Under Section 80CCD(1), investment in NPS up to Rs 1.5 lakh qualifies for income tax deduction.
In
a few months time, the accounts department of your organisation will
seek proof of your income-tax saving investments under Section 80C and
other deductions. PPF (public provident fund), ULIP (Unit Linked
Insurance Plan), ELSS mutual funds (Equity Linked Savings Schemes),
National
Savings Certificate (NSC), 5-year bank fixed deposits (FDs) and
Sukanya Samriddhi Yojana are some of the popular investment options
that offer tax benefits under Section 80C. Ideally, you should start
planning your tax-saving investments from the beginning of the financial
year.
Financial planners say that the choice of investments to
save income tax under Section 80C should be in line with your financial
goals and wealth creation, not just avenues to save tax. An assessee can
claim deduction of up to Rs 1.5 lakh under Section 80C of the Income
Tax Act for investments in specified instruments.
National Pension System (NPS)
NPS
is a voluntary contribution-based retirement savings scheme. Both
salaried as well as self-employed persons get tax benefits on investing
in NPS. Under Section 80CCD(1), investment in NPS up to Rs 1.5 lakh
qualifies for income tax deduction. But remember that the total amount
of deduction under sections 80C, 80CCC (investment in pension plan
offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs.
1.5 lakh.
In addition, an investment up to Rs 50,000 is
deductible from taxable income under Section 80CCD (1B) of the Income
Tax Act, 1961. This deduction is in addition to Rs 1.5 lakh allowed
under Section 80CCD (1).
Under current income tax laws, 40% of the
amount of accumulated corpus in NPS at age 60 can be claimed as
tax-exempt. The rest is taxable unless invested in purchasing an annuity
plan.
NPS
allows partial withdrawal of up to 25% of own contribution for specific
expenses like children’s higher education or marriage, construction or
purchase of the first house, and medical treatment. This withdrawal is
tax-free.
A subscriber can exit NPS before the age of 60, but the
subscriber must invest 80% of the corpus to buy an annuity. The 20% of
corpus withdrawn is taxed according to the subscriber’s income tax slab.
Equity-Linked Savings Scheme (ELSS) mutual funds
Investment
in this diversified equity fund scheme offers Section 80C tax benefits
but this mutual fund scheme comes with a lock-in period of three years,
which is lowest among Section 80C investments. The returns from
ELSS mutual funds,
which invest in a basket of stocks, are market linked. Gains from these
tax-saving mutual funds are treated as long-term capital gains and
taxed at 10%. But long-term capital gains from equity investments,
including tax-saving mutual funds, are exempt up to Rs 1 lakh in a
financial year.
PPF
Among the fixed income category, government-backed PPF is one of the most popular Section 80C tax-saving instruments. The
interest rate on PPF
is revised quarterly and for the current quarter it fetches 8% per
annum. PPF accounts have a maturity period of 15 years and can be
extended in blocks of five years. They also come with partial withdrawal
and loan facilities. The minimum investment required in PPF in a
financial year is Rs 500 and a maximum of 12 deposits are allowed in a
financial year. The maturity proceeds and withdrawals are tax-free.
National Savings Certificate (NSC)
The
five-year NSC or the National Savings Certificate
currently fetches interest of 8%. There is no upper limit for
investment in the NSC and the minimum investment required is Rs 100.
Deposits of up to Rs 1.50 lakh in the NSC in a financial year qualifies
for tax deduction under Section 80C. Interest accrued yearly on NSCs is
deemed to be reinvested on behalf of the investor and qualifies for
deduction under Section 80C within the total limit of Rs 1.5 lakh. But
as the final year’s or the fifth year’s interest is not reinvested, it
cannot be claimed as a deduction from taxable income under Section 80C.
Therefore, the last year’s interest income is added to the
certificate-holder’s income and taxed accordingly.
Sukanya Samriddhi Yojana (SSY)
This
popular girl child savings scheme currently fetches an interest of 8.5%
(for the current quarter) compounded annually. Earlier this year, the
government brought down the minimum amount required for opening a
Sukanya Samriddhi account to
Rs 250, from Rs 1,000 earlier. The minimum annual deposit requirement
in Sukanya Samriddhi account every year has also been lowered to Rs 250
from Rs 1,000 earlier. Sukanya Samriddhi accounts mature 21 years from
the date of account opening. Partial withdrawal is allowed after the
girl turns 18. Contribution into Sukanya Samriddhi account up to Rs.
1.50 lakh in a financial year qualifies for income tax deduction under
Section 80C of Income Tax Act. The interest earned and maturity amount
is non-taxable.
Unit Linked Insurance Plan (ULIP)
ULIPs are hybrid products
that offer life cover along with investment. The investment component
in a Ulip works like a mutual fund, but with a different cost structure.
Ulips come with a lock-in period of five years. Investors get tax
benefits up to Rs 1.5 lakh insurance premium, under Section 80C. This
tax benefit is available only if the cover is 10 times the annual
premium.
Tax-saving bank or post office FDs
This
special category of bank fixed deposits can help you claim deductions
under Section 80C of the Income Tax Act. Five-year post office term
deposits also qualify for this tax benefit. But there is a minimum
lock-in period of five years.
SBI, for example, is offering 6.85% interest on these deposits.