Section 80C: Four popular options that can help you save up to Rs 46,800 in a financial year

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When it comes to tax-saving options, Section 80C of the Income Tax Act is of great use to taxpayers. This is because under this Section, an individual taxpayer can claim deductions of up to Rs 1.5 lakh in a financial year. The best part is you can pick investments according to your risk appetite. For instance, for risk-averse investors, there is PPF and for risk-takers, Equity Linked Savings Scheme or ELSS. Let us take a look at some of the popular options under Section 80C:

ELSS

Mutual funds pool in money from investors and invest on their behalf in stocks, bonds and money market. There are different types of categories such as equity-based mutual funds, debt based mutual funds or a combination of both known as hybrid mutual fund.

For tax saving purpose, ELSS is the category to invest in. These funds have a lock-in period of three years and mostly invest your money in largecap funds. Under Section 80C, you can invest in ELSS and claim deduction of up to Rs 1,50,000 a year, which can help you saving taxes up to Rs 46,800 a year. However, note that your investments are locked-in for three years from the date of investment. If you invest for the long term; then gains up to Rs 1,00,000 within a year is completely tax-free. But if your gains exceed 1,00,000 within a year then you are taxed 10% of your total gains. For example, if you earn Rs 5,00,000 per year and your taxable income is Rs 4,00,000 and you invest Rs 1,50,000 in ELSS then your taxable income is reduced to Rs 2,50,000 whereas in normal mutual fund it does not.

PPF

PPF was introduced by the National Savings Institute of the Ministry of Finance in 1968. Currently, the PPF interest rate is 7.1% and a lock-in of 15 years but you can extend the tenure in the multiples of 5 years.

The PPF is also a tax-free tool. But as all there is a catch, you cannot invest more than Rs 1,50,000 in PPF in a year. As a long-term investment plan. It has low risk but guaranteed reward tool in investment planning.

PPF is one of the few investment initiatives by the government that possess the triple exemptions benefits which means that PPF gets exemption from tax at all the levels of investment procedure namely investment, accrual, withdraw. While you benefit from tax deduction at the time of investment, interest and withdrawal amount are tax-free.

NPS

National Pension Scheme is an initiative by the Indian government to provide retirement benefits to all even the people from unorganised sectors. Regulated and administered by the PFRDA or Pension Fund Regulatory and Development Authority under the PFRDA Act 2013. You can claim an additional amount of Rs.50,000 , as NPS is only investment to provide tax benefits of up to Rs 2,00,000. The Rs.50,000 extra deduction on NPS is useful for those in the highest tax bracket of 30%, who can make an additional saving of Rs.16,000 in taxes. Upon maturity you can withdraw up to 60% of corpus tax-free and the remaining 40% has to be invested in a pension plan.

NPS gives you two investment options : Active and Auto choice. In active choice you can save regularly through different asset classes which are Equity (E), Corporate debt (C) and Government Bonds (G). In auto choice there is a Lifecycle Fund. You have to choose your Pension Fund Manager and your money get invested as per the Life cycle fund matrix on the basis of your age.

ULIPs

Unit Linked Insurance Plan is a combination of both investment and term insurance. A portion of your investment is directed towards insurance premium and the remaining is invested in stocks, bonds, money market etc. The best part is ULIPs allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of the market’s performance. There is no tax-liability on switching your funds from equity to debt or vice versa. The lock-in period was increased from 3 years to 5 years by the governing body (IRDAI) in 2010. But for an investor to utilise all the benefits you have to invest for at least 10-15 years as insurance is a long-term product.

In Budget 2021, the financial ministry announced that any gains from ULIPs will be treated as capital gains if, the premium paid of any year exceeds Rs 2.5 lakh and will be taxed at 10% on maturity.