"Tax planning is an integral part of wealth management and is something that should be considered throughout the year, not just during tax season." - David Rae
Most often we all wait till the last moment to do anything in life. Tax planning and contributing to tax saving investment is no different. During the last few weeks of any financial year, we make hasty decisions to invest in tax saving instruments. In the process, we end up buying products which are not right for us.
Tax planning should be done early and put in action over the entire year. This helps us in scheduling and planning our monetary outflows in tax saving investments over the entire year instead of contributing lumpsum in the last quarter. It also gives us ample time to understand and evaluate different options that are specific to your financial situation. Start your tax planning now for Assessment Year 2022-2023.
Here are some simple tips for planning your taxes this financial year:
The first step is to know how much tax you would be paying in this Financial Year. If you are wondering, “how to do that?”, well, you can contact your tax planner for the same.
Once you know the tax liability you can start planning to optimizing your tax saving plans.
Income Tax Deduction under Section 80C
The volume of information available in the market is infinite. Similarly, the various sections and their respective sub-sections with numerous clauses of the Income Tax Act are also endless. However, certainties exist among the never-ending and intricate, such as section 80C of the Income Tax Act. The various investments and deductions available u/s 80C can be used by nearly all taxpayers. This guide examines sec 80c, which is the most widely used section of the Income Tax Act and the deductions available to lower one’s tax bracket.
What is 80c in Income Tax?
Section 80C comprises of various investments and expenses that are eligible for tax deductions. A taxpayer can claim maximum tax deductions of Rs 1.5 lakh for a particular financial year (FY) from his/her taxable income through investments made by him/her under section 80C of the Income Tax Act, 1961.
Who is Eligible for Deductions under 80C?
An individual or a Hindu Undivided Family (HUF) is eligible for claiming tax deduction u/s 80C.
80C Investments Eligible for Tax Deductions: The below-mentioned investments are eligible for deductions u/s 80C. An investor can choose to either invest in all the available tax-saving instruments or in some of them.
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- National Savings Certificate (NSC)
- Equity Linked Savings Scheme (ELSS)
- Sukanya Samriddhi Scheme
- Senior Citizens Savings Scheme (SCSS)
- Bank Fixed Deposits (FD)
- Post Office Time Deposit
- Unit Linked Insurance Plan (ULIP)
Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF)EPF is a retirement benefits scheme that is available to all salaried employees. Employer and employee both have to contribute equally (12% of basic salary) to the provident fund account of an employee. An employee can contribute a higher sum of money through voluntary contributions (VPF). Employee’s own contribution to provident fund qualifies for 80C deductions.
- Eligibility: If the employee’s basic salary exceeds Rs 15,000 per month, he has an option to join the scheme, and otherwise he/she has to compulsorily contribute towards provident fund.
- Liquidity: A person cannot withdraw his/her PF balance for as long as he/she continues to work except in special circumstances (flat, construction, marriage/education of children etc.). In case, he/she quits the job and does not take up employment within two months with an employer covered by PF Act, then he/she can withdraw the entire balance.
- Rate of Interest (ROI): The current rate of interest is 8.65% p.a. to be realigned on a quarterly basis.
- Investment Limit: Both employer and employee have to contribute a minimum 12% of Basic Pay + D.A. Employee can voluntarily increase his own contribution up to 100% of Basic Pay + D.A.
- Tax Treatment: The EPF falls under EEE (Exempt, Exempt, Exempt) category. Employer’s contribution to the PF account up to 12% of salary is tax exempt. Employee’s own contribution qualify for deduction under section 80C. Entire accumulated balance (including interest) of PF is tax exempt if withdrawn after continuous service of 5 years.
Public Provident Fund (PPF)
PPF scheme is a long-term investment option backed by the Government of India.
- Eligibility: PPF account can be opened by Resident Indian individuals either in their own name or in the name of the minor child. It can be opened by both salaried and non-salaried individuals. A HUF cannot open a PPF account.
- Liquidity: Maturity period of a PPF account is 15 years, but can be further extended by 5 years. Partial withdrawals are allowed after 7 years. Premature closure is allowed after 5 years
- Rate of Interest (ROI): Current interest rate is 7.9% p.a. (compounded yearly) to be realigned on a quarterly basis.
- Investment Limit: Minimum and maximum investment limit is Rs 500 and Rs 1.5 lakh respectively.
- Tax Treatment: PPF qualifies for EEE (Exempt, exempt, exempt) category.
Equity Linked Savings Scheme (ELSS)
ELSS is an open-ended Equity Mutual Fund that helps save tax, and also provides an opportunity to grow money at a comparatively faster rate. ELSS provides inflation-adjusted growth in the long-term.
- Eligibility: Anyone with a Demat account can invest in ELSS.
- Liquidity: Minimum lock-in period for this scheme is 3 years
- Rate of Interest (ROI): As the return on investment is directly linked to stock market performance, in the long run, ELSS has the wide potential to provide you with the best return on your investments. It is more suitable for the person with an appetite to take a bit more risk due to market factor
- Investment Limit: The minimum investment limit is Rs 500. There is no upper limit for investment in this scheme.
- Tax Treatment: ELSS falls under EEE category
National Savings Certificate (NSC):
NSC is a postal department’s saving scheme ranked as ‘highly secured’ in the class of Investments.
