(This post evaluates 10 widely preferred tax-saving instruments eligible for tax deductions under old tax regime- section 80C and also discusses here some of the important deductions under Section 80C, 80CCC, 80 CCD(1A), 80 CCD (1B), 80CCE, 80D, 80DD, 80 DDB,80E,80EEE,80G, 80GG,80TTA, 80TTB, 80U, 87(A) & Sec 24 an individual taxpayer is eligible to claim. )
Under old rules of income tax individuals can claim deductions besides section 80 C, there are various deductions a taxpayer can claim from his total income which would bring down his taxable income and thereby reduce his tax outgo.
The ultimate idea of buying any tax-saving instrument is not just to reduce the tax liability for the year; we must get back good returns on the investments made. There are multiple options in investments that allow us a deduction of Rs. 1.50 lakh from our total income under Section 80C (Chapter VI-A) of IT Acts 1961. However, it is important to figure out which tax-saving product is most suitable for our future needs. In order to help those who do tax planning themselves, we have made the evaluation of the ten widely preferred tax-saving instruments, on the basis of returns; safety, flexibility, liquidity, and tax-ability of returns. Figure out from the below list which tax-saving instrument suits you the most.
Terms of taxation used:
EEE (Exempt – Exempt – Exempt) EET (Exempt – Exempt – Taxable) ETE (Exempt – Taxable – Exempt) ETT (Exempt – Taxable – Taxable)
The first character represents the Investment stage, the Second Character represents the earning (income on the investment) stage and the third Character represents the redemption (withdrawal) stage.
For the latest interest rates on investments in small savings schemes which are subject to change every quarter, please click ‘Interest Rate’
The following schemes are eligible under section 80 C of the Income Tax Act
- ELSS (Equity-Linked Savings Scheme)
Tax rule: EEE*
Equity-Linked Savings Scheme (ELSS) funds are currently considered top-ranking tax-saving instruments due to the excellent returns they have generated in the past couple of years. ELSS is an open-ended diversified equity fund offered by mutual funds. In this scheme, the investor’s money is chiefly invested in the portfolio of equity shares. The investment in the scheme offers you an income tax rebate u/s 80 (C) of IT act up to the maximum limit of Rs. 1.50 lakh in a financial year. The ELSS funds are managed by experts who will manage controlled losses during market corrections,
Equity-Linked Savings Scheme (ELSS) funds are currently considered top-ranking tax-saving instruments due to the excellent returns they have generated in the past couple of years. You can make lump-sum investments or start investing in the top ELSS funds using a SIP of as low as Rs 1000. Moreover, there’s no upper limit on the amount of investment.
Returns: Investment in ELSS has given very good returns to investors even in the bearish market. As per various financial magazine reports, some of the top performing mutual funds like Quant Tax Plan, Mirae Asset Tax Savers Fund Regular growth, Canara Robeco, ICICI Prudential, and Axis ELSS Funds: have earned in the previous year ELSS earned 15.00% to 21% average annualized return for 3 years. However, it is to be remembered that the investment in mutual funds carries with it an element of risk and that the returns are not guaranteed in any type of mutual funds including ELSS investments. All these funds are managed by experts in the market investment business who will manage controlled losses during market corrections, Therefore, prior to your investments visit the concerned mutual fund’s websites and find out their performance for the past 3 years, where you want to invest.
Advantage of ELSS: Lowest lock-in of 3 years, a maximum period of 5 years. Higher return compared to FD/PPF, option to invest monthly (SIP),
Effective from 1 April 2018, long-term capital gains exceeding Rs 1 lakh a year are taxable at the rate of 10%, and there is no indexation. For example, you have invested Rs.1.50 lakh in ELSS and redeemed the same investment after 3 years with a return(profit) of Rs.120000/- over the investment. Here, you have to pay a tax of Rs.2000 (i.e. on Rs.20000 at the rate of 10%).
Caution: If you wish to invest in ELSS, you must remember that the money deposited by you in the scheme is reinvested by the funds’ manager in equity-related investments. Such investments are exposed to market risk. Even a fund that is showing very good performance at present may end with disappointing returns at a future date. Investors who have an appetite for risk could consider the option of investing in ELSS. To learn more about the scheme Click Equity Linked Savings Scheme (ELSS)
- Senior Citizens’ Savings Scheme🙁SCSS)
Tax rule: ETE
Returns:7.40% p.a For the latest rate click “Rate“
From April 2016 onwards, the interest rate on all small savings schemes was notified by the Government on a quarterly basis instead of the earlier system of announcing every year.
