15 Investments to Save Tax u/s 80C – Which is the Best?

The tax season is here and I have started getting mails and comments asking for the “Best Tax Saving Investments”. Unfortunately there is no straight answer to this. The best investment is different for different people and is aligned with their return expectations, risk taking ability, personal circumstances, and alignment with their financial goals among other things.

Investments for Section 80C

You can claim maximum deduction of Rs 1.5 Lakhs u/s 80C (including Sections 80CCC, 80CCD) by investing in eligible instruments. Unfortunately investments and expenditures allowed u/s 80C is too crowded and that makes the choice difficult for most people.

Below is the list of investments/expenses eligible for deduction u/s 80C:

1. 1. Provident Fund (EPF/ VPF)
   2. Public Provident Fund (PPF)
   3. Sukanya Samriddhi Account (SSA)
   4. National Saving Certificate (NSC)
   5. Senior Citizen’s Saving Scheme (SCSS)
   6. Tax Saving Fixed Deposits (for 5 Years)
   7. Life Insurance Premium
   8. Pension Plans from Mutual Funds
   9. Pension Plans from Insurance Companies
   10. New Pension Scheme (NPS)
   11. Tax Saving Mutual Funds (ELSS)
   12. Central Govt. Employees Pension Scheme
   13. Principal Payment on Home Loan
   14. Tuition Fees for up to 2 children
   15. Stamp Duty for registration of Home

Download: Free ebook for Income Tax Planning for FY 2019-20

The post below suggests the approach to select the investments for tax planning.

Expenditures Eligible for Tax Benefit

The first step is to check all expenditures which are eligible for tax deduction. Below is the list:

1. Tuition Fees for up to 2 children

The expenses on tuition fees for full time courses for maximum of two children is eligible for deduction u/s 80C. However, the deduction is not available for tuition fee to coaching classes or private tuitions. The following expenses are not considered as tuition fees – Development Fee, Transport charges, hostel charges, Mess charges, library fees, Late fines, etc.

2. Stamp Duty for registration of New Home

Stamp duty and registration charges up to Rs 1.5 Lakh can be claimed for deduction u/s 80C. The payment should have been made in the same financial year for which the tax is being paid. i.e. the deduction cannot be carried forward to next year. Also the house should be in the name of assessee claiming deduction.

Also Read: How builders use super built-up area to deceive home buyers?

In case you have paid stamp duty for new home, you most probably would exhaust your 80C limit for the year and no further investment might be required.

Compulsory Deductions

There are some compulsory deductions that are eligible for tax benefit u/s 80C. Check if you contribute in any of such deductions:

1. Provident Funds (EPF/VPF)

EPF is a compulsory deduction for most salaried employees. The deduction can be 12% of the basic salary & dearness allowance or Rs 1,800 every month. Look at your salary statement to know how much have you contributed for the year. Count only your contribution. Employer’s contribution is not eligible for tax saving investment. You can also have some amount contributed through Voluntary Provident Fund (VPF), which can be up to 100% of the basic salary & DA.

Also Read: VPF – A Good Retirement Option!

2. National Pension Scheme (NPS)

NPS (Tier 1) is compulsory for most Government employees who joined after 2004. Look at your salary slip to check your deduction. Again only your contribution is valid deduction. Employer’s contribution is not eligible. The good thing is you can use this contribution to claim additional tax deduction up to Rs 50,000 under the newly introduced Section 80CCD(1B). We have explained this at the last paragraph of the post.

Also Read: NPS – Maturity, Partial Withdrawal & Early Exit Rules

Recurring Deductions

There are some deductions which happen year on year like home loan repayment, insurance premium etc.

1. Home Loan Principal Amount

Are you paying home loan? The principal component paid every year is eligible as tax deduction. For this you can download the tax statement from banks’ website. In case not get it from the loan provider. This would give you an estimate of principal and interest paid for the financial year.

2. Insurance Premium

Have you bought life insurance products like ULIP, Endowment Plan or Term Insurance where you need to pay the premium for subsequent years? If you want to continue investing in the same you can continue to claim tax benefit.

3. PPF (public Provident Fund)

If you have PPF account you should contribute minimum Rs 500 in a financial year. In case you don’t do, a fine is levied.

Also read: How to Claim Tax Exemptions while filing ITR?

4. Sukanya Samriddhi Account (SSA)

Minimum deposit of Rs 1,000 needs to be made every year else penalty of Rs 50 is levied.

5. NPS

Do you have NPS account? A minimum contribution of Rs 1,000 is required every financial year to keep the account active.

For many people the 80C deduction limit is reached by this time. In case not, choose from the list below depending on your risk profile and investment goals:

New Investment for 80C

1. Term Life Insurance

Do you have dependents? Would they survive financially in case something happens to you? Do you have enough life insurance? If no go get a term insurance first. It’s important to opt for protection first.

Useful Tips:

• Online term plans are much cheaper than offline. So it makes sense to go for online plans.
• Do not provide false information in the insurance form. The insurance claim can be rejected for wrong information.
• Do not buy anything other than Term Plans from insurance companies. No money back, endowment plans!

