To boost savings among the Indian population, Finance Minister Arun Jaitley may be contemplating increasing the tax exemptions according to section 80C falling under the Income Tax Act to INR 2 lakh. Currently, the maximum limit under this section is INR 1.5 lakh per annum.
There are several investment options eligible for tax deductions as per section 80C. Some of these include Public Provident Fund (PPF), National Pension System (NPS), National Savings Certificate (NSC), tax-saving fixed deposits (FDs), Equity-Linked Savings Schemes (ELSS), and many more.
How will the increased limit affect investors?
The primary aim to enhance the section 80C limit is to encourage investors to increase their annual savings. Generally, investors save their funds in unproductive physical assets such as real estate or gold. The government aims to shift these investments to more lucrative investment avenues.
If an individual earns INR 15 lakh per annum, currently he pays income tax on INR 13.5 lakh after reducing the section 80C deductions. However, with an enhanced limit, his taxable income will reduce to INR 13 lakh. This will allow him to not only invest more in higher returns investments but also help him to save tax. Moreover, a hike in the investment limit would provide relief to salaried individuals who face plenty of trouble due to the constantly rising rate of inflation.
How to claim tax benefits
The most common way for taxpayers to reduce their tax liability is to use the tax saving options under section 80C. They may decrease their invested amount from the gross total income and then calculate their income tax liability. When claiming the deduction, investors must remember the benefits are available only on the investments made during the financial year. Using section 80C benefits, individuals are able to save tax by decreasing their taxable income.
Here are three points taxpayers must remember while claiming tax deductions.
- Section 80C deductions are available only from salary or business income. These are not available from capital gains, if any, included in the income tax return (ITR). Therefore, if an individual's income comprises only of capital gains, he will not benefit from investing in any of the section 80C investments.
- The tax amount saved by investors primarily depends on their income tax bracket. For example, if an investor is in the highest tax bracket of 30% before deducting the section 80C benefits, the amount of tax saved will be limited to that slab.
- If an individual’s annual income is less than the minimum limit (INR 2.5 lakh), any investment made in section 80C instruments will not offer any tax savings.
Available investments under section 80C
If an individual knows how to save tax under this section, he must understand the different options that are available. Here are seven options.
- Public Provident Fund (PPF)
You may open an account with the post office or bank. It comes with a lock-in period of 15 years and a minimum contribution of INR 500 per annum is mandatory. The principal, interest, and maturity proceeds are all tax-free.
- National Savings Certificate (NSC)
The lock-in period for this tax-saving instrument is five years and offers interest at 8.5%. However, this interest is taxable as per the individual’s slab.
- Tax saving FDs
Investors have to lock-in their investments for five years with no premature withdrawal allowed. The interest earned on these FDs is taxed at the holder’s income tax slab.
- Pension plans
These plans deliver market-related returns and investors may exit their investment after a three-year lock-in period. Maturity proceeds and dividends are tax-free.
- National Pension System (NPS)
Investors must contribute at least INR 6000 to NPS and remain invested until retirement age. Some portion of the maturity proceeds must be invested in an annuity plan. The returns on NPS are market-driven.
- Equity-Linked Savings Schemes (ELSS)
These are diversified equity funds where the corpus is invested in stocks and related products. Investors may invest either through a lump sum or through a Systematic Investment Plan (SIP). The principal, dividends, and maturity proceeds are all tax-free.
- Unit-Linked Insurance Plans (ULIPs)
Investors may invest in ULIPs that offer life cover along with an investment option. There is no surrender value after a five-year lock-in period. All gains made on ULIPs are tax-free.
Investors have several options when they want to know about the different tax saving options they can utilize. However, making accurate investment decisions may be difficult. They may use ARQ; the powerful investment engine offered by Angel Wealth., As a core highlight of Angel Wealth’s mobile application, ARQ uses scientific methods to analyze different options to match investment recommendations based on individual’s risk profile and financial objectives. It is entirely automated, which eliminates all human bias.