This article would enable you to effectively invest in tax saving instruments, in order to optimally reduce tax liability; and this is seen as one of the most sought after sections when it comes to tax planning. It offers a host a popular investment instruments mentioned below which qualify for a deduction under Section 80C of the Income Tax Act from your Gross Total Income (GTI):
Life insurance is a vital part of financial planning
and it is pertinent to think while you are considering your insurance needs, you should ideally look at only pure term life insurance plans, thus keeping your insurance needs separate from investment needs. In case of an individual policy can be taken on his own life, life of the spouse or any child dependent or independent subject to insurance premium cannot exceed the maximum ceiling given below-
If policy is issued before April 1, 2012: 20 percent of sum assured.
If policy is issued after April 1, 2012: 10 percent of sum assured.
• Public Provident Fund (PPF)
It is noteworthy that if you are risk averse, then this product is the best in its class for tax planning. Moreover, it also offers you an appealing tax-free return of 8.7% p.a. (compounded annually). According to the Public Provident Fund scheme, an individual can open PPF account and get the benefit of deduction under section 80C in his own name or in the name of minor or in the account of his/ her spouse up to maximum is Rs. 1,00,000 (Rs. 70,000 prior to December 1, 2011). The scheme is for 15 years.
• National Saving Certificates (NSC)
The NSC is scheme floated by the Government of India and one can invest in the same your nearest post offices. The certificates can be made in your own name, jointly by two adults or even by a minor and has tenure of 5 years. It offers an interest @ 8.60% p.a. compounded half yearly, thus giving you an effective interest rate of 8.77% p.a. The interest income will accrue annually and which is deemed as reinvested further in the scheme till maturity (i.e. 5 years) is also qualified for deduction for first 5 years. However, the interest income is chargeable to tax in the year in which accrues.
• Employees Provident Fund
Any contribution either statuary or voluntary towards statuary provident fund and recognized provident fund is also eligible for a deduction under section 80C.
• Equity Linked Saving Schemes(ELSS)
These are mutual fund schemes, which are 100% diversified equity funds providing tax benefits. And these are popularly known as Tax Saving Mutual Funds. A distinguishing feature about them is that they are subject to a compulsory lock-in period of three years, but the minimum application amount in most of them is as little as Rs. 500, with no upper limit. You can either make lump sum investments or investments through the Systematic Investment Plan (SIP). It is noteworthy that, in the long-term if you intend creating wealth by hedging the inflation risk, then this tax saving instrument can give you luring returns.
• National Pension Scheme(NPS)
National Pension Scheme which was earlier available only for Government employees was later on May 1, 2009 also introduced for people in the organized (private) sector, as need for deeper participation in the pension contribution (through this product) was felt. For NPS, if you (eligibility age: from 18 to 60) belong to the unorganized sector (i.e. private sector); the contributions done by you towards the scheme would be voluntary, and you can invest in any of the two under-mentioned accounts: Tier-I Account and Tier-II Account. This may be good option for your retirement planning.
• Bank Deposits and Post Office Time Deposits
The 5-Yr tax saving bank fixed deposits available with your bank is also eligible for a deduction under Section 80C. The minimum amount that you can invest is Rs. 100 with an upper limit of Rs1 lakh ,in a financial year.
• Senior Citizens Saving Scheme(SCSS)
Well, the SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens. So, in case if you are over 60 years old, you are eligible to invest in this scheme. Moreover, if you have attained 55 years of age and have retired under a voluntary retirement scheme; then too you are eligible to enjoy the benefits of this scheme.
In order to avail the benefits of this scheme, you are required to open an SCSS account (either in a single name, or jointly along with your spouse) at your nearest post office or any nationalized bank. You can do a onetime deposit under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs15 lakh (in case of jointly) and Rs9 lakh( in case of single). The maturity period provided for this scheme is 5 years offering a rate of interest of 9.3% p.a. payable on a quarterly basis and its interest is also taxable in the year of accrual and subject to tax deduction at source.
• Tuition fees paid for children’s education
Any sum paid a tuition fee not including any payment towards development fees/ donation/ payment of similar nature whether at the time of admission or otherwise for full time education any two children of an individual is also eligible deduction under section 80C up to Rs1 lakh.
Hence, if you invest in any or all of the aforementioned instruments; you would qualify for deduction under this section subject to the maximum of Rs1 lakh p.a. However, most people tend to think that tax saving ends with section 80C; pause here that there’s more to tax saving than just investments specified under section 80C. And many people are deprived from all options for tax savings due to ignorance or not knowing the facts of provisions of Income Tax Act, 1961.
In the next post, we will discuss many other provisions that can provide more to tax planning than the mere Rs1 lakh limit under section 80C, of the Income Tax Act, 1961. A simple thing like taking a loan for buying a house can make you eligible to get tax benefit.