Most people start thinking about tax savings during the last quarter of the financial year. Section 80C of the Income Tax Act offers several tax deductions and benefits. Individuals are advised to choose from the various eligible products, based on their risk appetite, current life stage, and expected returns.
Criteria to choose eligible investments:
- Return on investments: Contrary to popular belief, not every eligible product u/s 80C is an advantageous investment. There are several categories, such as savings options, allowed expenses like children tuition fees, and wealth creation products. Several investors opt for insurance plans to maximize their benefits under this section and often pay huge premiums, considering insurance is an excellent investment option. However, this is not accurate, because insurance offers financial security to your dependents in case of an untoward incident. While choosing an investment to take advantage of this section, individuals must ensure that they procure reasonable returns on their investments.
- Asset allocation: Any good financial plan must diversify the overall investment portfolio and achieve the right asset allocation balance. This balance is achieved by taking into consideration factors such as age, risk appetite, and life stage. Early stage investors may opt for more aggressive instruments, such as equity-linked savings schemes (ELSS), to maximize returns in the longer period. Using the National Pension System (NPS) to take advantage of an additional INR 50,000 deduction u/s 80C is also advisable. Investors closer to retirement may opt for less risky products like public provident fund (PPF) or employee provident fund (EPF) for the safety of their investments.
- Liquidity: Tax savings options like NPS, EPF, and PPF have restrictions on pre-mature withdrawals. In addition, investments under section 80C have minimum lock-in periods ranging from 3 years to several decades. Determining your cash flow requirements in the short and long term before opting for investment products is crucial to ensure you do not face any liquidity crises during your lifetime.
- Risk and return profile: The number of assured returns instruments like PPF u/s 80 C is decreasing. Most products now offer market-related returns, and knowing the amount of risk you are willing to assume before making your choice will be beneficial. Assured returns are available for instruments like National Savings Certificates (NSC), Kisan Vikas Patra (KVP), and post office time deposits. Floating returns products like PPF and EPF are also available, where the interest rates are periodically modified. Finally, although market-related products like NPS and ELSS provide higher returns, they are riskier because negative market fluctuations will significantly affect your overall earnings.
Eligible Investments
Benefits of investments made under section 80C are limited to a maximum of INR 1.5 lacs per year. However, NPS,which is slowly becoming the best pension plan in India, offers an additional tax deduction of INR 50,000 for subscribers.
Below are some of the eligible taxsaving investments available for tax benefits u/s 80C.
- Insurance premium paid for self, spouse, and dependent children
- Contributions made to provident funds under the regulations of the Provident Fund Act, 1925
- Investments made to unit-linked insurance plans offered by the Life Insurance Corporation and the Unit Trust of India
- Equity-linked savings schemes
- National Saving Certificate and post office time deposits
- Five-year bank fixed deposits
- Infrastructure bonds
There are several choices available to investors. This is why it is important to plan for section 80C&80CCD and draw up an investment plan to maximize the benefits and returns on your investments.
