Regular post-retirement income | Additional tax benefit on investments up to ₹50,000 u/s 80CCD (1B) - EEE Category | Regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India) Invest Now

Whether you are looking to optimise your portfolio or plan for the financial year, it helps to know investments that reduce your tax liability. Section 80C of the Income Tax Act allows you to leverage various tax-saving tools to maximise your income. Popular options include ELSS funds, ULIP investment plans and others. 

 

Under this section, you can enjoy up to ₹1.5 Lakhs annually in tax deductions on your total taxable income, through investments. Read on to know more about the avenues that enable you to save tax.

Tax-Saving Instruments Under Section 80C

The tax-savings investment instruments that come under Section 80C include: 

 

  • Public Provident Fund (PPF)

  • National Pension System (NPS)

  • Equity-Linked Savings Scheme (ELSS)

  • Unit Linked Insurance Plans (ULIP)

  • Employees' Provident Fund (EPF)

  • National Savings Certificate (NSC)

  • Fixed Deposit (FD)

  • Sukanya Samriddhi Yojana (SSY)

  • Life Insurance Premiums

  • Home Loan Principal Repayment

  • Senior Citizen Savings Scheme (SCSS)

 

Now that you know what tax-saving tools are under this section, read on to learn more about 4 of these investment options. These are PPF, NPS, ELSS investment, and ULIP Plan.

A Brief Overview of the Top Tax-Saving Investments in India

  • PPF

Public Provident Fund (PPF) is a government-back savings scheme with a lengthy investment window. It is a safe investment tool that was initiated to encourage citizens to save and invest. 

 

To start investing in it, you need to open a PPF account in a Post Office or any bank branch. The only eligibility requirement is that you need to be an Indian citizen. Note that the government determines the rate of interest for this scheme, which is revised four times every year.    

 

Moreover, you can claim up to ₹1.5 Lakhs of tax deductions under the aforementioned section on interest and maturity earned on a PPF account. 

  • NPS

The National Pension Scheme (NPS) is a retirement benefits scheme started by the Central Government in 2004. It is a voluntary contribution scheme that all salaried workers can avail of, even in the unorganised sector. 

 

You or the employer can make these contributions to invest in numerous assets, including equities and government securities. Apart from the interest accrued, you can also avail of a tax liability deduction under the following sections of the Income Tax Act, 1961:

 

  • Section 80C: Up to ₹1.5 Lakhs deductions 

  • Section 80CCD (1b): Additional deductions of up to ₹50,000

  • 80CCD (2): Deductions on taxes if your employer contributes 10% of your basic salary.

  • ELSS Funds

Equity-linked savings scheme, or ELSS investment, is an open-ended mutual fund with which you can invest in stocks of various listed companies in the Indian Stock Exchanges. Unlike the regular mutual fund, the ELSS funds have a lock-in period of three years. 

 

Note that these returns are market-linked as it has a minimum equity exposure of 80%. So, the returns on these investments are generally high, but they have a higher risk than government-backed schemes. 

 

Under Section 80C, you are eligible to claim a tax deduction of up to ₹1.5 Lakhs on ULIP returns in a financial year.

  • ULIP

Unit Linked Insurance Plan (ULIP) is an insurance scheme where a part of your premium is also invested in your chosen funds. It offers to invest in equity, debts or a combination of both. ULIP plan may be perfect for you if you are looking to invest in long-term goals for your family’s future. 

 

Moreover, you can also avail of tax benefits under Section 80C. When exiting, in certain conditions of Section 10(10d) of the 1961 Act, you can also receive a tax-free maturity benefit.

Things to Consider Before Choosing A Tax-Saving Investment

As all these investment options provide tax benefits, you must look at various aspects of these schemes to make the right decision. You need to consider the following to make up your mind about where to invest.

1. Purpose of Investment

First, you must figure out the intent behind investing in a scheme. Here are some options to consider:

 

  • PPF for steady earnings over a lengthy horizon

  • ELSS for market-linked returns and tax savings in the short-term

  • For long-term goals, go with the pension scheme or ULIP investment plan

2. Tenor

It is the period for which your money will be locked in a certain financial product. If you are looking for a shorter scheme, then ELSS clearly stands out. It has a shorter tenor of three years. 

 

On the other hand, you can make withdrawals only after 7 years from the PPF account. For ULIP and NPS, it is after the maturity period and after reaching 60 years of age, respectively.

3. Investing options 

When investing, it helps to consider the routes as well. PPF offers just one structural option, which is by opening an account in a bank or post office. In contrast, ELSS has as many as 38 choices which you can opt for. Multiple insurance firms also offer various ULIPs alongside other offers. Lastly, NPS has seven different fund managers, allowing for flexibility. 

4. Returns

If you are looking for higher returns, market-linked schemes can be your preferred choice. ELSS funds, NPS and ULIPs specifically. However, ELSS stands out among all, as it has had a 10-12% CAGR in the growth of returns in the last 10 years. 

5. Risk Appetite    

Risk is also a factor that you must look at before investing in a tax-saving instrument. PPF is backed by the government and relatively safe. But, the interest rate varies as it is revised quarterly.  On the other hand, market-linked schemes offer higher returns but also carry a higher risk.

PPF vs NPS vs ELSS vs ULIP: Tenor, Limits and Returns

The following table shows everything that would help you more in sorting out where to invest

PPF vs NPS vs ELSS vs ULIP

 

PPF

NPS

ELSS

ULIP

Tenor

15 years

Until 60 years of age

3 years

5 years

Minimum Investment

₹500

Tier 1: ₹1,000

Tier 2: ₹1,000

₹500 

₹10,000

Returns

Revised quarterly by the government (currently fixed at 7.1%)

Market linked and depends on fund chosen

Market linked

Market linked and depends on ULIP plan chosen

Risk

Safe; government-backed

Moderate to high-risk

High-risk

Moderate to high-risk

Assets 

Only in government bonds/securities

Depending on the choice of funds; set equity allocation

Minimum 80% equity allocation

Depending on the choice of funds; equity allocation varies

Withdrawal

Partial withdrawal subject to conditions from year 7

Only at 60 years of age

After 3-years lock-in

No premature withdrawal

Maximum annual investments to save tax under Section 80C

₹15 Lahks

₹1.5 lakh and additional deduction for investment up to ₹ 50,000 in Tier I account in a financial year under Section 80CCD (1B)

₹1.5 Lakh

₹1.5 Lakh

Tax implication on maturity

EEE

EEE

Capital gains are taxable

EET

From the above comparison, it would be clear that ELSS and NPS is one of the best options available for you. 

 

There’s no doubt that PPF is the best scheme if you are looking for safe investment options. It has a long lock-in period and no choices at all. ULIPs are a mix of insurance and investment and can provide profitable returns in the long term.

 

However, ELSS has a shorter tenor and promises higher returns. Added to this, the long-term capital gains of up to ₹1 lakh a year from ELSS mutual funds comes under tax deduction provisions.

 

On the other hand, NPS is the best available option if you are looking for a pension scheme. You can avail of tax deductions under three sections of the Income Tax Act if you choose to invest in it. 

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