When you start earning, one piece of advice you might receive from almost everyone is to start investing. Investing early on creates a healthy habit of saving your income and earning great returns on it. However, many people start investing in instruments without understanding the tax system. If you wish to save tax on your income and investments, you need to include financial instruments in your tax saving plan, which help you enjoy the benefits of Section 80C of the Income tax act. Keep reading to know more about such investments.
Which instruments should you invest in?
The following are the investments that you should include in your tax saving plan:
1. Public Provident Fund (PPF)
Public Provident Fund (or PPF) is a popular investment scheme used to save tax. As it is issued by the Government of India, people consider it to be a safe investment choice. Under Section 80C of the Income Tax Act, you can claim a tax exemption of up to Rs 1.5 Lakhs annually. Do keep in mind that this scheme has a lock-in period of 15 years. Once the lock-in period ends, you have the option to increase the investment tenure for another five years. Investing money every year is necessary for your PPF account to remain active. The minimum amount you can invest per year is Rs. 500, while the maximum amount is Rs. 1.5 lakh. PPFs allow you to make one partial withdrawal per year after your account has completed seven years. You can also enjoy tax benefits on your investment, the interest you get, and the maturity benefits you earn from it.
2. Equity Linked Saving Scheme (ELSS)
ELSS is an open-ended mutual fund scheme. Under this scheme, at least 80% of its assets are invested in the stock market. This means that the returns on ELSS funds vary as per the fund’s market performance. Despite the market risk it carries, they are quite popular among investors due to their returns. Known as tax-saving mutual funds, you can avail of an annual tax deduction on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act in ELSS. One other advantage of ELSS funds is that their lock-in period is only three years.
3. National Pension System (NPS)
The National Pension System (NPS) is a scheme that allows you to invest a nominal amount of your income in enjoying the benefits of pension post-retirement. This is especially beneficial for those who are non-govt employees. Any individual between the age of 18 to 60 can open an NPS account in India. Investments up to Rs. 1.5 lakh in this scheme are eligible for tax deductions under Section 80C of the Income Tax Act. Additionally, you can avail of tax benefits on investments of Rs. 50,000 under Section 80CCD(1B). As the pension does not start until you are 60 years old, your NPS account will be locked in until you reach that age.
4. Unit Linked Insurance Plan (ULIP)
Unit Linked Insurance Plan is a type of life insurance where you get to enjoy the dual benefits of insurance and investments in a single plan. ULIPs help investors build wealth while providing life cover at the same time. A part of your premium is allocated to the insurance component. The remaining amount is invested into equity, debt, and balanced funds, which is a mixture of the two. You can invest in ULIPs to meet long-term goals like financing your child’s college education, retirement planning, or any major financial goals. As per the old tax regime, under Section 80C of the Income Tax Act, premium payments of up to Rs. 1.5 Lakhs is eligible for a tax deduction. And at the time of maturity, the returns you earn on the policy are exempt from income tax under Section 10(10D). As per the new tax regime, premium payments exceeding Rs. 2.5 Lakhs are not eligible for tax deductions under Section 10(10D).
These are some of the tax-saving instruments that let you enjoy the benefits of Section 80C. You should contact your tax advisor to know about other such instruments. You can use the income tax calculator to get an estimated amount of tax that might get applied on your investments.
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