Investment options for tax benefit:
SECTION 80C
This is the most popular exemption as you can claim up to Rs. 1 lakh in deductions. The investment options include Employee Provident Fund (EPF), Public Provident Fund (PPF)- up to Rs.70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, Life insurance policies, Equity-Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), school fees, and home loan principal repayment. For making investments in this section you will have to decide on the ideal debt vs. equity mix that is right for you based on your age, risk-return profile, and goals.
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SECTION 80D
If you have taken a medical insurance plan for yourself, your spouse, dependent parents or children, you can claim deductions up to Rs 15,000 (and additional Rs 15,000 for your parents’ medical insurance) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.
SECTION 80DD
Expenses on the medical treatment of a dependent with a disability qualify for tax benefits under Section 80DD. In this case, deductions up to Rs 50,000 or 75.000 can be claimed based on the severity.
SECTION 80C DEDUCTIONS
Investment options under Section 80C can be broadly categorised as market linked, fixed income and insurance. The fixed income category includes investment options such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving bank fixed deposits, National Savings Certificate (NSC) and senior citizens savings schemes.
While it is the most popular tax saving category, market-linked instruments including tax-saving equity mutual funds (ELSS) and unit-linked insurance plans (ULIPs) are gradually catching up.
PUBLIC PROVIDENT FUND (PPF)
One of the oldest investment options, PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exempt-exempt-exempt) tax regime.
This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax.
PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to Rs 70,000 a year and mandatory investment tenure of 15 years.
An investment of Rs 70,000 every year in PPF for 15 years will amount to a tax-free maturity sum of Rs 20.5 lakh at the end of the 15-year tenure.
EMPLOYEE PROVIDENT FUND (EPF)
Under the current norms, 12% of the employee’s salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is considered as a voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of Rs 1 lakh per annum.
Like PPF, EPF also falls under the EEE tax regime wherein the interest received (on retirement from service) is tax-free in the hands of the investor. The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO). After having maintained a steady interest rate of 8.5% per annum for quite some time, the EPFO has enhanced the rate of interest to 9.5% for the financial year 2010-11.
While it is still not sure whether such an attractive interest rate will continue in the following years, those who have been contributing to EPF for quite some time now and have accumulated a large corpus are bound to benefit immensely with this year’s higher interest as interest is compounded annually.
NATIONAL SAVINGS CERTIFICATE
Similar to PPF, NSC also earns an interest rate of 8% per annum and investment up to Rs 1 lakh is exempt from tax under section 80C. However, unlike PPF, interest received on NSC, at the time of maturity, is taxable in the hands of the investor which makes it comparatively less attractive.
On the positive note, however, NSC has a relatively shorter lock-in period of just about 6 years and the interest here is compounded half-yearly. Thus, every Rs 100 invested into NSC will grow to Rs 160.10 on maturity.
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TAX SAVING BANK FDS
Investment up to Rs 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C.
These fixed deposits mandate a lock-in period of five years and interest is compounded quarterly, just like any other ordinary bank fixed deposit.
The drawback is taxability of interest income upon maturity. As most banks are currently offering attractive interest rates, tax-saving bank fixed deposits are currently offering interest rates as high as 8.5% to its investors.
SENIOR CITIZENS SAVING SCHEME
Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme, which offers a fairly attractive interest rate of 9% a year, payable on quarterly basis.
While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor.
EQUITY LINKED SAVINGS SCHEME (ELSS)
These tax saving mutual fund schemes do carry an embedded market risk and calls for investor prudence before making an investment decision. However, their returns are equally rewarding and tax-free in the hands of the investor.
As ELSS has a mandatory lock-in period of three years, they are positioned as long-term equity assets and thus returns are tax-free in the hands of the investor. And though these schemes mandate a three-year lock-in period, investors are likely to be better off if they continue to stay invested for a longer term as equities generate best returns over a longer time frame.
*The article is inspired by Economic Times Story.
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