If you haven't made tax-saving investments for the fiscal year 2023-24, don't worry, you have till March 31 to do so. Investments made after the conclusion of FY24 will not be eligible for claiming deductions under the old tax regime when filing the Income Tax Return (ITR) for FY24. Here are some ways to save on taxes under section 80C of the Income Tax Act, 1961.
National Pension System (NPS)
The National Pension System (NPS) is a government initiative that encourages individuals to save for retirement. Contributions made towards NPS qualify for tax deductions under Section 80C up to the amount of Rs 1.5 lakh. The scheme also allows an additional tax deduction of 50,000 under Section 80 CCD (1B). Moreover, if you have a corporate NPS, then 10% of the basic salary contributed by the employer in NPS is eligible for deduction under Section 80CCD (2).
NPS serves as a cost-effective retirement savings tool, providing financial support during your golden years when the regular income flow ceases. Consistent investments in NPS now can accumulate a substantial amount for your retirement. For those unfamiliar, NPS offers both Tier I and Tier II accounts. Tier I is a mandatory pension account with specific withdrawal restrictions, while Tier II is an optional savings account offering greater flexibility for withdrawals. Upon reaching the age of 60, subscribers are required to use a minimum of 40% of the NPS corpus to acquire an annuity from a life insurance company, and they can withdraw up to 60% of the corpus as a tax-exempt lump sum. Recently, NPS has also started the facility of systematic withdrawals on maturity. One can consider investing in equity or debt funds of NPS as per their risk profile. You can invest maximum up to 75% in equities in NPS.
Equity-Linked Saving Scheme (ELSS)
Equity-Linked Saving Scheme (ELSS) is a type of diversified equity mutual fund with the lowest lock-in period of three years, making it an attractive tax-saving instrument. They mostly invest in large-cap funds, making it an attractive tax-saving option as large-cap stocks are expected to perform better in 2024.
These funds are eligible for deduction under Section 80C up to the amount of Rs 1.5 lakh. Moreover, the option of a Systematic Investment Plan (SIP) allows the investor to invest a fixed amount regularly in ELSS, which can be as low as Rs 100-500. Investing in this way can inculcate a regular saving habit among individuals, which is crucial for long-term wealth creation.
However, like all mutual fund investments, the returns on ELSS are not guaranteed as they are market-linked. This means that the performance is primarily based on how well the Indian stock markets are doing. In the past five years, ELSS funds have given an average return of around 18%.
Public Provident Fund (PPF)
It is a government-sponsored scheme with triple tax benefits: deduction at the time of investment under section 80C, interest received is tax-free and maturity amount is also tax-free. One of the substantial advantages of PPF is its security. Given that it is backed by the Indian government, the PPF scheme tends to be a safer investment route compared to other investment options, such as mutual funds, stocks, or corporate bonds. This element of safety, coupled with fair returns, makes PPF a sought-after choice among many conservative investors.
The PPF entails a mandatory lock-in period of 15 years, which instils a disciplined saving habit in the investors. This requirement also magnifies the growth potential of the savings as it leverages the power of compounding. What's more, the PPF account holders have the flexibility to extend the account in blocks of 5 years after the completion of the initial 15-year period. They can avail of this benefit without losing out on any interest.
PPF investments are not subject to market risks and deliver steady returns, making them particularly beneficial for risk-averse investors. However, the government has not increased PPF rates for the last four years and hence compared to other post office schemes it offers low interest rate. The current rate of interest offered on PPF is about 7.1%.
Senior Citizens Saving Scheme (SCSS)
The Senior Citizens Saving Scheme, or SCSS, is a government-backed investment avenue designed exclusively for Indian citizens who are over 60 years old. This scheme provides a secure and rewarding investment option, giving senior citizens a chance to receive a consistent income even in their retirement phase.
SCSS was introduced as part of government initiatives aimed at enhancing the social security and welfare of senior citizens. It provides an interest rate of up to 8.2% per annum, making it one of the highest paying small savings schemes in India. Going beyond offering high returns, SCSS comes with the added benefit of being a low-risk, tax-efficient scheme.
The maximum investment limit under this scheme is Rs 30 lakh. One can open an SCSS account individually or jointly with a spouse in any certified bank or a post office. The deposit under SCSS matures after five years from the date of account opening.
Sukanya Samriddhi Yojana (SSY)
The Sukanya Samriddhi Yojana is a government-backed savings scheme in India that aims to secure the future of a girl child. This scheme is a part of the 'Beti Bachao, Beti Padhao' campaign initiated by the Government of India, and it not only promotes the education of the girl child but also ensures her financial security.
The main attribute that sets it apart is its attractive interest rate which is currently 8.2%, making it one of the best small-saving schemes. The maximum annual deposit limit is Rs 1.5 lakh and the minimum requirement is just Rs 250, making it accessible to most Indian families.
The scheme can be opened at any post office and designated branches of authorized commercial banks before the girl child turns 10. The account will remain operative for 21 years from the date of its opening
Insurance Policies
There are two types of popular insurance policies: Unit-Linked Insurance Plans (ULIP) and Traditional policies. ULIP is a combination of insurance and investment. A part of the premium goes to secure life insurance and the rest is invested in equities or debts. These plans have given an average return of 8-10 per cent in the past 5 years and have a lock-in of 5 years. Under traditional plans, the investments are made in fixed-income instruments and give an average return of around 5-7 per cent. They have a higher lock-in period and levy high charges if the policy is discontinued. paid The premium paid for insurance policies (including term insurance) can be claimed as a tax deduction under section 80C of the IT Act.
The important point here is that maturity becomes taxable in the case of ULIPs, taken on or after February 1, 2021, if the premium paid in any year during the life of the policy is more than Rs 2.5 lakh. In the case of insurance policies other than ULIPs, taken on or after April 1, 2023, the premium paid in any year during the life of the policy shall not be more Rs 5 lakh for the maturity amount to be tax-free.
National Saving Certificate (NSC)
These certificates can be purchased from any post office across India, making it easily accessible to a large section of the population. They are available in denominations from Rs100 to Rs10,000, enabling people from different economic backgrounds to invest. The term of NSC is 5 years.
Currently, NSC offers an attractive interest rate of 7.7% per annum which is compounded annually but payable at maturity. An important feature to be noted is that the interest incurred on the NSC is reinvested and qualifies for a fresh tax deduction, thus leading to a higher effective interest rate.
From the perspective of tax savings, NSC is an eligible instrument under Section 80C where investments up to Rs 1.5 lakh in a financial year can be deducted from taxable income.
Tax Saving Fixed Deposits (FDs)
Tax Saving Fixed Deposits (FDs) are a good and simple way to save tax. A maximum of 1.5 lakh can be claimed under 80C for investment in FDs with a lock-in period of 5 years.
In conclusion, each of these tax saving schemes serves a specific purpose and is useful under different circumstances. Such planning not only helps in reducing tax burden but also in securing financial stability for the future.