Best tax saving investment options under Section 80C
August 15, 2018
Do you know that you can claim a deduction of ₹1,50,000 under section 80C of the Indian Income Tax Act, 1961? Many people don’t. They are clueless about investing their hard-earned money and save tax on their salary income. By the end of the financial year, they would realize that they haven’t made any investments and eventually settle with opening a Fixed Deposit account at the last moment. Now I’m not saying that Fixed Deposit is the worst financial instrument to save tax, but it’s certainly not the best performing option in the lot.
If you have just started earning and are just as clueless, this article will help you make some better investment decision and save income tax on your income.
ELSS (Equity Linked Saving Scheme) is my personal favorite among all the tax saving instruments available. ELSS is a tax saving mutual fund which qualifies for income tax deductions under Section 80C.
As per the Budget 2018-19, ELSS now falls under ETE category. ETE means that the principal amount and the amount on maturity are entirely exempted from tax only the profits generated are taxable. It has the lowest lock-in period of 3 years and gives highest returns of around 15% to 18% on an average.
EPF (Employees’ Provident fund) is a type of provident fund which is mandatorily deducted from your salary by your employer. You don’t have an option to choose here and is only applicable for salaried employees. You contribute 12% of your monthly salary, and an equal amount is paid by your employer. Though it provides you an option to increase your contribution while the employer will contribute 12% regardless of your contribution. EPF also qualifies for tax deduction under Section 80C and is categorized as EEE.
It generates around 8% to 9% of returns and has a lock-in period of 5 years.
PPF (Public Provident Fund) is another type of provident fund which, unlike EPF, can be opened by unsalaried or self-employed individuals along with salaried employees. PPF is eligible for tax deduction under Section 80C. PPF also enjoys EEE status just like previously mentioned tax saving instruments.
Provident funds (PPF/EPF) are less riskier as compared to ELSS. PPF gives returns of around 7% to 8% and has a lock-in period of 15 years, but in this case, you can perform partial withdrawal after completion of the sixth financial year from the date of PPF account creation.
Now that we know about ELSS, EPF and PPF, let’s discuss why they are considered better than FD (Fixed Deposit). FD is also eligible for tax deductions under Section 80C, but unlike others, it falls under ETE status. Here, the T means that interest from these investments is taxable.
Therefore, eventhough FD gives decent returns of 6% to 7%, the actual returns when the investment is withdrawn would be lesser than the promised fixed returns after paying tax on the interest amount. The lock-in period of FD is 5 years, which is much less than PPF, but still more than that of ELSS.
So which tax saving instrument is the best – ELSS, EPF, PPF or FD? The answer is… it depends on your personal preference. Each of these instruments has their own merits and demerits. It is true that ELSS has given really impressive returns in the past but it is subject to market risk and in no way it guarantees profits. If you are averse to risk, you would probably go for FD, EPF or PPF instead. Or if you want a shorter lock-in period, you would want to choose ELSS or FD. You can have preferences of your own; in the end it’s all for you to decide.
Note: The information about returns is obtained from cleartax.