Section 80C tells that a deduction of 1.5 lakh can be claimed from your total income. In simple terms, you can reduce up to 1.5 lakh from your total taxable income through section 80C . For example, if your income is 10 lakhs/annum, you can invest 1.5 lakh under 80C and get tax exemption for this amount. As a result, your taxable income would be 8.5 lakhs only. If you are falling in 30% tax bracket, 1.5 lakh exemption means savings of about 45k. This tax saving option can be for an Individual or a HUF (Hindu Undivided Family).
Government considers a wide range of investments and expenses under the 80C tax exemption. I have summarised the various categories below:
Investments eligible for tax deduction
Public Provident Fund(PPF)
The PPF is a Public Provident Fund tax-free savings scheme. It was introduced by the Ministry of Finance in the year 1968. It was launched to encourage savings in Indians, especially to help them create a retirement accumulation. The deposit can be between 500/- to 1.5 lakh every financial year. The interest earned on the principle is completely tax free. The maturity for a PPF account is 15 years. Partial premature withdrawals can be made every year after completion of 7 years. Interest earned here is upto 8.1%.
Equity Linked Savings Scheme(ELSS)
ELSS stands for Equity Linked Saving Scheme, which is a category of diversified equity mutual funds. You can start investing directly assuming you have knowledge about all funds. Alternatively, you can invest through any unbiased distributor (www.next.groww.in). This will help you pick the best mutual funds. The amount that can be invested is a minimum of 500/-. There is no upper limit for investment here. But only up to 1.5 lakh can be claimed for tax deduction under 80C. The lock in period for ELSS is only 3 years which is the shortest tenure compared to any other investments. The returns earned have been anywhere between 16-23% which is completely tax free.
National Savings Certificate(NSC)
The National Savings Certificate Scheme was started by the Indian Government somewhere around the 1950’s. It was introduced primarily for small savings and income tax savings. One can obtain the NSC for a specific amount from any post office. It can be brought for yourself or for a minor or jointly owned by two adults. NSC are issued for a maturity periods of either 5 or 10 years. They are eligible for tax deductions for the year in which they are purchased. The interest earned is computed annually which is 8.8%. Unlike ELSS and PPF the interest earned in NSC is taxable.
United Linked Insurance Plan(ULIP)
United Linked Insurance Plan was first launched by the UTI along with Government of India in the year 2001. Later many insurance companies have launched various plans. It is basically a combination of both investment and insurance. That is, a part of your money goes for insurance premium and the balance is invested in stocks, bonds or mutual funds. There is always a risk associated with ULIP, subject to the market fluctuations. Overall, due to the dual nature of the product, ULIP are typically expensive for customers. The tenure can be 5,10 or 15 years. For a complete detailed knowledge on ULIP, take a look at this blog.(https://groww.in/blog/what-all-you-need-to-know-about-ulip/)
Fixed Deposit in Post Office
Any sum deposited for a fixed term in a post office for a minimum period of 5 years. You obtain an interest rate of 7.9% for a 5 year scheme.
Fixed Deposit in Bank
Any sum deposited for a fixed term of 5 years in a bank. For government banks the interest is somewhere between 6.5%-6.85% and for private banks it is 7%.
Senior Citizens Savings Scheme(SCSS)
Designed for individuals above 60+years,this scheme offers a safe investment options for the elderly. Only one time investment is allowed for each SCSS account in multiples of 1000/- up to 15 lakhs. Amount invested in this scheme can be claimed for tax deductions. The maturity period is 5 years and can be extended for another 3 years as required. The interest earned is 8.6%. The returns are taxable.
Notified Savings Scheme(NSS)
The Notified Savings Scheme or Notified Deposits Schemes was started by the Government of India in the year 2006. This is the only deposit scheme that is available for tax deductions under 80C in banks. The minimum deposit is 100/- and not more than 1.5 lakh per year. Maturity period is 5 years. The issue bank fixes the interest rates to around 8.7% on an average. The returns are taxable.
Notified Pension Fund(NPF)
Notified Pension Fund scheme took effect from the year 2004. An employer can make a contribution of 10% of his salary. This scheme can give returns of around 12%-14%. The maturity period is 5 years. The returns are taxable.
Home Loan Account Scheme
Amount paid for the subscription for the home loan approved by the National Housing Bank. Or, subscription to the deposit scheme from a public-sector company, which provides housing finance is also tax exempted under Section 80C.
Annuity Plan by the LIC
Contributions to the Jeevan Dhara or Jeevan Akshay units of LIC or on the units of Mutual Funds. They are single premiums that are obtained at once by paying a lump sum. The interest rate is around 7.25%.
Part of any approved eligible issue of capital made by a public company or public financial institutions. The interest rate is 8.7% . The returns are taxable for short term (less than 1 year) and non-taxable for long terms(>1 year).
Any notified bonds approved by the NABARD (National Bank for Agriculture and Rural Development). Minimum value is 5000/- and later on in multiples of 1000/-. The interest rates availed are 7.29% for a tenure of 10 years.7.64% for 15 years. Returns are non-taxable.
ELSS vs Others? The dilemma
The world’s changing in such a fast pace,wherein today’s technology is obsolete the next day. In this ever-changing environment, we must always move away from the traditional options. We do this to achieve as much as possible in a short time interval. One such factor is choosing over investing in either ELSS or the other options. Every option has its own set of pros and cons, but today we see a steady rise in young investors turning to ELSS.
Comparison between all the Investment Schemes under Section 80C
|SCHEME||INTEREST OBTAINED P.A.(in%)||MATURITY/LOCK IN PERIOD(in years)||RETURNS TAXABLE/NON-TAXABLE|
|ULIP||Depends on the category||5,10,15||Taxable|
|FD in Post Office||7.9||5||Taxable|
|FD in Banks||6.5-7||5||Taxable|
|Annuity Plan by LIC||7.25||_||Taxable|
|Equity Shares||8.7||_||Short term Taxable|
Amongst all the above schemes, people are increasingly picking either PPF or ELSS. PPF is very popular among adults who are 40 and above. Most of the people who are not willing to take a risk choose PPF as the tax saving option. But with today’s changing trend, we see a lot of young adults migrating to ELSS. It’s because of the various user friendly features that ELSS has over PPF.
Why choose ELSS over PPF?
- ELSS has lock-in period of only 3 years. Whereas, PPF matures in 15 years with minimum of 7 years waiting period.
- ELSS have earned higher returns (almost double) compared to PPF. PPF offers an interest of 8.1% whereas most of the ELSS plans has given returns anywhere between 16-23%.
- ELSS are subject to market risks. They bear higher risk than PPF.
|Tax free investment||Tax free investment|
|Shortest lock in period of 3 years||Maturity at 15 years and can withdraw funds partially after 7 years|
|Higher interest rates (16%-23%)||Interest rate is 8.1%.|
|Subject to market risks||Not subject to market risks|
The graph below summarizes,how ELSS(Tax saving MF) has shown higher growth rate than than PPF and FD.
To sum up all these points, the important factors that makes ELSS a better option are, shortest lock-in period and higher returns. This makes ELSS stand apart in today’s scenario. The growth of ELSS is way above PPF and FD from the above statistics. Even though there are fluctuations in the graph, the growth never fell below PPF nor FD. This shows ELSS is much better option to invest rather than PPF nor FD for saving taxes under Section 80C as well as creating wealth in long term.