Also Read: 9 Tips to Buy the Right Life Insurance

2. ELSS (Equity Linked Saving Scheme)

Popularly known as Tax saving Mutual Fund. These are equity based mutual funds and one of the best investment options to create wealth in the long run while saving tax. In case you can digest the volatility of stock market, this is the recommended option.

Lock-in Period: 3 Years

The Good:

• Among the tax saving investments, ELSS has least lock-in period of 3 years.
• The gains on ELSS Fund is Tax Free.
• Convenient to buy and manage as ELSS can be bought and redeemed online.

The Bad:

• There can be considerable volatility in returns and you can get negative returns at the end of 3 years.

Also Read: Best ELSS (Tax Saving Mutual Fund) to Invest in 2017

Helpful Tips:

• Invest through SIP (Systematic Investment Plan). This helps in tiding over volatility to some extent.
• Choose “Growth” option over “Dividend Payout” as this creates wealth in the long run.
• Try to invest directly to fund as this would give you 0.5% to 1% higher returns as compared to when you invest through broker (How to Invest Direct in Mutual Funds?)
• If doing lump-sum check for stock market valuations. If you invest at high valuations, you might see very low or negative returns at the end of 3 years.
• Avoid “closed-ended” ELSS NFOs which are launched at this time of the year.

3. PPF (Public Provident Fund)

PPF is another popular tax saving investment option for 80C, especially for people without any other provident fund.

Lock-in Period: 15 Years. However partial withdrawal is allowed from 7th year

The Good:

• The interest earned on PPF is Tax Free
• After opening the PPF account, investment can be done online every Year (for some banks)
• Highest Safety – backed by Govt. of India

The Bad:

• The lock-in is for 15 years but there is partial liquidity from 7th year on wards.

Also Read: PPF – A Must Have Investment

Helpful Tips:

• Investment done till 5th of the month earns interest for the month. So deposit your money before 5th of month
• You can use combination of PPF and ELSS for tax saving investments. In case you find stock market over-valued, PPF is good option.

4. Senior Citizen’s Saving Scheme (SCSS)

SCSS is good option for senior citizens (above 60 years of age) as it gives regular quarterly interest income directly in bank account.

Also read: All about Senior Citizens’ Savings Scheme

Lock-in: 5 years

The Good:

• Highest Safety – backed by Govt. of India
• The interest rate offered is highest among the small saving schemes

The Bad:

• The interest received is taxable.
• TDS would be deducted if the total interest in a year is over Rs 10,000. However, if eligible Form 15H can be submitted to avoid TDS.

Helpful Tips:

• SCSS account can be closed after 1 Year (with penalty) but in case you have availed Sec 80C benefit, it would be reversed.
• The joint account can be opened only with your spouse. There is no age limit applicable for the joint account holder.

5. Sukanya Samriddhi Account (SSA)

SSA can be opened by parents of girl child subject to certain conditions. SSA can be a good option for fixed income investment for child. However you should also invest in ELSS or other equity mutual funds for goals related to child.

Also Read: All about Sukanya Samriddhi Account

Lock-in: Deposit to the account to be made for 14 years and account matures at 21 years from date of opening

The Good:

• The interest earned on SSA is Tax Free and also higher than that offered to PPF
• 50% withdrawal allowed when girl turns 18 for marriage/higher education
• Highest Safety – backed by Govt. of India

The Bad:

• No provision of Loan or pre-mature withdrawal unlike PPF

Helpful Tips:

• Minimum deposit of Rs 1,000 needs to be made every year else penalty of Rs 50 is levied
• Account can be closed before 21 years in case of marriage

6. National Saving Certificate (NSC)

NSC can be bought at post offices to save tax u/s 80c. It is available for 5 years (NSC VIII) only. The interest offered is 7.8%.

Also Read: All about NSC (National Saving Certificate)

Lock-in: 5 Years

The Good:

• The interest is higher than most tax saving bank fixed deposits.
• Certificates can be kept as collateral security to get loan from banks
• No Tax deduction at source
• The interest accrued for NSC qualifies for Sec 80C deduction in subsequent years
• Highest Safety – backed by Govt. of India

The Bad:

• The interest earned is taxable
• You need to visit Post office for buying and redeeming NSC units. This can be a hassle for people who shift addresses frequently.

Also Read: Calculate Tax on Arrears in 7 Easy Steps

Helpful Tips:

• You can buy NSC in denominations of Rs 100, 500, 1000, 5000 and 10000
• NSC is better tax saving option than banks Tax Saving FD (offering similar interest) as interest accrued for NSC qualifies for Sec 80C deduction in subsequent years

7. Tax Saving Bank Fixed Deposits

India loves fixed deposits and FD which saves tax is obviously very popular.

