Investments for good returns are ideally what investors look for while choosing an investment instrument. But wouldn't it be wonderful if your investments also have the added benefit of tax saving? But is that even an option?
Yes! Under Section 80C, which highlights ‘deductions on investments’, investors can reduce their taxable income by making tax-saving investments or incurring qualified expenses. This section enables a maximum deduction of Rs 1.5 lakh from the investor's total income per year.
So the next question that pops up is, where to invest?
We have this sorted for you. Archit Gupta, founder, and CEO of Clear Tax has helped Business Today curate a list of investment options, which give investors the added benefit of tax saving.
1. Tax-saving Fixed Deposits
Tax-saving FDs are like regular fixed deposits but come with a lock-in period of 5 years and a tax break under Section 80C on investments of up to Rs 1.5 lakh.
Eligibility: Can be opened by Resident Indian individuals.
Liquidity: Fixed Deposits have lock-in period of 5 years.
Rate of Interest: FD interest rate across different banks ranges from 5.5 per cent to 7.75 per cent.
Investment Limit: Minimum investment limit is Rs 1000.
Tax Treatment: Interest earned in taxable.
2. Public Provident Funds (PPF)
Investments in 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: Can be opened by Resident Indian individuals, salaried and non-salaried individuals. A HUF cannot open a PPF account.
Liquidity: PPF accounts have a lock-in period of 15 years, but can be further extended by 5 years. Partial withdrawals are allowed after 7 years.
Rate of Interest: Current interest rate is 7.1 per cent p.a.
Investment Limit: Minimum and maximum investment limit is Rs 500 and Rs 1.5 lakh respectively.
Tax Treatment: Interest earned is tax-free.
3. Employee Provident Fund (EPF)
EPF is a retirement benefit scheme that is available to all salaried employees. This amounts to 12 per cent of basic salary + DA, that 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 15,000 /month.
Liquidity: Can withdraw PF balance after 2 months of leaving a job and does not take up employment within two months with an employer covered by PF Act.
Rate of Interest: The interest rate on the 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 PF balance (including interest) is tax-free if withdrawn after continuous service of 5 years. However, if EPF /VPF contribution is above Rs. 2.5 lakh in any year, the interest earned on such excess contribution is now taxable, however, the limit is increased to Rs 5 lakh where the employer has not contributed to the fund (i.e. for government employees).
4. National Pension System (NPS)
The NPS is a pension scheme that has been started by the Indian Government 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 of tax deductions under Section 80C. Additional Rs 50,000 deduction is available for NPS contribution over and above Section 80C limit of Rs 1.5 lakh.
Eligibility: Can be opened by every Indian citizen between the age of 18 and 70.
Liquidity: Partial withdrawals are allowed after 3 years but under special conditions.
Rate of Returns: Returns rate on the NPS varies between 12 per cent – 14 per cent.
Investment Limit: No limit on 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).
5. Unit-linked Insurance Plans (ULIPs)
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 markets. Investments of up to Rs 1.5 lakh in ULIPs are eligible for tax breaks under Section 80C.
Eligibility: An investor can buy ULIP for self or spouse or child.
Liquidity: Interest rate varies as it is market-linked.
Rate of Returns: Return rate on the ULIP varies between 12 per cent – 14 per cent.
Investment Limit: No limit on maximum contribution.
Tax Treatment: Investment and withdrawals and maturity amounts are tax-free. But if the annual premium exceeds Rs 2.5 lakh in any year during the term of the policy, then proceeds of such ULIPs shall be taxable.
6. Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana/Scheme 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/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 interest rate on Sukanya Samriddhi Yojana is 7.6 per cent
Investment Limit: Investment is limited to a maximum of Rs 1,50,000 in a financial year
Tax Treatment: Investment and withdrawals & maturity amounts are tax-free
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