Each year, when individual taxpayers begin their tax planning, Section 80C of the Income Tax is perhaps where they commence. Under this section, taxpayers can claim deductions for investments and expenses of up to Rs 1.5 lakh per financial year. This helps reduce their overall tax liability.
The Rs 1.5 lakh annual limit applies to all deductions claimed under Sections 80C, 80CCC, and 80CCD (1) combined. Importantly, except for the deduction for the employer’s contribution to NPS that falls under Section 80CCD (2), none of the other tax deductions are allowed under the new tax regime.
Will the Budget hike the limits for Section 80C deductions? Tax experts say that appears unlikely as these deductions can be availed only in the old tax regime. The new income tax regime does not allow them.
Here are five key investments that offer you Section 80C benefits.
Public Provident Fund (PPF) – You can invest as little as Rs 500 and as much as Rs 1.5 lakh in your PPF account with a bank or post office every year. The PPF account comes with a lock-in period of 15 years but premature withdrawals are allowed from the fifth year, subject to conditions. You have the option to extend the PPF account in blocks of five years after the 15 years.
PPF enjoys EEE – exempt, exempt, exempt – status, that is, contributions to PPF are eligible for tax deduction, and the interest earned and the maturity amount do not attract tax, making it a low-risk, attractive investment option.
From offering 12 percent between April 1, 1986, and January 14, 2000, the PPF interest rate has gradually declined to the current 7.1 percent, which has been in force since April 1, 2020.
National Pension System (NPS) – NPS was made available to all citizens in May 2009. It provides the option of investing in a combination of equity (scheme E), corporate bonds (scheme C), government bonds (scheme G), and alternative investment funds (scheme A), as per your age and risk appetite. To incentivise inflows into NPS, the government offers tax breaks on this defined benefit retirement scheme.
One, you can claim a tax deduction for NPS investments under the overall Rs 1.5 lakh limit under Section 80C. Two, you can claim an additional deduction on NPS contributions of up to Rs 50,000 under Section 80CCD (1).
Additionally, NPS subscribers under the corporate model (where NPS is offered by an employer), can claim tax deduction under Section 80CCD (2) for the employer’s contribution of up to 10 percent and 14 percent of their salary (basic pay + dearness allowance) under the private sector and the government sector, respectively.
These tax deductions apply only to contributions made to Tier I accounts, not Tier II accounts of NPS. Investments in Tier I accounts (mandatory) come with a long lock-in and are suitable for accumulating a retirement corpus, unlike Tier II accounts (voluntary) from which withdrawals can be made anytime.
Also read: How to use EPF, PPF, and NPS (G+C) to handle the debt side of your long-term portfolio
Tax-saver fixed deposits – These are bank fixed deposits with a five-year tenure where the amount invested can be claimed as a deduction under Section 80C. But, as with other FDs, the interest income from tax-saver FDs is taxable. Such FDs cannot be prematurely closed.
The post office's five-year time deposit, too, is an eligible investment under Section 80C.
Equity-linked savings scheme (ELSS) funds – These are equity mutual fund schemes that come with a three-year lock-in period and are eligible for Section 80C tax deduction.
Your investment in an ELSS, whether as a lump-sum or SIP (systematic investment plan), can be deducted from your taxable income. If your investment is via an SIP, then every SIP that you make gets locked in for three years from the date on which the installment gets invested.
Unit-linked insurance plans (ULIP) – ULIPs are offered by insurance companies and combine both insurance and investment – a portion of your investment goes towards providing life cover and the rest is invested in mutual funds to provide market-linked returns. ULIPs come with a five-year lock-in period and the money invested (premium paid) during this period is eligible for deduction under Section 80C. The policy period (the period for which you are insured) can extend up to 10 years or longer.
As per Section 10(10D) of the IT Act, in case of the death of the policyholder during the policy period, the death benefit paid is tax-free. In case of payment of maturity benefit (policyholder survives) on ULIPs issued from February 1, 2021, onwards, the amount is tax-free only if the annual premium paid for the ULIP/ULIPs (all put together in case of multiple ULIPs) does not exceed Rs 2.5 lakh. The maturity benefit from ULIPs issued before this date is exempt from taxation, irrespective of the premium amount. Section 10(10D) benefit is covered under both the old and new tax regimes.
All investments under Section 80C help lower your tax liability. Therefore, when deciding which one to pick, you must look beyond tax considerations alone. If you have a long investment horizon and do not mind locking in your money for several years, you can consider PPF for tax-free predictable returns or NPS for marked-linked returns.
For those who desire some flexibility of withdrawal, ELSS with its three-year lock-in can be a better option. Since ELSS is an equity product, a longer investment horizon is recommended.
Finally, while the tax benefit under Section 80C may be the factor nudging you to invest, some of these investments can be useful in building a retirement corpus.
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