What are the Best Tax Saving Options Under Section 80C

Come January and your company’s HR will start knocking on your door. If you work in a company with an open office, they will be knocking on your desk. But knocking, they will be. It will be time to furnish your tax-saving proofs, after all.

The last quarter of the financial year, which is January-February-March, is typically when salaried employees have to submit proofs and documents of their tax-saving endeavors. This is also the time when most people make their tax-saving investments.

They rush to do them. Which, of course, is not the best way to invest. Investment decisions should be taken after adequate understanding and planning, not to just meet a deadline.

If this is your first time-Saving Tax then you must read: A Beginner's Guide To Tax Saving In 2019

Investing in ELSS funds

With that in mind, we suggest that you start investing to save taxes at the start of the financial year. Or even anytime during the year, not merely at the end. This is especially true if you are investing in Equity Linked Savings Schemes (ELSS). 

These are tax-saving mutual funds that invest primarily inequities. And spreading your investments in them over a few months is the best way to invest in ELSS funds.

What are ELSS funds?

Let’s understand ELSS funds in more detail. ELSS funds are equity-oriented mutual funds. Just like other equity funds, ELSS funds can also have a portfolio diversified across market capitalization and sectors. The difference being that investments of up to Rs 1.5 lakh made in ELSS funds are tax-deductible under Section 80C of the Income Tax Act. Another benefit of ELSS funds is that they come with the lowest lock-in period of only 3 years.

With ELSS funds, you get the best of both worlds: tax-saving and equity returns. When you invest in ELSS funds through SIPs, you also benefit from rupee cost averaging and safeguard your investments against catching a market peak.

To get into more details read: PPF vs ELSS - Which one is a Better Tax Saver?

ELSS funds versus other tax-saving investments

While ELSS funds are recommended by investment experts, the other popular investment options under Section 80C are fixed deposits (FD), National Pension System (NPS), Public Provident Fund (PPF) and Unit Linked Insurance Plans (ULIP). The table below details how they compare.

As the table shows, ELSS funds make a very strong case in terms of the shorter lock-in period and higher returns. You can begin your tax-saving investments in a few clicks right away with Wealthy.

Understanding Section 80C

Under Section 80C, the Income Tax Department has listed several investments and expenses that can be used to reduce your overall taxable income for a financial year. The upper limit to avail tax deductions under Section 80C is Rs 1.5 lakh. 

The following investments and expenses qualify for deductions under Section 80C:

Investments under 80C

1. Equity Linked Savings Scheme (ELSS)

   ELSS are open-ended equity mutual fund schemes, allowing you to invest in equities and get high returns. At the same time, they offer you tax savings.
   
   Returns: 15–20% (Market returns, Long term historical average)
   Tax on Returns: Long term - 10%
   Lock-in Period: 3 years

2. Employee Provident Fund (EPF) and the Voluntary Provident Fund (VPF)

   Money for your PF gets deducted from your salary. As per PF laws, you and your employer both contribute to it. However, only the employee’s contribution (i.e. your contribution) is counted towards Section 80C investments. Your employer’s contribution isn’t taken into account.
   
   VPF is the option to voluntarily make additional contributions to your PF.
   
   Returns: 7.9% (2019–20)
   Tax on Returns: No tax
   Lock-in Period: Till retirement

3. Public Provident Fund (PPF)

   PPF is one of the most popular small saving schemes with assured returns. You must note here that the returns are not fixed and can vary from year to year depending on government policies.
   
   Returns: 7.9% (2019–20)
   Tax on Returns: No tax
   Lock-in Period: 15 years

4. Sukanya Samriddhi Account

   This scheme is quite popular with parents looking to invest in their daughter’s financial security. This account can be opened at any time from the birth of a girl child till she attains the age of 10 years.
   
   The opening amount for this account is Rs 1,000. Thereafter a multiple of Rs 100 can be deposited to the account with a minimum of Rs 1,000 per year.
   
   Returns: 8.60% for FY 2016–17 (Yearly compounded)
   Tax on Returns: No tax
   Lock-in Period: 21 years (Partial withdrawal, maximum up to 50% of the balance standing at the end of the preceding financial year can be taken after Account holder’s attaining the age of 18 years)

5. National Savings Certificate (NSC)

   This tax-saving instrument has a maturity period of 10 years. The minimum investment amount is Rs 100 and there is no upper limit. Only in specific cases such as the death of the holder, premature withdrawals are allowed.
   
   Returns: 8% (2016–17)
   Tax on Returns: Accrued interest is taxable in the year in which it has accrued
   Lock-in Period: 10 years

6. Infrastructure Bonds

   Popularly called Infra Bonds, these are issued by infrastructure companies and not the government.
   
   Returns: (Varies from year to year)
   Tax on Returns: Interest accrued is taxable.
   Lock-in Period: 3 to 10 Years

7. 5-year bank fixed deposits (FDs)

   These are widely available. All you need to do is walk into any bank branch, comply with their KYC norms and invest your money in their tax-saving fixed deposit.
   
   Returns: 5–6% post-tax (varies)
   Tax on Returns: Interest is taxable
   Lock-in Period: 5 years

8. Senior Citizen Savings Scheme (SCSS)

   This scheme is very popular among senior citizens. According to the scheme, the interest is payable quarterly. The interest is not compounded.
   
   Returns: Increased to 9.30% wef 01/04/2015 for FY 2015–16
   Tax on Returns: Interests are taxable
   Lock-in Period: 5 years

9. 5-year post office time deposit (POTD) scheme

   This scheme is very much like a bank fixed deposit. However, they are available for varying time duration: 1 year, 2 years, 3 years and 5 years.
   
   Point to note here is that only the 5 years Post office time deposit qualifies for tax saving under section 80C. Interest is paid annually and compounded quarterly.
   
   Returns: 7.8% for FY 2015–16
   Tax on Returns: Interests are taxable
   Lock-in Period: 5 years

10. Unit Linked Insurance Plan (ULIP)

    A ULIP is a product offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.
    
    Returns: 8% *(average of five-year return for top-5 performing funds)
    Tax on Returns: No tax
    Lock-in Period: 5 years

Expenses under 80C

1. Life Insurance Premiums

   The amount paid towards life insurance premium for yourself, your spouse or your children are allowed to be included in Section 80C deduction. You should note that premiums you pay for your father/mother/both or your in-laws are not eligible for deduction under this section.
   
   Returns: 0–6%
   Tax on Returns: No tax
   Lock-in Period: 5 years
   
   In case you are new to tax-saving, you also wanna read: How to Save Taxes with Life Insurance

2. Tuition fees for children

   Payments towards education fees i.e tuition fees, including admission fees or college fees, for full-time education of any two children, qualifies for an income deduction.

3. Stamp Duty and Registration Charges for a home:

   The amount paid as stamp duty during the purchase of a house and the amount paid for the registration of the documents of the house can be claimed as a deduction under Section 80C. The claim should be made in the year of purchase of the house.

4. Home Loan Principal Repayment:

   Your home loan repayment EMI that you pay every month consists of two components — Principal and Interest. The principal component of the EMI can be claimed as a deduction under Section 80C.
   
   To know more about the tax benefits of home loan read: Know the Tax benefits of your Home Loan

These are the various options that you can use to save taxes under Section 80C. But remember that the entire limit under 80C is Rs 1.5 lakh. Hence, even if the cumulative amount of the investments or expenses that you choose goes beyond the limit, you will be able to claim deductions for only Rs 1.5 lakh.

Get started with your tax-saving right away!