Wealth Guide: Income Tax - How to maximize savings up to Rs 46,800 under Section 80C|Step-by-step process

Wealth Guide: Tax-saving is an integral part of financial planning. Income Tax Act has laid down tools using which a taxpayer can save his tax liability to an extent. Every individual strives to save maximum taxes. Section 80C is the most popular and important income tax deduction. It helps you reduce your taxable income by making tax-saving investments or incurring eligible expenses. 

One can invest in tax saving investments that qualify for the Section 80C income tax deduction to reduce your gross total income by up to Rs 1.5 lakh per annum. It helps you reduce your net taxable income and, thereby, the income taxes you pay. Archit Gupta, Founder and CEO, Clear, shares his knowledge and expert advice on how to maximize savings up to Rs 46,800 under Sec 80C of Income Tax Act:-

As per Archit Gupta, “Some of the investments that qualify for income tax deduction under Section 80C are:

• Equity-linked saving scheme or the ELSS

• Public Provident Fund (PPF)

• National Savings Certificate (NSC)

• Five-year post office time deposits

• Five-year tax-saving bank deposits 

• Contribution to Employee Provident Fund (EPF)

• Senior Citizens Savings Scheme (SCSS)

• National Pension System(NPS) 

• Sukanya Smriddhi Yojana (SSY)
   

Some of the expenditures that qualify for deduction under Section 80C are:

• Principal repayment of housing loan

• Stamp-duty and registration charges of house property

• Tuition fees of children (up to 2 children)

• Life Insurance Premium.”

He says, “Points to keep in mind while investing under Section 80C for tax saving:

• You can claim Section 80C tax deductions only if you opt for the old income tax regime, as the new income tax regime doesn't offer this deduction.

• Under Section 80C, the total deduction across all eligible tax-saving investments and expenses cannot exceed Rs 1.5 lakh per year. 

• If you fall in the highest income tax bracket, the maximum utilization of the Section 80C tax deduction can save you up to Rs 46,800 per financial year, inclusive of the cess of 4%. 

However, the maximum amount you can save in taxes by exhausting the Section 80C tax deduction depends on your income tax bracket. The table below shows you the maximum tax saving under Section 80C for the Financial Year 2020-21 for different income tax brackets:

You can save taxes up to Rs 46,800 per financial year if you fall in the highest income tax bracket and ultimately utilize the Rs 1.5 tax deduction under Section 80C by investing in suitable tax-saving investments.”

Gupta adds, “Let us see how one should decide the most suited investment options under 80C.  

Section 80C Investments for conservative investors:

A conservative investor may invest in the public provident fund, national savings certificate or the tax-saver fixed deposit to save taxes under Section 80C. However, a collective tax deduction up to a maximum of Rs 1.5 lakh per year is only under Section 80C. You will have to choose either one of these tax-saving investments or invest in a combination of them to exhaust the Section 80C tax deduction and save taxes.

• 1. Public Provident Fund or PPF:

PPF investment qualifies for the exempt-exempt-exempt or EEE status. PPF currently offers an interest rate of around 7% and has a lock-in period of 15 years. Withdrawal after the sixth year can be made only in case of a financial emergency from the PF account. Also, a loan against the PPF balance is available from the third year to the sixth year of opening your PPF account, subject to certain conditions. 

• 2. Five-year tax Saver Fixed Deposit:

An investment in a tax saver fixed deposit at a public sector or private sector bank can be done with a minimum of Rs 100. One can invest a maximum amount of Rs 1.5 lakh per financial year. The interest rate offered by banks on tax saver fixed deposits is similar to regular bank FDs. Tax saver FDs have a five year lock-in period. The interest earned from tax-saver FD is taxed according to your income tax bracket. However, one cannot take a loan against the tax saver FD. 
 

• 3. National Savings Certificate or NSC:

NSC investment also has a 5-year lock-in period. You can avail of a loan against the balance in your NSC account up to specified limits. The interest earned from the NSC is taxable as per the normal tax slab applicable to the investor. However, it is not paid out, but reinvested. 

• 4. National Pension Scheme (NPS) 

All Indian citizens aged between 18 to 70 years can join the NPS. You can continue with the NPS till you are 75 years old and avail of the tax benefits. You have two different accounts under the NPS called the Tier I and Tier II account. Tier I is the retirement account that offers many tax benefits. You cannot withdraw your NPS contributions until the age of superannuation or until you attain 60. Moreover, there are restrictions on complete withdrawal from the Tier I account even at retirement." The Tier I account is mandatory when opening your NPS account. 

• An employee's contribution towards the NPS account qualifies for a tax deduction up to 10% of the basic salary + dearness allowance under Section 80CCD(1) of the IT Act, within the overall ceiling of Rs.1.5 lakh permitted under Section 80C.

• A self-employed person can also contribute a maximum of 20% of their gross income towards the NPS account and claim a deduction under Section 80CCD(1) of the IT Act, subject to the overall ceiling of Rs.1.5 lakh permitted under Section 80C.

• Individuals can claim an additional deduction up to Rs 50,000 per year under Section 80CCD(1B), over and above the deduction of Rs 1.5 lakh. 

• Salaried employees can also claim a tax deduction if an employer contributes towards NPS. Privately-employed employees can claim up to 10% of their basic salary + dearness allowance (14% in case of central/state government employees) under Section 80CCD(2) of the IT Act. The deduction available u/s 80CCD(2) is over and above the limit of Rs.1.5 lakh u/s 80C and 80CCD(1B). However, Finance Act 2020 has capped the employer's contribution to PPF, NPS and superannuation fund at Rs.7.5 Lakh as non-taxable perquisite. 

• Only contributions towards the NPS Tier I account qualify for tax deductions.

• NPS qualifies for the EEE or exempt-exempt-exempt tax status. The NPS tax exemption extends to the investment amount growth of the corpus, and you can withdraw 60% of the accumulated corpus at maturity tax-free. However, you must compulsorily invest 40% of the remaining corpus in an annuity plan where the annuity income is taxable as per the individual's income tax bracket.”

Section 80C Investments for Aggressive Investors

Further, Gupta suggests, “For aggressive investors, ELSS investments can be one of the best options to save tax under Section 80C. ELSS funds invest primarily in stocks and can offer inflation-beating returns over time. As per historical tend, ELSS funds have managed to offer 12%-15% which is highest amongst other Section 80C investments. Moreover, ELSS investment has the shortest lock-in period of three years among all tax-saving investments under Section 80C.”

“AMCs offer the facility of spreading the investment in the ELSS through the systematic investment plan or SIP across market levels and average the purchase price of units over time, called rupee cost averaging. ELSS offers the opportunity to benefit from the power of compounding if the investor stay's invested for the long run. ELSS is a tax-efficient investment for those in the highest income tax bracket. They are taxed as equity-oriented funds where the long term capital gains up to Rs 1 lakh are tax-free.”

“Individuals must choose tax-saving investments under Section 80C to achieve their financial goals rather than save taxes. You must start your tax planning as early as possible to select the right tax-saving investment which matches your risk tolerance and time horizon to save the maximum taxes,” Gupta concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)