You must be aware of deduction under Section 80C under the Income Tax Act. Section 80C, w.e.f. 1st April 2006, basically allows certain investments and expenditures to be exempt from tax. Through 80C, you can claim deductions up to Rs.1.50 lakh per financial year, thereby lowering your tax liability. To put it simply, qualifying investments, up to a maximum of Rs. 1.50 lakh per financial year is deductible from one’s income.
Many investors do use this 80C to save on their taxes. Different investments are preferred by varied investors, each having their risk tolerance, liquidity, legal, and return requirements.
Investments that qualify for deduction under 80C are –
- Provident Fund & Voluntary Provident Fund
- Public Provident Fund
- Life Insurance Premiums
- Equity Linked Saving Schemes (ELSS)
- Home Loan Principal Repayment
- Stamp Duty & Registration Charges for Residential Property
- Sukanya Samriddhi Account
- National Saving Certificate (NSC)
- Infrastructure Bonds
- Pension Funds
- Fixed Deposits for 5 years term
- Senior Citizen Saving Scheme 2004
- Post Office Time Deposits for 5 years tenure
- NABARD Rural Bonds
- Unit Linked Insurance Plan
- Educational Expenses for Children
Let us have a look at four of the most popular investment avenues.
| Sl. No. | Basis | Tax Saving Fixed Deposits | Equity Linked Saving Scheme | Public Provident Fund | National Pension System |
| 1. | Eligibility | Can be opened by every Indian citizen including HUF & NRI | Can be opened by every Indian citizen including HUF & NRI | Can be opened by Resident Indian individuals. HUF & NRI cannot open a PPF account | Can be opened by every Indian citizen between the age of 18 and 65 including NRI. HUF cannot open an NPS account. |
| 2. | Lock-in Period | 5 years | 3 years | 15 years but can be further extended by 5 years. Partial withdrawals are allowed after 7 years | Partial withdrawals are allowed after 15 years but under special conditions |
| 3. | Rate of Interest / Return | Interest rate across major banks currently ranges from 5.25% to 7.50% | Around 12% (depending on market fluctuation) | Interest for the current quarter is 7.10% | Depends on the scheme and type chosen
|
| 4. | Tax Treatment of Interest / Return | Taxable as per investor’s tax bracket | LTCG at 10% for gains exceeding Rs. 1 Lakh a year | Tax-free | Lump sum withdrawal of 60% is totally tax free at the time of maturity. For the remaining 40% – annuity received under the pension plan is taxable in the hands in the year of receipt at the tax rates applicable to your income. |
| 5. | Risk Level | Very low | Moderate to high | Very Low | Depends on the type of scheme one chooses |
Why ELSS is better than all other 80C Investments?
Higher Return on Investment (ROI): Given that ELSS invests predominantly in the equity instruments, the returns are much higher than most investment options with tax-saving benefits in the longer run. This serves two purposes; you not only save on taxes but also generate high returns/profits. ELSS can be the right choice for an individual who is willing to invest for a medium to long duration. Historical performance shows that ELSS generates about 12% over ten years and more. This, when compared to other 80C options, is a significant gain.
Given below are the historical performance (as on 08.02.21) of ten largest (in terms of their corpus) ELSS Mutual Funds:
| Scheme | AUM (Rs) |
Annualised % |
||||
| 1 Yr | 2 Yr | 3 Yr | 5 Yr | 10 Yr | ||
| Axis – Long Term Equity Fund (G) | 27,181 | 18.12 | 20.22 | 15.16 | 15.65 | 18.08 |
| Aditya Birla Sun Life – Tax Relief 96 Fund ELSS (G) | 13,037 | 16.50 | 12.80 | 7.95 | 13.60 | 13.65 |
| Nippon India – Tax Saver (G) | 10,564 | 8.39 | 7.89 | -2.06 | 8.12 | 11.90 |
| SBI – Long Term Equity Fund (G) | 8,767 | 24.58 | 15.69 | 8.46 | 12.63 | 12.37 |
| ICICI Pru – Long Term Equity Fund (G) | 7,784 | 21.28 | 16.50 | 11.11 | 13.28 | 13.44 |
| HDFC – Tax Saver (G) | 7,737 | 14.83 | 9.50 | 3.58 | 11.96 | 10.21 |
| DSP – Tax Saver Fund (G) | 7,425 | 21.61 | 20.09 | 11.56 | 16.52 | 14.78 |
| Mirae – Asset Tax Saver Fund (G) | 5,489 | 30.82 | 22.46 | 15.55 | 21.51 | – |
| Franklin – India Taxshield (G) | 4,202 | 18.53 | 12.87 | 8.39 | 11.82 | 13.38 |
| L&T – Tax Advantage Fund (G) | 3,439 | 15.49 | 13.32 | 5.55 | 13.56 | 12.10 |
Shorter Lock-in Period: In comparison to other tax savings instruments like the NPS, tax savings bank deposit, or Public Provident Fund, the lock-in period is much lower for an ELSS fund. While NPS, tax-saving FD, and PPF require a lock-in timeframe of 15 years, 5 years, and 15 years respectively, an ELSS fund has a lock-in period of only 3 years.
Flexibility of ELSS: If you are unhappy with your ELSS fund, then you may move to another fund as you are not required to commit to a multi-year deal. In the case of a ULIP and NPS, if you are unhappy with the fund, you can only shift and invest in funds that are offered by them.
Ease of Investment: ELSS Mutual funds offer a systematic investment plan (SIP) facility, wherein, you can invest a fixed amount every month. Thus, plan it in advance or exhaust your 80C in Feb/March at once – ELSS Mutual Funds gives you all the comfort you need.
Have you invested in ELSS for the year?
Only seven weeks left to invest in ELSS to claim 80C benefit for FY 20-21!