The scheme is the most suitable tax-saving product and safe investment plan for senior citizens. Investment in SCSS is eligible for tax exemption up to Rs.1.50 lakh u/s 80C of the IT Act. Interest on SCSS is taxable as per individual’s tax slabs. The disadvantage is that the income is liable to tax deduction at source (TDS) if it exceeds Rs 50,000 in a financial year. The depositor may not have a taxable income but still have to file their tax returns to get back the excess TDS. Redemption proceeds are not added to the taxable income.
The deposit shall be for an initial lock-in period of 5 years which can be further extended. The scheme allows the depositors to operate more than one account in an individual capacity or jointly with the spouse (husband/wife). Any number of accounts can be opened in designated branches of all Public sector banks and selected private sector banks or post offices within the overall limit of Rs.30 lakh. The interest on SCSS accounts payable on a quarterly basis is on the 1st working day of April, July, October, and January irrespective of deposit opening dates.
As per new rules, individuals of 55 Years and above who retired before 60 years of age can invest the retirement benefits in the SCSS scheme within 3 months from the date of receipt of retirement benefits. As per old rules, the time limit for opening an SCSS account was 1 month from the date of receipt of retirement benefits.
To know more about the scheme click SCSS
3. National Saving Certificates
Tax rule: ETE
Returns: 7.00 % p.a For the Latest rate click rate
NSC VIII issue is specially designed for individuals who are Income Tax assesses. The investor in the scheme is eligible for tax exemption up to Rs.1.50 lakh u/s 80C of the IT Act. However, there is no maximum limit for investment. No Tax deduction at source. Hence, the NSC holders do not have to take the pain of filing their tax returns to get back the TDS. Redemption proceeds are not added to the taxable income. Banks easily grant loans against the collateral security of the certificates. Further, the advantage of buying 5-year NSCs is that the accrued interest on NSCs purchased in previous years is eligible for the tax rebate. However, you have to remember that the interest received on NSCs is to be added to your taxable income and pay tax according to tax slabs.
To know more click details on NSC
4. National Pension Scheme (NPS)
Tax rule: EET* [*Redemption of 60% of the total corpus accumulated is tax-free) + Pension (annuity income) paid to the subscriber shall be included in the taxable income of the subscriber and the same is taxed under the eligible tax slab].
Returns: NPS has yielded an average of 9.50% return and for the past 5 years 12.50%.
Besides tax savings, the scheme is useful to individuals who save money for their retirement plans. Under Sections 80 CCD (1) and 80CCE of Income Tax, an investment of up to 10% of Basic Pay plus Dearness Allowance or a maximum of Rs 1.5 lakh, whichever is lower, is deductible from gross taxable income. A self-employed person may also contribute to NPS and claim tax deductions up to 10% of his gross income under Section 80 CCD (1). In addition to the overall ceiling of Rs.1.50 lakh, an investor can contribute Rs.50000/- to NPS and claim deductions under Section 80 CCD (1B). Hence the total tax benefit for investing in NPS under Section 80 CCD (1) and Section 80 CCD (1B) is Rs 2 lakh. Only an investor in a Tier I account can claim the above tax benefits. Thus, NPS is also useful to those individuals who have exhausted the 1.50 lakh limit under 80 C. and wish to save further by investing Rs.50000/- in NPS. Presently, LIC pension funds, SBI pension funds, and ICICI prudential pension funds are some of the top performers in this portfolio.
To know more click details of NPS
- Public Provident Fund(PPF) Account(PPF)
Tax rules: EEE
Returns: 7.10% at present from October 2023 to December 2023.
For the latest rates click the PPF rate
PPF is one of the top-ranked investments all these years because of the following advantages.
- The balance available in the PPF account is free from court attachment.
- The principal and interest earned on PPF accounts are exempted from income tax and wealth tax.
- The interest rate on the PPF account is now linked to the bond yield in the secondary market making it an even better investment.
Now the PPF interest linked to the bond yield guarantees the returns on investments in line with the prevailing market rates. Therefore, the PPF rate is no longer fixed and is likely to come down as the interest rates fall. Though the interest rate offered is ahead of the present inflation rate, in terms of long-term potential the present rate of 7.10 % p.a is not so attractive to investors.
6. EPF/VPF A/c:
You may reassess the scheme with other options if the rate offered for 2021-22 is not attractive. Salaried individuals may save in Voluntary Provident Funds besides a mandatory deduction of 12% from their basic salary towards EPF which offers interest at 8.50% at present. VPF (Voluntary Provident Funds) is a voluntary option to be taken by an employee to save more towards their retirement and the same is to be communicated to the employer.
Click here to learn more about PPF accounts.
