Albert Einstein said, ‘The hardest thing to understand in the world is income tax.’
But don’t worry, we’re making it as easy for you as possible. Tax is computed on total income of an assessee. Total income is arrived at after considering gross total income and deductions under Chapter VI-A. Chapter VI-A comprises of various sections. Deductions under Chapter VI-A includes section 80C.
The Government of India strove to cultivate a habit of savings and investments for individuals and HUFs. Savings not only help in increasing individual wealth and standard of living but it also helps to grow the economy. With this view, individuals and HUF are offered deductions against certain avenues of investments.
Deductions under section 80C include the following:
Equity Linked Savings Scheme:
ELSS are equity oriented mutual funds with a minimum lock-in period of 3 years. ELSS are market-linked and thus provide relatively higher return compared to the traditional forms of investments. Returns range between 12-15%, and their risks are also higher compared to PPF, NSC, etc.
Investment in PPF:
Public Provident Fund is a traditional form of investment. Investment in PPF is risk-free since it is only available with the post office and government-sanctioned banks. It has a lock-in period of 15 years, and return for the FY 2016-17 is 8.1% (compounded annually). Withdrawals from PPF are tax exempt. Additionally, one can avail loan against PPF account as well.
New Pension Scheme:
NPS offers various schemes which are market linked. There is no guarantee of returns. Also, the proceeds on maturity are taxable. However, NPS is a Government initiative and additional deduction of Rs. 50,000 can be claimed under section 80CCD(1B).
Employee Provident Fund:
Investment in EPF up to 12% of an employee’s salary can be claimed as a deduction. The interest rate for EPF is roughly 8.8%.
Tax Saving Fixed Deposits:
Tax-saving FDs are like traditional fixed deposits from banks with a lock-in period of 5 years. Interest earned on such FDs is 7-9%. But the maturity proceeds are taxable.
National Savings Certificates one of the oldest known ways of tax saving. They are long-term investment avenues issued by post offices. Interest earned from NSC is around 8.1%.
Unit Linked Insurance Plans are hybrid products. ULIP is a combination of life insurance and mutual fund. Along with providing a life cover, a part of the ULIP premium is invested. Hence they provide market-linked returns.
Life Insurance Policies:
Premium paid for any life insurance policy for oneself, spouse or children can be claimed as a deduction. However, the deduction can be claimed only if the premium is less than 10% of sum assured. E.g., if you have insurance of Rs. 5,00,000, you are permitted to claim up to Rs. 50,000 as a deduction.
Interest on repayment of home loan can be claimed as a deduction, too. Such deduction is to be considered only once deduction under house property is claimed completely.
Also, payment of tuition fees for up to two children can be claimed as a deduction. However, it can be claimed only for a full-time course.
Investments in Sukanya Samriddhi Yojana and Senior Citizens Savings Scheme can also be claimed as a deduction. Each of these schemes has a different eligibility criterion for investments, laid down by the regulatory authority.
It is worthwhile to note that deduction only up to Rs. 150,000 can be claimed under section 80C. This limit is not applicable to each form of investment. Instead, it is an aggregate, blanket limit per assessee.