- Eligibility: Non-residents, Trust and HUF cannot invest in this scheme.
- Liquidity: NSC comes with a lock-in period of 5 & 10 years
- Rate of Interest (ROI): the Interest rate is 7.9% compounded annually for 5 years NSC VIII Issue.
- Investment Limit: Minimum investment limit is Rs 100. There is no maximum investment limit.
- Tax Treatment: Interest accrued on the amount invested in NSC is taxable but it is counted as a fresh investment and hence qualifies for the 80C deduction. The investment is eligible for deduction under 80C and maturity amount is tax-free
Sukanya Samriddhi Scheme
Sukanya Samriddhi Scheme is one of the best investment options available today.
- Eligibility: Parents/guardians can open an account in the name of a girl child till she attains the age of 10 years Maximum of two accounts can be opened by a natural or legal guardian for 2 different girls. The account can be opened at public sector banks and post offices.
- Liquidity: Deposit should be made every year till the end of 14 years from the year of opening the account. Partial withdrawal is allowed up to 50% of the balance in the account as per the end of the previous financial year, for the purposes of higher education or marriage after attaining the age of 18 years. Maturity period is 21 years post opening of the account.
- Rate of Interest (ROI): Rate of interest currently being offered is 8.4%, compounded annually.
- Investment Limit: Minimum & maximum investment limit is Rs 1,000 & Rs 1.5 lakh p.a. respectively.
- Tax Treatment: Sukanya Samriddhi Scheme comes under EEE category.
Senior Citizens Savings Scheme (SCSS)
As the name suggests, this scheme is for senior citizens.
- Eligibility: An individual aged 60 years or more is allowed to open the account. An individual of the age of 55 years or more but less than 60 years, who has retired under VRS (Voluntary Retirement Scheme) is also permitted to open an account if he/she satisfies 2 conditions. First, the account is opened within 1 month of receipt of retirement benefits. Second, the investment amount should not exceed the amount of retirement benefits.
- Liquidity: Maturity period is 5 years. The account can be extended for 3 more years after maturity. Premature withdrawal after 1 year is allowed on deduction of an amount equal to 1.5% of the deposit and after 2 years by deducting 1% of the deposit.
- Rate of Interest (ROI): Interest rate offered is 8.4% per annum which is paid on a quarterly basis.
- Investment Limit: Minimum and maximum investment limit is Rs 1,000 and Rs 15 lakh respectively.
- Tax Treatment: Interest income is taxable and taxes will be deducted at source if it is more than Rs 10,000 p.a. Maturity amount is exempt from tax.
5 Year Post Office Time Deposit
5 year fixed deposits can be opened with any branch of Indian Post Office.
- Eligibility: Account may be opened by any individual.§ Liquidity: Maturity period is 5 years
- Rate of Interest (ROI): Rate of interest is 7.7% calculated quarterly and payable annually.
- Investment Limit: Minimum investment limit is Rs 200. There is no upper limit to investment.
- Tax Treatment: Interest earned under this scheme is fully taxable. The investment is eligible for deduction under 80C and maturity amount is exempt from tax.
5-year Tax Saving Bank Fixed Deposits (FD)
As the name suggests, it is a type of fixed deposit investment.
- Eligibility: All resident individuals can open an account. Senior citizens above the age of 60 years are also eligible to open a tax saver fixed deposit account.
- Liquidity: Maturity period is 5 years A person can’t break this FD.
- Rate of Interest (ROI): The interest rates vary from time to time. You can check the latest interest rates with the respective bank where you intend to invest.
- Investment Limit: Minimum investment limit is Rs 1000. No upper limit for investment.
- Tax Treatment: Interest income is taxable on maturity. The investment qualifies for deduction under 80C and maturity amount is exempt from tax.
Unit Linked Insurance Plan (ULIP)Unit Linked Insurance Plan is a life insurance product that is a combination of investment and insurance. That means a portion of the money invested in ULIPs will be used to provide risk cover and the balance amount will be invested in the stock market.
- Eligibility: An investor can buy ULIP for self or spouse or child. A child can be married or unmarried, dependent or independent and minor or major.
- Liquidity: Partial withdrawals are allowed after 5 years§ Rate of Interest (ROI): Rate varies because it is market-linked.
- Investment Limit: An investor can invest an amount higher than Rs 1.5 lakh but the deduction will be allowed only up to Rs 1.5 lakhs.
- Tax Treatment: Investment and withdrawals & maturity amount are tax-free.
Other 80C Deduction List- Infrastructure Bonds: Infrastructure companies such as Infrastructure Development Finance Company and India Infrastructure Finance Company issue infrastructure bonds, also popularly called infra bonds that are approved by the government. The amount invested in these bonds can be claimed as a deduction.
NABARD Rural Bonds: NABARD Issues two types of Bonds namely NABARD Rural Bonds and the other one is Bhavishya Nirman Bonds. Investments made in NABARD Rural Bonds are eligible for tax deductions.
Expenses Eligible for deductions under 80C:
- Life Insurance Premium
- Children's Tuition Fees
- Repayment of Principle for Home Loan
- Stamp duty and Registration charges for House Property
With this we conclude the Blog, we hope this long blog made you more aware of all the Tax saving options available.
Happy Tax Saving!
Launch your Graphy