Also Read: Highest Tax Saving Bank Fixed Deposit Rates U/S 80C across 44 banks

Lock-in: 5 years

The Good:

• Convenient to invest. Many banks offers online facility for Tax Saving FD
• High Safety – FD up to Rs 1 Lakh is insured by RBI

The Bad:

• The interest received is taxable. (Tax treatment of Fixed Deposits)
• Cannot be withdrawn prematurely
• Cannot be pledged to secure loan or as security

Helpful Tips:

• The minimum tenure is of 5 Years. Some banks offer special schemes for longer tenures with slightly higher interest rates
• Don’t be mislead by banks advertisements about their yield on Tax Saving FDs. Those are manipulative calculations. [SBI Tax Saving Deposit Scheme – Interest & Annual Yield]
• Be cautious of small co-operative banks as they have higher risk than bigger private and public sector banks.

8. Pension Plans from Mutual Funds

There are Pension plans from mutual funds which offer tax benefit u/s 80C:

1. Templeton India Pension Plan
2. UTI Retirement Benefit Pension Fund
3. Reliance Mutual Fund Pension Plan

The above funds are hybrid or balanced mutual funds – the first two funds are debt oriented mutual fund while the one from Reliance has two funds – one debt oriented and other equity oriented.

Lock-in: 5 years

Helpful Tips:

• Reliance Mutual Fund Pension Plan is better option among the three funds as you use Wealth option (which is equity oriented fund) to create the corpus and then switch to Income option (which is debt oriented fund) for regular income after retirement.
• All 3 funds levy exit load to discourage people from exiting early

Download:Excel based Income Tax Calculator for FY 2017-18 [AY 2018-19]

9. NPS (National Pension Scheme)

Some of you might have to contribute compulsorily to NPS. In this case you can take deduction up to Rs 50,000 under the newly introduced Section 80CCD(1B). And then you can choose more efficient investment for 80C.

Here is an example:

Mr Amit is Government employee and has compulsory NPS deduction of Rs 60,000 every year. Until last year this NPS was part of Section 80C deduction. After introduction of Section 80CCD(1B), he can claim Rs 50,000 deduction under this section. Rest of Rs 10,000 (Rs 60K – 50K) can be claimed as deduction u/s 80C. And he can additionally make investment of Rs 1.4 lakhs in other 80C instruments like PPF, ELSS, etc – taking his total deduction to Rs 2 lakhs [Rs 1.5 lakhs from 80C & Rs 50,000 from Sec 80CCD(1B)]

However for people who do not have NPS account, it might NOT make sense to open one just for newer introduced tax benefit u/s 80CCD(1B). You would do better to pay tax and invest the remaining amount in good equity mutual fund.

With New taxation for NPS on maturity you can invest in NPS to take tax benefit u/s 80CCD(1B). We redid our calculations which you can check in hte link below.

Also Read: Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?

Why you should not invest in NPS?

1. The investment is locked-in till the time of retirement of till the subscriber turns 60. If you close the account mid-way only 20% is offered lump-sum and buy compulsory annuity for rest 80%. So in case of early retirement, this money is not going to work for you.
2. On maturity at least 40% of amount needs to buy annuity which offers low returns and is taxable.

Investments to Avoid for 80C

Below are some investments that I would recommend to stay away as they have poor returns and/or can hold you in complicated tax tangles. Also you would hear multiple horror stories on how these investments were miss-sold and people are now struck.

Also Read: How to Pay 0 Income Tax on Rs 16 Lakh Salary?

1. Pension Plans from Insurance Companies

Unit Linked Pension Plans (ULPP) is offered by insurance companies as a investment to take care of your retirement. The broader product structure is, you invest in the product for first few years and then the insurance company pays you some lump-sum amount and then a regular annuity after certain period.

Why you should not invest in ULPP?

1. These are long term products and you would need to pay premium for a long period of time.
2. The returns on ULPP are miserable.
3. If you want to surrender these, you loose a lot in terms of returns.
4. The tax benefit claimed is reversed if the plan is surrendered mid-way.
5. Only one third of amount at maturity/surrender can be taken as lump-sum. Two third amount has to be necessarily used for buying annuity.

2. Life Insurance (Endowment Plan/ ULIP)

ULIP and endowment plans are other investment which is miss-sold very often. People do not understand the complex product and later suffer heavily.

Also Read: Not all Life Insurance/ULIPs Offer Tax Benefit?

Why you should not invest in ULIPs?

1. These are long term products and you would need to pay premium for a long period of time (at least 3 to 5 years)
2. The returns endowment plans are miserable (lesser than fixed deposits)
3. In case you want to discontinue your investment, the surrender value is pathetic.
4. The tax benefit claimed is reversed if the plan is surrendered mid-way.

Which is the Best Tax Saving Investment?

As said earlier the best tax saving investment is different for different people and is aligned with their return expectations, risk taking ability, personal circumstances, and alignment with their financial goals among other things. So you must choose product that suits your above requirement. Also the ranking done by me may not suit you but you would do good to stay away from ULIPs, Endowment Plans and Pension Plans (ULPP). Go ahead and save tax!