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Retirement planning and tax-saving are two primary investment objectives of most investors. Investment options which offer tax benefits and an opportunity to create wealth are always a favourite of the investing community. The Government of India, under Section 80C of the Income Tax Act, provides a list of investments/expenditures which offer tax deductions to people. Here is the list:
- Life insurance policy premium
- Sum paid under a contract for a deferred annuity
- Sum deducted from the salary payable to the government servant for securing deferred annuity or making provision for his wife/children
- Contributions made under Employees’ Provident Fund Scheme
- Contribution to Public Provident Fund Account/any recognised provident fund
- Contribution to an approved superannuation fund
- Subscription to any notified security or notified deposit scheme of the Central Government like Sukanya Samriddhi Account Scheme
- Subscription to National Savings Certificates (VIII Issue)
- Contribution for participation in the unit-linked insurance plan of UTI
- Contribution to a notified unit-linked insurance plan of LIC Mutual Fund
- Subscription to notified deposit scheme or notified pension fund set up by the National Housing Bank
- Tuition fees (excluding development fees, donations, etc.) for full-time education of any two of his/her children
- Certain payments for purchase/construction of residential house property
- Sum paid towards notified annuity plan of LIC
- Subscription to any units of any notified [u/s 10(23D)] mutual fund or the UTI (Equity Linked Saving Scheme, 2005)
- Contribution to any pension fund set up by any mutual fund, which is referred to in section 10(23D) or by the UTI (UTI Retirement Benefit Pension Fund)
- Subscription to equity shares or debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions
- Subscription to any units of any approved mutual fund referred to in section 10(23D)
- Term deposits for a fixed period of not less than five years with a scheduled bank, and which is under a scheme 11 framed and notified
- Subscribing notified bonds issued by NABARD
- Deposit in an account under the Senior Citizen Savings Scheme Rules 2004
- 5-year term deposit in an account under the Post Office Time Deposit Rules 1981
How can you save tax and earn high returns simultaneously?
With such a long list of options, choosing the right investment can be a daunting task, to say the least. The aim of any tax-saving investment is not only to lower the tax payable but also to save for the future and create a corpus of emergency funds. Now, you could only invest in the traditional Section 80C approved investments – like LIC and PPF – and make do with that. But if you want to grow your wealth, you have to invest in a tool that promises you high returns long term.
ELSS funds have been the most preferred option in recent years for the following reasons:
a. ELSS funds offer a tax deduction of up to Rs 150,000 under Section 80C of the Income Tax Act
b. These funds offer the EEE benefit – tax exemption, wealth accumulation, and zero exit load
c. Further, these funds invest primarily in the equity market in a diversified manner, which gives investors a good opportunity to earn inflation-beating returns
How can you invest in ELSS and earn high with low lock-in periods?
Of all the investment options available under Section 80C, ELSS funds offer the lowest lock-in period of only three years. Also, these funds do not have a limit on the investible amount. Once the lock-in period is completed, the investor can choose to liquidate the investment or stay invested, based on the fund performance. Here is a quick glimpse at how ELSS compares with the other commonly used tax-saving investments:
|Lock-in period||3 years||15 years||5 years||5 years||Till retirement|
|Tax on returns||No||No||Yes||Yes||Yes (partially)|
*Investors may choose the funds as per their goals. Returns are subject to change.
What should you know about ELSS before you invest?
- You may invest any amount you like in an Equity-Linked Savings Scheme, but it is only contributions of up to Rs 1,50,000 that are tax-exempt under the Income Tax Act, Section 80C
- It is one of the best investment options that offer tax benefits with potentially higher returns and short lock-in periods
- The returns on Equity-Linked Savings Schemes are tax-exempt whether it is dividend income or capital appreciation
- You can continue to invest in this scheme even after the completion of the lock-in period of three years.
- The risk involved with ELSS is higher when compared to a fixed deposit or a PPF, but the returns are potentially higher as well.
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