A complete guide to investing and I-T rebates under Section 80C

Once you know the amount required for availing maximum deductions under Section 80C, it's time to select the investment option(s) based on their liquidity and taxability of returns.

With the financial year drawing to close, income tax-payers would have started exploring various tax-saving investment options allowed under Sec 80C of the Income-Tax Act. However, with various payments and mandatory outflows also qualifying under Section 80C, the first step towards making tax saving investments under this Section is to figure out the required investment amount.

(Business Standard)

Required investments for optimal Section 80C deduction

Taxpayers can claim up to Rs 1.50 lakh as deductions under Section 80C. Apart from the various investment options eligible for availing Section 80C deduction, certain pay-outs and mandatory expenses are also covered under the same deduction. These include your child’s tuition fees, repayment of your home loan principal, your contribution to EPF or recognized provident fund, term insurance premiums and stamp duties and registration charges incurred on acquiring a home loan property. Your required investment amount would be the amount left after deducting the mandatory pay-outs from the Rs 1.50 lakh limit.

For example, assume that your gross annual income is Rs 7 lakh and your qualifying mandatory pay-outs include Rs 80,000 as home loan principal repayment, Rs 20,000 towards EPF contribution and Rs 10,000 as a term insurance premium. You will need to invest Rs 40,000 in the investment options eligible for Section 80C deduction. Investing beyond this amount would not make sense, as all Section 80C investment options come with lock-in period and other restraints.

Best investment options

Once you know the amount required for availing maximum deductions under Section 80C, it’s time to select the investment option(s) based on their liquidity and taxability of returns and your own risk appetite and return expectations.

Equity-Linked Savings Schemes (ELSS): These are primarily diversified equity mutual funds with a lock-in period of three years from the date of investment. The 3-year lock-in period is the shortest among all investment options available under Section 80C. The funds can be easily redeemed after the completion of the lock-in period with the credit of redemption amount to the linked bank account within 2–3 working days. Being equity funds, ELSS come with the same market risk as other equity funds. However, as equities usually outperform other asset classes by a wide margin over the long-term, ELSS too has outperformed various fixed income investment options under Section 80C. ELSS as a category has generated an annualised return of about 10%, 16% and 16.3% p.a. over the last 3-year, 5-year and 10-year periods.