India Income Tax Saving Options 2018 under 80C

The tax-saving season is in full swing. Most working professionals are confused as to their investment options for tax savings. Should I invest in PPF? Should I invest Investment in ELSS? Should I go for insurance?

At the beginning it must be noted that investment, tax savings and insurance are three separate things.

  • Investment means that one sets aside an amount today so that he/ she can get a much larger amount in the future.
  • Tax saving is a process to ensure that one pays the least amount of tax possible in a legal manner.
  • Insurance is a product which secures us against future uncertainties.

In this post I will talk about various income tax savings options in India in 2018.

There is an old English saying that the only things that are certain are death and taxes. We cannot avoid taxes, but we certainly reduce taxes to a great degree. For this we must ensure that we do tax planning from the beginning of the Financial Year itself and not at the end. Generally most of my friends in software, information technology and banking services, wait till the last moment before they do their investments. That is wrong.

We need to be smart about tax savings options. For salaried employees, tax savings can be done through tax savings investments. There are quite a few tax savings instruments. Many people often select random products to avid tax benefits or listen to advice of their colleagues or friends or office income tax person without doing adequate due diligence. That is not a good approach. Any tax savings instrument should have the following characteristics:

  1. High returns
  2. Low risk
  3. High tax savings
  4. Easy to understand and use

Income Tax Saving Options under 80C

For salaried individuals, the list of tax savings instruments are specified in Section 80C on Income tax act where up to Rs 1.5 lakh deduction may be availed. It should be noted that deduction is a maximum of Rs. 150,000 which is the aggregate of the deduction that may be claimed under sections 80C, 80CCC and 80CCD.

Let us understand this with an example:

  • Ram has an annual income of Rs 4 lakhs.
  • As per current tax slabs, Rs 2.5 lakhs is nontaxable.
  • Hence taxable income is Rs 1.5 lakhs.
  • Tax rate is 5% – hence total tax to be paid is 5% of Rs 1.5 lakhs, or Rs 7,500/-

Activities under 80C can be divided into three categories:

  • Investment in Fixed Income Products like NSC, FD
  • Investment in Market Linked Products like ELSS
  • Spending activities like home loan principal payment

Now let us assume that Mr. Ram buys Rs 1.5 lakhs of tax savings products. In that case, he does not have to pay any taxes. I have presented the calculation below.

  • Annual income of Rs 4 lakhs.
  • As per current tax slabs, Rs 2.5 lakhs is nontaxable.
  • Deduction under Section 80C Rs 1.5 lakhs
  • Nil taxable income
  • Hence no taxes

Hopefully Mr Ram’s investment will also give good returns. For example, if Mr Ram had purchased a tax savings Fixed Deposit @ 7.5% interest rate, after 5 years he will get back Rs 2.15 lakhs.

The above is an example of a tax savings investment product.

Apart from this there are tax savings insurance options, where one purchases an insurance product or a hybrid product. In this case, tax benefits are availed along with future security.

Popular products, schemes and options under Section 80C are:

  1. Employee Provident fund
  2. Public Provident Fund
  3. 5-year term deposit in an account under the Post Office Time Deposit
  4. Tax Savings Fixed Deposit
  5. Post Office National Savings Certificates
  6. Unit Linked Insurance Plans (ULIP)
  7. Sukanya Samriddhi Yojana
  8. Life insurance premium
  9. Tuition fees to any university, college, school or other educational institution situated in India, for full time education of any 2 of his/her children
  10. Repayment of the principal of a loan

Other Income Tax Saving Options under 80C

Apart from this, some other options under 80C are:

  1. Senior Citizens Savings Scheme (SCSS)
  2. Notified bonds issued by the NABARD
  3. Notified savings certificates [National Savings Certificates (VIII Issue)]
  4. Notified deposit scheme or notified pension fund set up by National Housing Bank

Additional Tax Savings under 80C (80CCD)

Additional income tax deduction of Rs. 50,000 is allowed for contribution to the National Pension Scheme (NPS) under Section 80CCD and this increases the total deduction to Rs. 2 lakh.

Deduction allowable from Income for payment of Life Insurance Premium

  1. Life Insurance premia paid under an insurance policy, issued on or before the 31-Mar-2012 shall be eligible for deduction only to the extent of 20% of the actual capital sum assured or actual premium paid whichever is less
  2. Life Insurance premia paid under an insurance policy, issued on or after 1-Apr-2012 shall be eligible for deduction only to the extent of 10% of the actual capital sum assured or actual premium paid whichever is less
  3. Contribution to deferred annuity plans
  4. Contribution to Annuity Plans
    1. New Jeevan Dhara
    2. New Jeevan Dhara-I
    3. Jeevan Akshaya – VI

Categorization of Products by Nature of Investment

  • Retirement
    • Provident Fund (EPF/VPF)
    • New Pension Scheme (NPS) (u/s 80CCD) Atal Pension Yojana
  • Retirement Annuity
    • Pension Plans from Insurance Companies
  • Long Term Fixed Income
    • Public Provident Fund (PPF)
    • National Saving Certificate (NSC)
  • Long Term Debt
    • Tax Saving 5 years FD from Banks
    • 5 years Post Office Time Deposit (POTD)
    • Senior Citizen Saving Scheme(SCSS)
    • NHB deposit scheme
  • Life Insurance & Investment
    • Life Insurance Premium (Participating Endowment Plans)
    • Unit Linked Insurance Plan (ULIP)
  • Equity Mutual Fund
    • Equity Linked Savings Scheme (ELSS)

References

https://www.incometaxindia.gov.in/Charts%20%20Tables/Deductions.htm

https://www.licindia.in/getattachment/Customer-Services/Tax-Benefit/INCOME-TAX-FY2016-17.pdf.aspx

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This post is for educational purpose only. Before making any investment decision, please contact your financial adviser.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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