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 favorite 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:
a. Life insurance policy premium
b. Sum paid under a contract for a deferred annuity
c. Sum deducted from the salary payable to Government servant for securing deferred annuity or making provision for his wife/children
d. Contributions made under Employees’ Provident Fund Scheme
e. Contribution to Public Provident Fund Account / any recognized Provident Fund
f. Contribution to an approved superannuation fund
g. Subscription to any notified security or notified deposit scheme of the Central Government like Sukanya Samriddhi Account Scheme
h. Subscription to National Savings Certificates (VIII Issue)
i. Contribution for participation in unit-linked Insurance Plan of UTI
j. Contribution to notified unit-linked insurance plan of LIC Mutual Fund
k. Subscription to notified deposit scheme or notified pension fund set up by National Housing Bank
l. Tuition fees (excluding development fees, donations, etc.) for full-time education of any 2 of his/her children
m. Certain payments for purchase/construction of residential house property
n. Sum paid towards notified annuity plan of LIC
o. Subscription to any units of any notified [u/s 10(23D)] Mutual Fund or the UTI (Equity Linked Saving Scheme, 2005)
p. 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)
q. Subscription to equity shares or debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions
r. Subscription to any units of any approved mutual fund referred to in section 10(23D)
s. Term deposits for a fixed period of not less than 5 years with a scheduled bank, and which is in accordance with a scheme 11 framed and notified
t. Subscription to notified bonds issued by the NABARD
u. Deposit in an account under the Senior Citizen Savings Scheme Rules, 2004
v. 5-year term deposit in an account under the Post Office Time Deposit Rules, 1981
2. 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 ₹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
3. 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 3 years.
Also, these funds do not have a maximum investment period like PPF (15 years) or FD (10 years) has. The capital gain on these investments will be counted as Long-term Capital Gains (LTCG), which is tax-free. Post the lock-in period, 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)|
4. What should you know about ELSS before you invest?
a. You may invest any amount you like in an Equity Linked Savings Scheme but it is only contributions of up to INR 1,50,000 that are tax-exempt under the Income Tax Act, Section 80C
b. It is one of the best investment options that offer tax benefits with potentially higher returns and short lock-in periods
c. The returns on Equity Linked Savings Schemes are tax-exempt whether it is dividend income or capital appreciation
d. You can continue to invest in this scheme even after the completion of the lock-in period of 3 years
e. The risk involved with ELSS is higher when compared to a Fixed Deposit or a PPF but the returns are potentially higher as well
5. Why invest via ClearTax?
ClearTax helps you choose handpicked and lucrative funds recommended by experts. You can choose to opt for our 100% paperless investment that saves on cost, time and effort. Your investment proof will be sent to your email instantly, so you don’t have to worry about the paperwork. So, why don’t you take the leap and invest via our platform?