An income tax is a tax imposed on individuals or entities by the government which forms an important component of any country’s revenue collection which in turn is utilised to meet welfare and infrastructure expenses provided to the citizens. While these taxes can be harsh on the tax payer, the government also provides certain provisions to reduce tax liability. Once such provision is Section 80C under the Income Tax Act.
Firstly, lets understand the meaning of ‘Tax Deduction.’ It basically helps reduce your taxable income and reduced your overall tax liability. Depending on the type of deduction you claim, the deductible amount varies. Various day-to-day expenses qualify for tax deductions. Information about these expenses is very important in order to save money.
Tax Deductions Under Section 80C:
Section 80C and its various sub-sections, offer various alternatives for tax rebate applicable to several payments and investments made. Under this section, any individual or HUF is entitled to tax rebate upto Rs. 1,50,000/- every fiscal year. Not only does this reduce the tax liability, but it also promotes savings amongst the salaried class.
Popular Investments eligible under Section 80C are -
Public Provident Fund (PPF) - This scheme is a non-risky long term investment option backed by the government of India. Maturity period of a PPF account is 15 years but can be extended by 5 years. Partial withdrawals are allowed only after 7 years. Maximum investment limit is Rs. 1,50,000/- per annum. Current interest rate is 7.9% p.a. (compounded yearly) to be re-aligned on a quarterly basis.
Employee Provident Fund (EPF) - This scheme is a non-risky retirement benefit scheme available to salaried employees. The employer and employee both have to contribute equally (12% of basic salary) to the provident fund account of the employee. A higher amount can be contributed by the employee through Voluntary contributions (VPF). An employee can voluntarily increase his contribution upto 100% of Basic + D.A. Current interest rate is 8.65% p.a. to be re-aligned on a quarterly basis.
National Savings Certificate (NSC) - This scheme is a non-risky postal department saving scheme which is highly secure. It usually comes with a lock in period of 5 and 10 years. There is no maximum investment limit in this investment. Interest rate is 7.9% compounded annual for 5 years.
Equity Linked Savings Schemes (ELSS) - This scheme is a risky open ended Equity Mutual Fund which helps to grow money at a comparatively faster rate. This is considered a riskier option than the other investments since its performance is directly related to the equity market which may witness fluctuations over a period of time. There is no upper limit for investment in this scheme. Rate of return is directly related to the performance of the equity market.
Sukanya Samriddhi Scheme - This is a non-risky scheme wherein parents/guardians can open an account in the name of a girl chid till she attains the age of 10 years. These accounts can be owned at public sector banks and post offices. Maximum investment limit is Rs. 1,50,000/- per annum. Maximum investment limit is Rs. 15,00,000/-. Current rate of interest is 8.4% p.a. (compounded annually).
Senior Citizens Savings Scheme (SCSS) - This is a non-risky scheme for senior citizens maturity period of which is 5 years. The account can be extended by 3 more years after maturity. Current interest rate is 8.4% p.a. which is paid out on a quarterly basis.
Unit Linked Insurance Plan (ULIP) - This is risky scheme which is a life insurance product that is a combination of investment and insurance. This implies that a portion of the money invested will be used to provide risk cover and the balance will be invested into the stock market. This is considered a riskier option than the other investments since its performance is directly related to the equity market which may witness fluctuations over a period of time. There is no upper limit for investment in this scheme. Rate of return is market linked.
Effective investment and utilisation of the above investment options can not only help to reduce tax liability but also inculcate a habit of savings and grow money. It is always better to plan your 80C investments through the fiscal year rather than rushing towards the end of the year just to exhaust the 80C limit.
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