The Income Tax Act, with an objective to encourage savings and investments amongst taxpayers, has provided for various deductions from the taxable income of an individual under chapter VI A.
Section 80C, which allows for a maximum deduction of Rs 1.5 lakh per year on tax saving investments and eligible expenditures, is the most commonly used.
The benefits of this section are only available to individuals and Hindu Undivided Family (HUF). Companies, partnerships, limited liability partnership firms (LLP) cannot avail of this benefit.
What are the options available to individuals to avail this benefit?
1. Employee Provident Fund: Both employer as well as employee contribution to Provident Fund is eligible for deduction under 80C. This retirement scheme is available to all salaried employees. These contributions are normally 12% of salary (basic + dearness allowance).
2. Public Provident Fund: An individual who is not salaried can open a PPF account to plan for his/her retirement. Minimum contribution under the scheme is Rs 100 and maximum Rs 1.5 lakh. Contributions need to be made for 15 years. Salaried class who have EPF account can also open a PPF account.
3. Equity-Linked Savings Schemes: ELSS are tax saving schemes operated by mutual funds. They have a lock-in period of three years. Investment in these schemes of up to Rs 1.5 lakh in a financial year can be eligible for tax exemption under 80C.
4. Unit Linked Insurance Plans: ULIP is an insurance cum investment plan. A portion of the money invested is used to provide insurance while the other is invested in stock markets to generate returns. It provides market linked returns.
5. Traditional/Term Insurance Plans: Life insurance premiums paid for traditional insurance plans with endowment benefits are eligible for deduction under 80C. An endowment policy is a life insurance contract designed to pay a lump sum after a specific term or on death. Premium paid for term plans which are pure protection plans in which payouts happen only in case of death is also eligible.
6. Sukanya Samriddhi Scheme: Under this scheme money can be deposited in the name of a girl child and withdrawn once she attains 18 years of age to cover the expenses for her education/marriage. The scheme is aimed for the betterment of the girl child.
7. Tax Saving Fixed Deposits: These are like regular fixed deposits but come with a lock-in period of 5 years and tax break under Section 80C on investments of up to Rs 1.5 lakh. One cannot break this FD in between in case you need funds.
8. Senior Citizens Savings Scheme: To protect senior citizens from reduction in interest rates, as such interest is their primary source of income, the government has launched SCSC. Any person above 60 years of age or a person above 55 who has opted for early retirement can invest in this scheme a sum up to Rs 1.5 lakh in FDs of 5-year tenure.
9. Principal repayment of home loan: An individual who has taken a home loan can claim up to Rs 1.5 lakh as deduction under 80C for repayments made on account of principal amount to banks in any financial year.
10. National Savings Certificate: NSCs can be bought from designated post offices and come with a lock-in period of 5 years. Investments of up to Rs 1.5 lakh in NSCs can be made to save taxes under Section 80C.
11. National Pension Scheme: NPS has been started by the Government of India to allow unorganised sector and working professionals to have a pension after retirement. Investments of up to Rs 1.5 lakh can be used to avail tax deductions under Section 80C.
Please note that the aggregate of investments under all these options cannot exceed Rs 1.5 lakh per annum. The option you choose depends upon your income, age, risk profile and appetite, taxability of maturity proceeds, et cetra.