Section 80C: Your complete guide for investing in tax-saving schemes

Taxpayers can claim up to Rs 1.50 lakh as deductions under Section 80C.

Financial year 2019 is drawing to a close and taxpayers need to start exploring 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 investments under this Section is to figure out the required investment amount.

Required investments for optimal Section 80C deduction

Taxpayers can claim up to Rs 1.50 lakh as deductions under Section 80C. Apart from 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.

(Business Standard)

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.

Unit Linked Insurance Plans (ULIPs): ULIPs offer the combined benefits of insurance and investment. While a small part of your premium is used for providing your life cover, the remaining part is used for generating returns through investments in equities and/or debt instruments. ULIPs also have a longer lock-in period of 5 years and provide switching facility to switch between equity, debt or balanced options depending on your changing risk appetite, financial goals and market outlook.

National Pension Scheme (NPS): This is a market-linked investment product aimed at providing post-retirement financial security to its subscribers. An annual deduction of up to Rs 1.5 lakh is available under Section 80C whereas an additional deduction of Rs 50,000 is available under Section 80CCD(1B). The investments remain locked-in till the attainment of 60 years by the subscriber and at least 40% of the corpus has to be used for purchasing the post-retirement annuity. While the amount withdrawn as a lump sum after the maturity is tax-free, the income derived from the annuity will be taxable as per the subscriber’s tax-slab....Read More