Tax saving investment is an important financial planning tool where one can invest to save tax. Section 80C of Income Tax Act 1961 is one of the best tax saving instrument in India. It allows investors to claim deductions from their taxable income by investing in certain eligible investment schemes. You can claim the deduction from the taxable income subject to a maximum limit of Rs 150,000 under 80C. For example, if you invest Rs 100,000 in a scheme u/s 80C, your taxable income will become lower by Rs 100,000 for the purpose of tax calculation – if you are in 30% tax bracket you can save Rs 31,200 in tax including 4% income-tax cess. You can save a maximum amount of Rs 46,800 in taxes every year by investing Rs 150,000 in schemes u/s 80C (if you are in 30% tax bracket).
Let us discuss tax saving instrument under section 80C in India
There are many tax saving instruments available under section 80C.one can avail section 80C which provide a deduction of up to Rs 1,50,000 in one of the miscellaneous investments and specified expenses.For example- PPF, investment in ELSS, tax saver FDs, national saving certificates(NSC). Some of the expenses that cover section 80C deduction are tuition fees, principal repayment of home loan etc. These investments have different provide a different return on the basis of their risk.
Tax saving investment plans
There are broadly two categories of investments u/s 80C – risk-free and market-linked. Risk-free investment schemes under Section 80C are Public Provident Fund, National Savings Certificates, tax saver FDs etc. Traditional life insurance plans, another investment scheme u/s 80C, are also risk-free investments. That is so because the investor will surely get the amount in the event of an unfortunate event.
It includes sum assured plus bonus (declared every year) upon the maturity of the policy.The market-linked investments under Section 80C are mutual fund equity-linked savings schemes (ELSS) or tax saver funds, Unit Linked Insurance Plans, and National Pension Scheme. Not all market-linked investments provide the same return. and same liquidity.
The below table summarizes the interest rates/returns and other characteristics of the popular tax saving investment option under Section 80C.
Saving taxes should not mean locking up your money for long periods of time. Longer lock-in periods constrains your flexibility. You can see that tax saver funds or ELSS schemes provide superior liquidity compared to all other 80C investment options. We do not suggest that you redeem your ELSS investments immediately after the lock-in period. But the small lock-in period is a significant advantage for ELSS vis a vis other 80C investments. So one can have ELSS if you need liquidity from your investment for any planned or unplanned reason.
Tax saver funds or ELSS is also one of the most tax-friendly investment options u/s 80C. Though this year’s budget introduces long-term capital gains tax at 10%, the taxability of ELSS is still more attractive than some of the other 80C investment options.
Return on equity market
ELSS or tax saver funds invest in equity or equity-related securities with the objective of generating capital appreciation for investors. Historical data says that equity is still the best performing asset class in the long term. In the last 20 years, the Sensex has given 11.66% return. This return is much higher than the return on risk-free investments. While equity markets are volatile, as we are seeing right now, but equities have the potential to beat the inflation. Equity Linked Savings Schemes are diversified equity funds with a lock-in feature. ELSS funds as a category have given nearly 25% returns in the last one year, 11% returns in the last 3 years and 19% returns in the last 5 years.
While as a product category, tax saver funds or ELSS outperformed other 80C investments over the last 1 to 5 years, the performance differential among different ELSS funds can be quite substantial. Investors should select funds based on the long-term track record of the fund manager. Good fund managers have a consistent investment strategy and have conviction in their strategy.
ELSS vs risk-free investments
if we compare the difference between the two investments, they both have a lock-in period. However, the lock period of risk-free investments is higher than ELSS. For example, the lock-in period of PPF is 15 years, whereas ELSS has 3 years lock-in period. Even a national savings certificate has a lock-in period of 5 years. However, as an investor, you should not treat ELSS as a short-term investment product. It is always better to link ELSS with a long-term horizon. This will help you to stay invested in the product even after lock-in period.
ELSS is risky, however, you can overcome this if you are invested for a long-term horizon. ELSS can provide an unbelievable return after staying invested for a longer period. Risk-free investments provide stable returns to the investors but it doesn’t beat the current high inflation. And if we talk about FDs, the interest rates are falling like nine pins.Moreover, interest earned on these fixed-income investments is taxable depending upon the slab rate of the individuals. investors must understand that equity has the potential to give superior returns than other risk-free asset classes over a long period.
While investing in various tax saving investment plans, one must consider the risk factor and liquidity. Investing in PPF is safe but the liquidity is very low. Tax saving FDs provides safety and little liquidity too. While investing in Equity scheme, the investors must be careful that mutual fund investments are risky and subject to market risk, so please read all scheme related documents carefully before investing.
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