Ways to Save Tax under Section 80C

Investing in various financial instruments that allows tax rebates under Section 80C is by far the most popularly uses tax saving method. Section 80c of the income tax act offers a wide range of financial instruments that provide tax deductions up to the tune of Rs. 1, 00,000. But with a large number of tax saving instruments offering tax incentives under section 80c of the Income Tax Act 1961, it sometimes get difficult to choose the right option.

Let us look at various ways to save tax under section 80c of this Act.

Market-linked instruments:

For young people with relatively high income and risk taking capacity, tax planning using market linked instruments offer good option to create wealth as well as to save tax under section 80c of the Income Tax Act.

ELSS: Equity Linked Savings Schemes commonly known as ELSS are mutual funds that are 100% diversified equity funds providing tax saving benefits. ELSS funds have a three year lock in tenure which is amongst the shortest amid all tax saving instruments covered under section 80c. Although the maximum tax benefit available under section 80C is Rs 1, 00,000, any long term gains at the time of exit after the end of the lock-in period are free from long term capital; gains tax or LTCG.

ULIPS: Unit Linked Insurance Plans or ULIPs are market linked insurance schemes that offer tax saving options under section 80c. Along with tax deduction benefits, ULIPs also offer an added life cover protection. ULIPs give the investor an opportunity to invest in equity or debt instruments depending on their choice and risk profile. Apart from Rs. 1, 00,000 available as tax deduction under section 80c, the amount received at maturity is tax free as per the provisions of Section 10(10D) of the Income Tax Act.

NPS: New Pension Scheme is an investment vehicle for retirement planning eligible tax saving under section 80c. Salaried individuals can claim deduction under Section 80CCD for up to 10% of the total salary comprising of their basic + DA. The downside of NPS is that tax deduction is permitted only for contributions to a tier-I NPS account which has a minimum annual investment of Rs.6,000. NPS accounts do not allow any premature withdrawals until you turn 60.

Assured Return Instruments:

If your age and risk profile is not as prudent as the above section of people, there are assured return instruments that offer with assured returns while offering deductions under section 80c.

PPF: Public Provident Fund or PPF is a statutory scheme of the Central Government of India offering a tax-free interest at 8.8% as well as tax saving benefit under Section 80C. PPF interest rates are linked to the bond yields in the secondary market allowing PPF to offer returns at par with other financial instruments. The contributions made to the PPF account are eligible for tax benefit but subject to the maximum eligible amount of Rs 1, 00,000 per annum.

NSC: National Savings Certificate scheme allows individuals to invest through their nearest post office. All investments in NSC are eligible for a deduction of up to Rs 1, 00,000 under Section 80C.

Bank Deposits and Post Office Time Deposits:  Bank fixed deposits and post office time deposits with a five year lock in period are eligible for tax deductions under section 80c. The interest earned however is subject to tax deduction at source. People with no other income can submit a declaration in form 15-H or Form 15-G to avoid TDS.

Senior citizen saving scheme (SCSS): Senior citizen saving scheme is available only for people above the age of 60 years offering 9.3 percent annual returns on deposits. The total amount of investment under the scheme is capped at Rs. 15 Lakh. Senior citizen saving scheme (SCSS) however offers tax deduction under Section 80c although the interest gained is taxable.

Snapshot of Tax Saving Financial Instrument section 80C: