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Tax saving under section 80c of the Income Tax Act, 1961.

Tax planning helps in finding out the best-suited instruments or tools that one can invest in to save tax. Investors while making an investment often overlook the tax consequence over the returns rate. For example, an investor feels glad if he gets returns of 7-8% on hard and fast deposit schemes but tends to overlook the fact that the income would be completely taxed and effectively bring down his returns to 5 to 6% rate of return. For an investor to keep up with the inflation rate this returns won’t be sufficient. In this article, we provide you the snapshot of Perfect return, investment limits, benefits and everything else you need to know. 

One of the ways to enjoy tax benefits is to claim deductions under Section 80C of the Income Tax Act. But to avail these deductions you must make a tax-saving investment or incur an eligible expense. The total amount of deduction that can be claimed under Section 80C stands at INR 1.5 lakh. As it is a substantial amount, planning your investments well can reduce your tax burden to a great extent. There is a large variety of investments that are exempted under various sub-sections of Section 80C. While choosing the right tax-saving investments plans it is important to consider the factors like safety, returns and liquidity. Also, it is important to keep a proper understanding of how the returns will be taxed. There are three stages of taxation on investment;

  1. Initial investment.
  2. Returns earned during accumulation.
  3. Final withdrawal (i.e. Returns along with initial investments at maturity)

Now let us understand three tax categories based on the above stages of investment;

Set out below is a snapshot of the various investments that can be made to claim tax benefits that fall under EEE tax-exempt category under Section 80C:

1. Tax saving scheme under 80c deduction

Investment Return Lock-in period Description
Equity Linked Savings Scheme (ELSS) 15% -18% 3 year period It is a diversified mutual fund scheme. Can opt for a dividend or growth option in an ELSS fund. The dividends in an equity scheme are 10% taxable. Investors in the highest tax bracket (30%) can, therefore, save up to Rs 46,350 in taxes (Rs 1.5 lakhs X 30.9% tax + cess) by investing in ELSS mutual funds
National Pension Scheme (NPS) 12%-14% Till Retirement Help to provide tax-exemption under three different sections as mentioned below. 

  1. The contribution, up to the maximum limit of Rs.1.5 lakh can be claimed for tax exemption under section 80C of IT Act.
  2. Under Section 80CCD (1b) one can get additional deduction up to Rs.50,000.
  3. If 10% of the basic salary of the individual is contributed by the employer in the NPS, then the amount is not taxed. 

However, in the NPS, only 40% of the fund is tax exempted at the time of maturity. Also, it is mandatory to invest 40% of the corpus in the annuity plan in order to earn monthly income. The annuity paid to the investors after retirement is treated as income and is totally taxable.

Unit Linked Insurance Plan (ULIP) Returns vary from plan to plan 5 years The investment returns are tax-exempted U/S 10(10D) of the IT Act. Few ULIP comes with zero premium allocation charges and zero administration charges, which result in better returns to the investors. The returns on ULIPs entirely depend on the market performance of the fund.
Public Provident Fund (PPF) 7%-8% 15 years The contribution made towards the PPF account, the interest earned and maturity proceeds are all tax exempted.
National Savings Certificate 7%-8% 5 years This is a fixed income tax saving investment scheme. A low-risk tax saving investment option, which offers guaranteed return on investment.
Bank FDs 6%-7% 5 years Offers a guaranteed return on investment to the individuals and also ensures the safety of investment as the amount invested gets locked-in up to the entire tenure.
Insurance Returns vary from plan to plan 3 years The premium paid and maturity proceeds toward the policy are tax-exempted. Moreover, the returns offered under the policy like endowment or money-back are also tax-free. However, it is not advised to the individuals to buy a life insurance policy only with the motive of saving tax

2. Tax on equity mutual funds

 The minimum holding period for long term capital gains in equity funds is one year. Short term capital gains in equity funds are taxed at the rate of 15% plus 4% cess. Long term capital gains tax in equity funds is 10% + 4% cess provided the gain in a financial year is over Rs 1 Lakh. Long term capital gains up to Rs 1 Lakh is totally tax-free. Dividends paid by equity mutual funds are tax-free in the hands of the investor but the AMC pays dividend distribution tax (DDT) at the rate of 11.648%.

3. Tax on debt mutual funds

The minimum holding period for short term capital gains in debt funds is 3 years. Short term capital gains in debt mutual funds are taxed as per applicable tax rate of the investor. Therefore, if your tax rate is 30% then short term capital gains tax on debt funds is 30% + 4% cess. Long term capital gains of debt funds are taxed at 20% with indexation. Indexation benefits reduce the tax obligation of debt fund investors considerably compared to investments in bank FDs and many small savings schemes. While dividends are tax-free in the hands of the investor, the fund house pays dividend distribution tax (DDT) at the rate of 29.120% for debt mutual funds before distributing dividends to investors.

Nature of Profits / Income Equity funds taxation Non-equity funds taxation
The minimum holding period for long term capital gains 1 year 3 years
Short term capital gains 15% + 4% cess = 15.60% As per the tax rate of the investor (30% + 4% cess = 31.20% for investors in the highest tax slab)
Long term capital gains 10% + 4% cess= 10.4% (If the long term gains exceed Rs. 1 lakh) 20% with indexation
Dividend distribution tax 10% + 12% surcharge + 4% cess = 11.648% 25%+ 12% surcharge +4% cess = 29.120%

Above discussed article provides you with enough insights on tax saving investment options to make a sound decision. While considering the above options one should look at current and future financial needs before opting for such schemes.

Plan investments to not only save tax but to also create wealth for your future needs. If you haven’t planned the best investment option then now is the time.

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