Tax saving investing options in 80C

The options saving under section 80C are as follows:

Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF) : Employee Provident Fund(EPF) is automatically deducted from salary. Both you and your employer contribute to it. Under the current norms, 12% of the employee’s salary is contributed towards EPF, which is exempt from income tax. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit per annum. EPF, falls under the EEE tax regime wherein the interest received (on retirement from service or withdrawal after 5 years of service) is tax-free in the hands of the investor. The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO).

Public Provident Fund (PPF) : PPF offers an interest rate of around 8-9% compounded annually and mandatory investment tenure of 15 years. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. Only the amounts which are actually cleared on or before the 5th of the month are eligible for that month’s interest. Money cannot be withdrawn before the completion of 6 years. It falls under EEE (exempt-exempt-exempt) tax regime i.e not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax. The government of India decides the rate of interest for PPF account. The current interest rate effective from 1 April 2012 is 8.8% p.a(compounded annually).

Tax Deduction

National Savings Certificate (NSC) : NSC also offers a return of around 8% on half yearly compounding basis. Interest accrued on NSC is also eligible for Section 80 C benefit. Interest received on NSC, at the time of maturity, is taxable in the hands of the investor. Earlier only a 6 year National Savings Certificate was available for investors. Since 1 April 2012 two types of NSCs are on offer:

NSC VIII Issue : 5 year instrument with current interest rate as 8.6% . Maturity value of Rs 100 shall be 152.35 after 5 years.

NSC IX Issue: 10 year instrument with current interest rate as 8.9%. Maturity value of Rs 100 shall be 234.35 after 5 years.

The government of India decides the rate of interest for new NSCs. For NSCs bought the interest rate remains constant for the entire tenure i.e Unlike many other instruments where a change in the interest rate is applicable to an existing investment(EPF, PPF) here the rate is locked in at the time of making of the investment.

Tax saving Bank Fixed Deposits : These are like regular fixed deposits with interest being compounded quarterly but with a lock-in period of five years. Investment up to Rs 1 lakh in these special tax saving bank fixed deposits entails an investor tax deduction under Section 80C. Most public and private banks offer these tax saving FDs such HDFC Bank. The drawback is taxability of interest income upon maturity.It is important to note that there is no option for premature withdrawal even with penalty for tax savings FD and the interest is taxable.

Senior Citizens Saving Schemes (SCSS) : Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme. If offers interest rate of 9.3% a year, payable on quarterly basis. Maximum investment is upto 15 lakh. It has lock in of 5 years which can be extended by 3 years. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor. Tax is deducted at Source (TDS) .The government of India decides the rate of interest for SCSS.

Equity Linked Saving Schemes (ELSS) : These are Diversified Equity mutual Fund schemes, which invest in stock market, with lock in of 3 years. The returns are linked to the performance of equity markets, hence are volatile.If one invests in ELSS by means of SIP (Systematic Investment Plan)every monthly investment carries a lock in period of 3 years not the date of first investment.

Life Insurance Premium: Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction.If you are paying premium for more than one insurance policy, all the premiums can be included. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry. An insurance plan will be eligible for tax deduction and the income will be tax-free only if it covers the policyholder for 10 times the annual premium. Till 2011, policies were required to offer a cover of five times the annual premium for tax breaks. Please note that life insurance premium paid by you for your parents (father / mother / both) or your in-laws is not eligible for deduction under section 80C.

Unit Linked Insurance Plans (ULIPS): Ulips, or market linked insurance schemes provide investors the benefit of both life cover and investment in equity and debt market. These are the insurance plans where a portion of premium is used for insurance, rest is invested in a mutual fund (equity ,debt) hence returns of these plans are market linked. These plans are complex & also expensive as they cover charges for insurance(mortality charges), fund management,Premium Allocation Charges.