Best Tax-Saving Investment Options Available Under Section 80C

This is the first month of the financial year, and several people are possibly planning for their annual 80C investments. While there are several other deductions, which are beneficial to the taxpayers, but over the years, investments made under Section 80C of the Income Tax Act, 1961, have emerged as the most popular option. 

It allows reducing the taxable income by making tax-saving instruments or incurring eligible expenses. It allows both individuals and Hindu Undivided Family (HUF) to claim a cumulative deduction of up to Rs 1.5 lakh per annum for certain specified investments made by them during a particular financial year. However, companies, partnership firms, and LLPs cannot avail themselves of this deduction. Section 80C includes subsections also – namely 80CCC, 80CCD (1), 80CCD (1b), and 80CCD (2). 

Section 80C allows deduction for investment made in Employees’ Provident Fund (EPF), Public Provident Fund (PPF), equity-linked savings scheme (ELSS), and payments made towards life insurance premium and the principal amount on a home loan, stamp duty and registration charges for purchase of property.

Investments made in Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), unit-linked insurance plans (Ulips), tax-saving FD for five years, and infrastructure bonds, also qualify for deduction under Section 80C of the Income Tax Act, 1961.

Here are some of the best tax saving investment options available under Section 80C: 

Equity-Linked Savings Scheme

ELSS are mutual funds that allow you to invest in the stock market and claim deductions under Section 80C. Data shows that of the 14 ELSS schemes that have existed in the last 20 years, 13 have delivered average returns of at least 13 per cent per annum. With a three-year lock-in period, ELSS funds have the shortest lock-ins among tax-saving investments. 

“Investment in ELSS is considered the best tax-saving option. These funds are specially designed to give you the dual benefit of saving taxes and getting higher returns on investment,” says Archit Gupta, founder and CEO, Cleartax, a tax portal. 

Eligibility: Investor needs to be KYC compliant to be able to invest in ELSS.

Liquidity: They have a lock-in period of three years.

Return: The returns are market-linked.

Investment Limit: Minimum investment varies across fund houses; there is no maximum limit.

Tax Treatment: Long-term capital gains of up to Rs 1 lakh is tax-free. Dividends are added to overall income and taxed at the applicable income tax slab rate.

Five-Year Tax-Saving FDs

Tax-saving FDs are like regular fixed deposits, but come with a lock-in period of five years and a tax-break under Section 80C on investments of up to Rs 1.5 lakh.

Eligibility: This can be opened by resident Indians.

Liquidity: Fixed deposits have a lock-in period of five years.

Rate of Interest: The rate of interest across different banks ranges from 5.5-7.75 per cent.

Investment Limit: Minimum investment limit is Rs 1,000.

Tax Treatment: Interest earned is taxable.

Public Provident Fund

PPF are long-term investments backed by the Government of India. Deposits made in a PPF account are eligible for tax deductions under Section 80C.

Eligibility: It can be opened by resident Indian individuals, and salaried and non-salaried individuals. An HUF cannot open a PPF account.

Liquidity: PPF accounts have a lock-in period of 15 years, but can be further extended by five years. Partial withdrawals are allowed after seven years.

Rate of Interest: At present, the rate of interest is 7.1 per cent per annum. 

Investment Limit: Minimum and maximum investment limit is Rs 500 and Rs 1.5 lakh, respectively.

Tax Treatment: Interest earned is tax-free.

Employees’ Provident Fund

EPF is a retirement benefits scheme that is available to all salaried employees. This amounts to 12 per cent of basic salary + DA, which is deducted by an employer and deposited in the EPF or other recognised provident funds.

Eligibility: Can be opened by an employee with a basic salary greater than Rs 15,000 per month.

Liquidity: Can withdraw PF balance after two months of leaving a job, provided the employee does not take up employment within two months with an employer covered by the PF Act.

Rate of Interest: The rate of interest on EPF is 8.5 per cent for the financial year 2020-21.

Investment Limit: Both employer and employee have to contribute a minimum of 12 per cent of Basic Pay + D.A.

Tax Treatment: Entire EPF balance (including interest) is tax-free if withdrawn after continuous service of five years

National Pension System

The NPS is a pension scheme that the Indian government has started to allow the 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. An additional deduction of Rs 50,000 is available for NPS contribution over and above the Section 80C limit of Rs 1.5 lakh.

Eligibility: Can be opened by every Indian citizen between the age of 18 and 60 years.

Liquidity: Partial withdrawals are allowed after 10 years, but under special conditions.

Rate of Return: The returns on NPS varies between 12 and 14 per cent.

Investment Limit: There is no limit on the maximum contribution.

Tax Treatment: Employer contributions are tax-free, subject to 10 per cent of the basic salary and dearness allowance (14 per cent in case of central/state government employees)

Unit-Linked Insurance Plans

Ulips are a mix of insurance and investment. A part of the invested amount in Ulips is used to provide insurance, and the rest of the amount is invested in the stock market. Investments of up to Rs 1.5 lakh in Ulips are eligible for tax breaks under Section 80C. But if the annual premium exceeds Rs 2.5 lakh in any year, then the proceeds from such ULIPs are taxable.

Eligibility: An investor can buy Ulip for self, spouse or child.

Liquidity: Have a lock-in period of five years.

Rate of Return: The return varies between 12 and 14 per cent.

Investment Limit: There is no limit on maximum contribution. 

Tax Treatment: Investment and withdrawals and maturity amount are tax-free. 

Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana is one of the most popular schemes by the Government of India. The scheme is aimed at the betterment of girl children in the country.

Eligibility: Parents or guardians can open an account in the name of a girl child till she attains the age of 10 years.

Liquidity: Up to 50 per cent of the deposit amount can be prematurely withdrawn once the girl reaches the age of 18 years.

Rate of Interest: The rate of interest is 7.6 per cent.

Investment Limit: Investment is limited to a maximum of Rs 1.5 lakh in a financial year.

Tax Treatment: Investment and withdrawals, and the maturity amount are tax-free. 

Payments eligible for tax saving deductions under Section 80C

Life Insurance Premiums

“The annual premium paid for life insurance in the taxpayer’s name or for the taxpayer’s wife and children is an eligible tax-saving payment under Section 80C. The deduction is valid only if the premium is less than 10 per cent of the sum assured,” says Gupta. 

Expenses For Children’s Tuition Fees

The tuition fee paid for the education of two children is eligible for tax deduction under Section 80C for a sum up to Rs 1.5 lakh. The fee can be paid to any school, college, university or educational institute situated in India. The fees have to be for a full-time course only.

Repayment Of Home Loan

The repayment of the principal amount on a loan taken to buy or construct a residential property is eligible for tax deduction under Section 80C. This deduction is also applicable on the stamp duty, registration fees and transfer expenses.