Tax Planning

Tax Saving Under Section 80C – Where Should One Invest?

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Financial Planning for the family and the Tax Planning for the financial year is one of the major responsibilities. Tax planning has always been procrastinated till the last minute, be it for a salaried individual or for a self employed individual.

Even in today’s technically savvy generation, many people lack basic tax planning requirements.

Below are the various avenues for investment where tax can be saved under section 80C.

Under Section 80C of the Income Tax Act, 1961, there is a total exemption limit under section of Rs 1,50,000 which can be saved so as to avoid tax payment as per income brackets. This benefit of Rs 1,50,000 of tax saving investment is available to everyone, irrespective of his or her income levels.

However, there is a minimum lock in of 3 years for availing Income Tax Deduction. It simply means that if you wish to avail Income Tax Deduction under 80C by investing in any of the following tools, you cannot withdraw the money within 3 years of investment.

The tools for Tax Saving Investment under section 80C.

Life Insurance Premiums

All premiums paid towards Life Insurance Policies are eligible for income tax deduction under section 80C of Indian Income Tax Act. Life Insurance Premiums paid till Rs 1,50,000 each year is eligible for 80C Tax benefit.

One can choose to invest in

  • Term Plans: A term plan provides a lumpsum amount to the nominee on death of the policyholder. The lumpsum provided as a death benefit is also tax exempted.
  • Endowment Plans: An endowment plan acts as a guaranteed savings plan where the returns provided will be mentioned upfront to the policyholder.
  • Unit Linked Insurance Plans: A market linked insurance plan where the policyholder can choose to invest between debt and equity funds and also get protection plus tax benefit. This helps your wealth grow as the market scales up. The returns are tax exempted under ULIPs.

Pension Fund

Under Section 80CCC, you can invest in a Pension Fund. Thus, any premium paid towards an annuity plan, whether deferred or immediate will give you tax relief in that financial year.

Provident Fund (PPF)

Any contributions to Employee’s Provident Fund, Voluntary Provident Fund (VPF) or savings made in Public Provident Fund (PPF Account) are eligible for income tax deduction under section 80C of Indian Income Tax Act. This limit has also been enhanced to Rs 1,50,000 of contribution per year whereas the minimum still being Rs 500.

Bank Fixed deposits of 5 Years

According to the new rule for 80C deduction, any investment done in Back Fixed Deposits for a minimum tenure of 5 years is also eligible for Income Tax Deduction under section 80C.

Principal part of EMI on Housing Loan deduction under section 80C

The Principal Amount of the Home Loan would be deducted under 80C if you are paying EMI on a Home Loan. There are 2 parts of the Home Loan the Principal Part and Interest Part. The principal part of the EMI on your housing loan is eligible for income tax deduction under section 80C. The interest part is also eligible for tax deduction, however not under section 80C but section 24.

Thus, a Home Loan is always a good option for tax saving purpose. Currently, anybody with a housing loan gets a deduction up to Rs 150,000, paid as interest for the loan, from his total income, for a self- occupied property.

Now that you are aware of the Various Tax Saving instruments available in the market you must choose the specific investment tool which is in sync financial goals and risk appetite.

Before investing, there are some basic questions that you need to ask yourself;

  • What is your risk appetite?
  • For how long can you stay invested?
  • What is your financial goal?

Once you are aware of the answers, you can choose an investment option that is best suited for you. You must choose an investment tool according to your requirement. Evaluate your needs and then choose a plan as per your changing requirements!

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