7. Sukanya Samriddhi Scheme
Tax rules (EEE):
Returns: 7.60% for January to March 2023
For the latest rate click “Rate”
The money deposited in the Sukanya Samriddhi account gets you a tax break within the overall cap of Rs.1.50 lakh under section 80C of the Income Tax Act. The investor of the Sukanya Samriddhi Scheme gets 0.50% more returns on investment compared to the PPF account for a similar tenure.
The account can be opened by the parent or legal guardian of a girl child below 10 years of age. You as a natural or legal guardian of the children can open only one account in the name of one girl child and a maximum of two accounts in the name of two different girl children. In the case of the birth of twins or triplets, the condition of opening accounts only for two daughters is exempted.
The account may be opened either in an authorized bank or in a Post office with a minimum initial deposit of Rs.1000/-.
To know more CLICK Sukanya Samriddhi accounts
8. Unit Linked Insurance policies (ULIPs)
Tax rule: EEE*
Returns: The investor can expect 9%-14% returns from his/her investment for a tenure of 10 years.
Investment in ULIP is eligible for deduction up to Rs 1.50 lakh deduction either under section 80C (life insurance) or 80CCC (pension) of the Income Tax Act.
ULIP is an integrated product of ‘insurance and investment’ developed and marketed by life insurance companies. ULIP offers investors the advantage of both insurance and investment under a single plan. In this integrated scheme of investment and insurance, a part of the premium paid by the policyholder is utilized for insurance cover and the rest of the premium portion is utilized for investments in various equity/debt schemes.
- Now to bring in parity between mutual funds and ULIPs, the Budget 2021 amended the Income Tax Act, 1961, and accordingly, any gains from a ULIP policy shall be treated as capital gains in case the premium paid for any year exceeds Rs 2.5 lakhs. Such policies will now be taxed at 10 percent at maturity.
Investment in ULIP is eligible for deduction up to Rs 1.50 lakh deduction either under section 80C (life insurance) or 80CCC (pension) of the Income Tax Act.
*Tax benefits on maturity proceeds of ULIPs: For the policies purchased up to 31.03.2012, if the premiums paid are less than 20% of the sum assured, then under section 10(10D) of the Income Tax Act the entire maturity proceeds are exempt from income tax. For the policies purchased after 01.04.2012, if the premiums paid are less than 10% of the sum assured, then under section 10(10D) of the Income Tax Act, the entire maturity proceeds are exempt from income tax. However, Premiums of ULIPs must be paid regularly and kept in force for 5 years to claim deductions u/s 80C of Income Tax Acts. If the policyholder discontinues paying the premium before 5 years, he will not be eligible for tax benefits and any deductions claimed in the previous years shall be added back to his income in the year in which ULIP is closed.
Caution: You must remember that the money invested in ULIPs is associated with market risk. Any loss in the investment made by the fund’s manager is borne by the policyholder. Even a fund that is showing very good performance at present may end with disappointing returns at a future date. Investors who have an appetite for risk could consider the option of investing in ULIPs.
To know more click on details of ULIPs
9. Tax Saver Fixed Deposits issued by Banks
Tax Rule: ETE (Interest on tax saver deposits, is accounted as interest income of the depositor, and tax on the interest paid is deducted at source.)
Returns: 5.50% to 7.50 p.a (Normally matched with deposits rate of 5 years fixed deposits of the concerned bank). Senior citizens are offered additional interest of 0.50% by most banks.
An individual or HUF can invest in Tax saver fixed deposits of banks, not exceeding the aggregate limit of Rs.150000.00 u/s 80 (C) of IT in a financial year is eligible for tax relief. The ‘deposit’ can be opened in a single name or joint name of an adult with a minor or in the joint name of two adults, payable to either or the survivor. The joint account cannot be opened for more than two people. In the case of joint accounts, only the first-named person in the ‘Tax Saver Deposit’ can claim the tax rebate. Banks accept Tax Saver deposits for a minimum period of 5 years. A nomination facility is available for tax-saver deposits. (For more details about the scheme, read: Tax saver fixed deposits: Dual advantage}
The disadvantage of a tax saver deposit is that it can neither be closed prematurely nor a loan can be availed against it. This ‘deposit’ cannot be offered as collateral security for any advance.
