.
Which are the best tax-saving instruments in India?
A famous adage says. “There are three things that are certain in life: Bills, Taxes and
Death.” Thankfully various investment schemes provide tax-saving benefits, thereby significantly increasing the effective investment portfolio of investors and helping them save taxes.
Tax saving is broadly divided into two categories:
- Expenses – Deductions such as tuition fees for kids, rent, repayment of home loans, medical expenses, etc.
- Investments – specifically strategized tax-saving investments
Starting to invest in the first quarters of the financial year will give investors ample time to carefully plan the tax-saving investments and thus meeting the financial goals becomes easier. The catch is investments may not be taxable, the returns sometimes attract tax.
The tax-saving season is here, in this article let’s look at the best tax-saving instruments after the union budget which can help you achieve your target of tax savings and at the same time provide good returns on investment.
1. Equity Linked Savings Scheme (ELSS)
Equity-linked Saving Scheme (ELSS) is one of the most popular market tax saving funds that invest primarily in equity shares of companies. ELSS gives the highest return among any
other similar instruments because the managers of this fund invest at least 80% of the total portfolio in liquid instruments such as equity securities.
ELSS funds create wealth over long periods though these have a lock-in period of 3 years. The total principal amount limit for ELSS is Rs. 1.5 lakh per financial year. It is up to an individual to continue investing further after the lock-in period as in the case of a pension plan, insurance plan, or a ULIP.
SIPs are preferred over the lump-sum mode of investment and capital gains of less than Rs. 1 Lakh is not taxable with long-term capital gains tax.
2. Public Provident Funds (PPF)
Sponsored by the Government of India, the Public provident fund is one of the best tax-saving instruments under section 80C for people who are not covered under EPF, are self-employed professionals, or are risk-averse investors. The return of the PPF fund is linked to government bond yields in the secondary market.
A maximum of Rs. 1.5 Lakh can be invested in a PPF account in one financial and PPF has a mandatory lock-in period of 15 years that can be extended in blocks of 5 years and after 7 years partial withdrawals are allowed.
In a designated state-owned bank or a post office branch, a PPF account can be opened.
The PPF interest rate paid by the scheme is announced by the government every quarter and remains constant for the given period. PPF also offers tax-free interest.
3. Senior Citizen Savings Scheme (SCSS)
Senior Citizens Savings Scheme is also one of the best tax-saving investments, as it enables you to enjoy SCSS tax deductions of up to Rs. 1.5 Lakh on an investment amount with a tenure of five years, which can be extended by three years. Only people satisfying the following criteria are eligible to subscribe to a Senior Citizen Savings Scheme.
Individuals aged 60 years and above or above the age of 55 years in case of investor opting for voluntary retirement services(VRS) or anyone aged 50 or above who are employed in the defense sector of India.
4. Life Insurance Plan
Every income-tax payer should have a life insurance policy not just for tax exemption which is up to 1.5 lacks under section 80C, but for securing his/ her family’s future in his absence. Also, in case of the death of the policyholder, the lump sum offered to the nominee as the death benefit is not taxable under section 10(10D).
5. Health Insurance Plan
Apart from the tax benefit under section 80C, you can also enjoy tax deductions on the premium paid on health insurance under section 80D. Health insurance premiums above Rs. 25,000 are subjected to tax deductions and for senior citizens, the limit is increased to Rs.
6. ULIPs (Unit Linked Insurance Plans)
ULIP is a long–term tax saving that offers insurance for investment. ULIP premiums are invested in the debt and equity market and returns are tax-free.
ULIPs have a lock-in period of five years which can be extended to 15 to 20 years but an investment period of 10–12 years gives good returns for the investors of this fund.
7. New Pension Scheme (NPS)
The government began this program to provide tax-saving benefits up to Rs. 1.5 Lakh to working professionals who are concerned about retirement. National Pension Scheme aims to provide financial security to investors on retirement
The national pension scheme is a systematic investment policy that accepts funds from both employers and employees who get to decide how to allocate money for investment, be it in gilts, corporate bonds, or equity.
Investors can choose to allocate funds in equity (up to 75 percent,) treasury bonds, or government securities.
8. Sukanya Samriddhi Yojna (SSY)
SSY account can be opened in the public sector and private banks or post offices by a person
having a daughter who is less than ten years old to avail tax benefits up to Rs. 1.5 Lakh every year. The interest rate is linked to government bond yields and changes every quarter.
As a part of the ‘Beti Bachao Beti Padhao’ policy is aimed at savings for the girl child, which can be used for her education and marriage.
9. Tax Saver Fixed Deposit (FD)
Fixed bank deposits with a lock-in period of five years are eligible for tax exemptions under Section 80C. FD assures guaranteed returns at a fixed interest rate.
Any premature withdrawals nullify tax benefits and interest earned under this scheme is taxable.
10. National Savings Certificates (NSC)
National savings certificate available with Post Office offers higher returns than bank FDs.
The tax-saving benefits like any schemes under section 80C are up to Rs. 1.5 Lakh on the principal amount around 7 percent. The lock-in period on this investment remains fixed at five years and ten years and it is up to investors to choose between any of the two periods.
To sum it up…
There are multiple ways to save tax but it is important to choose the one that saves returns and helps create wealth. Besides selecting the apt tax exemption scheme in the first quarter of the financial year investors should also aim for a better and financially stable future with long-term plans. Now that you know the top 10 tax-saving instruments for 2023 it makes sense to put the learning into practice and invest in one of these to save and grow your hard-earned money.