Many investors don’t think about the consequences of taxation while investing. For instance, an investor is happy if he approximately gets 8% to 9% interest from a fixed deposit scheme. However, if the interest income is fully taxable, then the effective post-tax return for the investor is just 5.6%– 6.3%. This return may not be sufficient to keep up with the inflation rate relating to the typical middle income urban Indian investor. On the other hand, mutual funds are one of the most tax-friendly investment options available to Indian investors. This article will take you through the concept of section 80c, benefits of mutual fund tax, different deductions on investments under section 80c and more.
Section 80C of the Income Tax Act was introduced on 1 April 2006. Basically, it provides certain expenditures and investments to be exempt from tax. If you plan your investments well and split them intelligently across different investment assets such as PPF, NSC, and more you can claim deductions up to INR 1.5 lakh, thereby lowering your tax liability.
PPF accounts have a maximum investment limit of Rs. 1,50,000 per year. The money deposited in this type of account will be locked-in for a period of 15 years. Partial withdrawals are permitted after 7 years. Thus, all deposits made to your PPF account can be claimed as deductions under Section 80C.
PF is automatically deducted from your monthly salary where both the employee and employer contribute to PF. The contribution by the employer is exempt from tax, whereas the contribution by the employee is eligible for deductions under Section 80C of the Income Tax Act.
Premiums paid to multiple life insurance policies are eligible for tax benefits under Section 80C. This deduction can be claimed for premiums paid towards covering self, spouse, dependent children and any member of Hindu Undivided Family.
To encourage taxpayers to park their money in the National Savings Certificate scheme, the government has allowed tax deductions to be claimed under Section 80C on the investments made in it. Interest earned on this scheme is liable to tax. The interest rate on this scheme is similar to that of tax-saving fixed deposits, PPF and other fixed-income earning instruments.
Sukanya Samriddhi Yojana is basically a saving scheme for the girl child. Investments made in this scheme are eligible for a tax deduction. A parent or legal guardian of a girl child within the age limit of 10 years can open this account. However, the account can be opened for two girl children (one account per girl child) and can be extended to a third if twins are involved.
For wealth creation over a long period, equity schemes are an ideal option. By Investing in these schemes you need to wait for a mandatory lock-in period of three years from the date of investment. Make sure you invest for a longer time frame like five to seven years.
Most of the banks offer tax-saving fixed deposits where deductions can be claimed under Section 80C of the Income Tax Act. However, the condition associated is that they come with a lock-in period of five years. This type of investment doesn’t allow Premature withdrawal. Interest earned on tax saver fixed deposits are taxable and will be deducted at source.
This scheme has a tenure of 5 years. To invest in this scheme, an individual has to be at least 60 years of age. On the other hand, those who have taken VRS (voluntary retirement scheme) can opt for it after the age of 55.
While purchasing a property, the huge expenses one has to bear is the stamp duty and registration charges. Here, the deduction can only be claimed once the construction is complete and you have legal possession of the house.
Tax deduction: Rs. 1,50,000
It includes payments made toward pension plans or annuity plans of insurance companies.
Tax deduction: Rs. 1,50,000
This section includes contributions made to the Pension Scheme of Central Government. This deduction is not available for HUFs but only for individuals.
Tax deduction: Rs. 20,000
Investments made toward long-term government-approved infrastructure bonds.
Tax deduction: Rs. 25,000
Investments made under a government-approved equity savings scheme.
1. Can I switch from one fund to another?
No, you cannot switch from one fund to another as the ELSS tax saving fund comes with a lock-in period of 3 years.
2. By investing Rs.2 lakh in a tax saving mutual fund, can I claim tax benefits for the entire investment?
No. You can claim income tax benefits only up to Rs.1 lakh to Rs.1.5 lakh in an equity-linked savings scheme.
3. Should I initially invest in ELSS?
Yes, until you reach your limit of saving up to Rs. 1.5 lakh rupees, your investments in mutual funds must go in an ELSS fund through SIP mode.
4. What is the maximal amount I can invest in these funds?
There is no limit on how much can be invested in these funds. It all depends on the investors how much he wants to invest in a fund.