Over the years, particularly in recent past, there has been increased attention from the government on the domain of personal finance and the various tax benefits they provide. Successive finance ministers have managed to strike a fine balance between the personal aspirations of people and demands of the balance sheet. Financial regulators always try to extend the maximum possible scope to the people to generate wealth.
Sections 80C and 80D (along with their subsections) of The Income Tax Act (1960) are the two major sections that encourage intelligent investment. While 80C provides immediate tax savings for investments within the financial year, 80D exclusively deals with health insurance and critical illness polices/riders and insurance premiums. Let’s check out the best tax saving options each of the sections has to offer.
Here are the best available options under this section.
1. Employee Provident Fund (EPF) and Voluntary Provident Fund (VPF)
EPF is automatically deducted from your salary. Both the employer and the employee contribute towards it. Presently, 12% of your salary goes towards EPF and is exempt from taxation. Your contribution will go towards 80C investments. Any contribution from your end, over the 12% threshold, will be considered as VPF. The same is exempt from tax subject to the limit specified in 80C. The EPF falls under exempt-exempt-exempt (EEE) regime where the interest earned by you at the time of retirement, or after five continuous years in service, is tax free.
2. Public Provident Fund (PPF)
With an interest rate of 8.1% for the 2016-17 financial year, PPF is an attractive investment option under section 80C. The interest is compounded annually with a 15-year mandatory investment period. It’s a good long-term wealth generation instrument with a seven-year lock-in period. Effective returns from PPF are more attractive vis-à- vis bank fixed deposits (FDs). Capital protection and tax-free returns have made PPFs a popular instrument to build a retirement corpus. Besides, backed by the government, there’s almost no chance of default. You can open an account in any nationalised or some select private banks.
3. National Savings Certificate (NSC)
With a return which usually hovers around 8% on a half-yearly compounding basis, interest accumulated on NSC is eligible for 80C benefits. At the time of maturity, the interest is taxable in the hands of the investor. The NSC VIII Issue for five years is currently offering an interest of 8%. The government decides the interest rate for new NSCs. The interest at the time of buying remains unchanged for the entire tenure, unlike the EPP or PPF, where the rates are subject to revision.
4. Tax saving bank FDs
These are like regular FDs where the interest is compounded quarterly but has a five-year lock-in period. These special tax saving FDs are eligible for investor tax deduction under 80C for investments of up to 1 lakh. Almost all public and private sector banks offer these FDs. However, interest income at the time of maturity is taxable.
5. Senior Citizens Savings Scheme (SCSS)
If you are over 60, or at least 55 years of age and have taken voluntary retirement from service, you can invest your retirement money in SCSS. The rate of interest is 8.6% payable quarterly. A maximum of 15 lakhs can be invested, with a lock-in period of five years that can be extended by another three years. Investments are eligible for tax deduction. But like tax saving bank FDs, the interest income is taxable for the investor. While tax is deducted at source, the interest rate is decided by the government.
6. Equity Linked Savings Scheme (ELSS)
These are diversified mutual fund schemes that invest in equities. There’s a three-year lock in period. Returns are directly linked to the performance of the stock market. ELSS are thus very volatile. But adopting a systematic investment plan (SIP) helps balance the rupee-average cost and irons out the risks. But every monthly investment has a three-year lock-in period and not the date of first investment.
With healthcare costs rising exponentially and shooting through the roof, buying a health insurance policy is more important than ever. Besides the coverage, a health insurance plan can extend tax benefits to the subscriber. For instance, premium paid for the insurance is tax deductible under this section.
Health insurance premium paid is eligible for tax deduction for up to Rs 25000. The earlier ceiling was Rs 15000 but the limit was raised in the 2015-16 Budget. The limit for senior citizen is Rs 30000 from the 2015-16 financial year, up from Rs 20000.
Tax deduction can be claimed if you are paying the premium for self, spouse or dependent children.
Here's how you can save taxes the best way under section 80D
- Claim tax deduction on the mediclaim plan given by your employer or on a policy taken by you. Tax deduction is allowed on both.
- Pay premium through net banking, credit/debit cards.
- Include your dependent children in the plan and claim tax relief. Male children, if unemployed, can covered till 25 years of age. Female children are covered until marriage.
The options mentioned above under Sec 80D and 80C have been chosen primarily on their past performance and the amount of return that they guarantee. Choosing them will ensure that you stay invested and at the same time are able to save your tax obligations in the best possible manner. So, if you have not yet started investing, don’t wait and start now.
Naval Goel is Founder & CEO PolicyX.com