If you are a salaried individual who pays taxes, we are sure you will be familiar with Section 80C of the Income Tax Act. This is perhaps the most popular of all the sections that allow you to claim income tax deductions. This is because most of the investment options come under this section. Here’s what you need to know about the section.
The main aim of Section 80C is to encourage individuals in the country to build savings and invest in certain schemes that will help them build wealth in the long run. The maximum tax deduction allowed under this section is Rs 1.5 lakh. So, if you are in the highest tax bracket, you could save as much as Rs 46,000 in taxes by making use of this section.
The schemes under this section are broadly classified into three different categories based on how they will be taxed. The categories are ETE, EET and EEE where E stands for Exempt and T stands for Taxable.
Investments under the ETE category is where the initial investment, as well as the maturity amount, will be exempt from tax while the returns will be taxable. The best example for this category will be bank tax-saving deposits. Here you can use the amount invested for tax deduction, the returns will be taxed while the maturity amount will be tax-free.
Investments under the EET category is where the initial investment, as well as the returns earned, will be tax exempt while the maturity amount will be taxable. The best example for EET category of investment will be the National Pension Scheme (NPS). Here you can use the amount invested for tax deduction, the returns will be tax exempt while the maturity amount will be taxable.
Investments under the EEE category is where the initial investment, the returns earned and the maturity amount will be tax exempt. The best example for EEE category of investment will be the Public Provident Fund (PPF). Here you can use the amount invested for tax deduction, the returns, as well as the maturity amount, will be tax exempt.
Some of the most popular 80C investments are listed below.
Deposits in PPF can be made as a lump sum or in installments. The maturity period of this investment is 15 years. The minimum deposit is Rs 500 for a financial year and the maximum is Rs 1.5 lakh. This investment comes under the EEE category and as 1st January 2018, the interest rate is 7.6% per year.
Employee Provident Fund (EPF)
The amount that you contribute towards EPF from your salary can be claimed as the tax deduction. Typically, 12% of an individual’s salary goes into their EPF account. As of January 2018, the interest for EPF is 8.65%. If you work in an organisation for five or more years, you can withdraw from your EPF without paying any taxes.
The premium that you pay for your life insurance policy can be claimed as tax deduction. This policy can be in your name, the name of your spouse or your children.
Equity-Linked Savings Scheme (ELSS)
These are equity mutual funds that are specifically meant for saving taxes. They come with a lock-in period of three years. These investments fall under the EEE category. They can give much higher returns than traditional investments such as PPF. In 2017, top 10 ELSS funds gave an average return of over 40%.
National Pension Scheme (NPS)
NPS is a government scheme that allows you to save for your retirement. The scheme invested in different asset classes such as equities and government bonds and is market linked. You can withdraw from NPS only after you retire except in case of emergencies.
The below table provides a comparison between the various popular investment options under Section 80C.
|Tax-saving FD||ETE||7%-8%||5 years|
There are other options such as home loan repayment and children’s tuition fees that come under Section 80C. Make note of all of them and you can choose different options for getting the maximum tax exemption of Rs 1.5 lakh.