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| 10. LIFE INSURANCE POLICIES: Tax rule: EEE Returns: Very ordinary There are different plans under Life Policies such as Term plans, Endowment plans, Money back plans. Premiums paid towards life insurance are covered under Section 80C of the Income Tax Act up to a maximum of Rs 1.5 lakhs. Proceeds on death/maturity are tax-free under Section 10(D). If a policy is surrendered /terminated within five years, deductions claimed are added to income and taxed accordingly. The core objective of buying life insurance policies is to provide salvage to the dependents on the unfortunate death of the policyholder. The tax rebate on the premium paid on an insurance policy is meant to reduce the cost of insurance, as the return on investment on insurance is very ordinary compared to returns on other investments. There is nothing wrong if an investor is planning to buy a life policy for the core purpose. However, buying a policy purely for tax-saving purposes is a bad idea. Not only the return on investments is very ordinary, but the policyholder also needs to keep paying premiums throughout the term of the policy even when other investments have already covered the upper limit of tax-saving investments. To learn more (CLICK) on How to buy insurance policies
Pension plans: Pension Plans are another form of life insurance. They serve a different end objective from other insurance plans like term plans and endowment plans – which are called protection plans. While protection plans are geared to financially secure the individual’s family on his death, pension plans aim at providing for the individual and his family if he lives on. Contributions towards pension are covered under Section 80CCC(sub-section under Section 80C) of the Income Tax Act. The aggregate limit of deduction under all the sub-sections of Section 80C cannot exceed Rs 1.5 lakhs. On maturity 1/3rd of the accumulated pension amount is tax-free with the balance 2/3rd treated as income and taxed at the marginal tax rate. The amount is tax-free upon the death of the beneficiary.
OTHER INVESTMENTS THAT ARE EXEMPT FROM INCOME TAX;
(i) Saving through investment in house property: Housing finance availed by individuals for residential property from a bank or housing finance company has multiple benefits. If you have not yet invested in the house property, it is the right time to invest. The borrower is eligible for tax deductions up to Rs.1.50 lakh u/s 80 C for the loan amount repaid. The stamp duty paid, and the registration fee paid is also eligible for tax deduction u/s 80 C up to the overall limit of 80C. In addition to the above separate deduction of Rs.2 lakh is allowed for interest paid on housing loans. The first-time borrowers who have availed of a housing loan of Rs.25lakhs or below on or after 01.04.2013 are eligible to claim the further tax deduction of Rs.100000.00 (Rupees one lakh) on interest paid. For more details: (Click) Housing Loans
(ii) Medical Insurance under Section 80D: Health insurance or Medical Insurance is more popularly known to cover expenses incurred from an accident/hospitalization. Mediclaim also covers pre and post-hospitalization expenses, subject to the sum assured. Section 80D includes a deduction of Rs 5,000 for any payments made towards preventive health check-ups. This deduction will be within the overall limit of Rs 25,000 for individuals below 60 years/Rs 50,000 for individuals above 60 years. This deduction can also be claimed either by the individual for himself, his spouse, dependent children, or parents. If individuals buy health insurance policies for parents, they will be eligible for additional tax exemption up to Rs.25000/ or 50000/(for senior citizen parent/s)- as the case may be. For the welfare of senior citizens (Resident + aged 60 or above) who don’t have health insurance, a deduction of up to Rs. 50,000 can be claimed on the medical expenses incurred for them. However, if they already have health insurance and have made payments to keep it active, they won’t be eligible for this deduction.
(iii) New Pension Scheme (NPS): The NPS or the New Pension Scheme is regulated by the Pension Funds Regulatory and Development Authority – PFRDA. Any citizen of India over the 18 – 60 years age bracket can participate in it. It is extremely cost-effective since fund management charges are low. The fund managers manage the money in three separate accounts having distinct asset profiles viz. Equity (E), Corporate bonds (C), and G Government securities (G). Investors can choose to manage their portfolio actively (active choice) or passively (auto choice). Contributions made to the NPS are covered under Section 80CCD of the Income Tax Act. The aggregate limit of deduction under this section along with Sections 80C, and 80CCC cannot exceed Rs 1.5 lakhs. Given the range of options, NPS is particularly useful for individuals, with varying risk appetites, looking to set aside money for retirement.
Tax benefits on Education Loans: Section 80C of the Income Tax Act has provisions for tax deductions on tuition/education fees paid by self or a parent towards educating his/her children. Taxpayers can avail deductions to a tune of Rs 1.5 lakh under Section 80C with other investments also eligible for this rebate.
Interest paid on education loans is allowed as a deduction under section 80E. There is no maximum deduction amount that can be claimed against an education loan according to Section 80 E of income tax. The interest you pay on an education loan is entirely tax-free for eight years, as you can claim tax deductions against it.
Deduction under section 80G: Any charity to notifies institutions or funds can be claimed as a deduction under section 80G. Section 80G of the Income Tax Act, of 1961, allows taxpayers to save tax by donating money to eligible charitable institutions. By donating to eligible institutions and organisations, taxpayers can claim deductions ranging from 50% to 100% of the amount donated.
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