Summary of various Tax Saving Investments under section 80C & their features as per Income tax act

In this article, we will discuss about various tax saving investments under section 80C & their features as per Income tax act which are as follows:

1. Voluntary Provident Fund (VPF) –

a) Liquidity – Very Low Liquidity
b) Lock-in-period – 5 years lock-in-period, but partial withdrawals is permissible as loan after 5 years.
c) Risk – Low Risk
d) Returns – 8.10% per annum (Rates fixed by government annually)
e) Tax Treatment – i) Investment, Interest Earned & Maturity Amount are all tax exempt. However, if EPF/VPF contribution is above Rs 2.5 lakhs in any financial year, then the interest earned on such excess contribution is taxable in  the hands of employee making contribution.
ii) TDS u/s 194A @ 10% will be deducted on interest earned in excess of Rs 2.5 lakhs in any financial year if interest amount exceeds Rs 40,000/50,000 threshold limit of TDS deduction.
iii) Interest earned will be taxable under the head income from other sources.

2. Public Provident Fund (PPF) –

PPF is a popular investment scheme among investors, it is a long-term investment scheme who want to earn fixed stable returns. It is ideal for individuals with a low-risk appetite. it is backed up with guaranteed returns to protect the financial needs of investors.

a) Liquidity – Very Low Liquidity
b) Lock-in-period – 15 years lock-in-period and partial withdrawals is permissible after 7 years
c) Risk – Low Risk
d) Returns – 7.10% per annum (Rates fixed by government every quarter)
e) Tax Treatment – Investment, Interest Earned and Maturity Amount are all tax exempt.

Note – i) It is advisable to invest in PPF account through lumpsum method at the starting of the financial year (probably in April or May month on or before the 5^th  date of the month) to cover the maximum portion of interest payable to maximise your return.
ii) Interest is payable on PPF taking into consideration whether amount is deposited in the PPF account before 5^th of the month or after 5^th of the month, if amount is deposited before 5^th of the month, then interest will be taken for the full month but if amount is deposited after 5^th of the month, then interest for that particular month will be ignored.

3. Sukanya Samriddhi Scheme (SSC) –

SSY is launched by government as a part of Beti Bachao Beti Padhao campaign specially for girl’s child.
a) Liquidity – Very Low Liquidity.
b) Lock-in-period – SSY comes with a lock-in period of 21 years & will mature after the expiry of 21 years. However, up to 50% of the deposit amount can be withdrawn prematurely only after the girl child reaches the age of 18 years.
c) Risk – Low Risk
d) Returns – 7.60% per annum (Rates fixed by government every quarter)
e) Tax Treatment – Investment, Interest Earned and Maturity Amount are all tax exempt

4. National Pension Scheme (NPS) –

NPS is a government backed pension scheme

a) Liquidity – Very Low Liquidity
b) Lock-in-period – when the investor attains 60 years of age. However, partial withdrawals are permissible only after 3 years only in certain specific circumstances such as medical emergency, child marriage etc.
c) Risk – Medium Risk
d) Returns – 10% – 12% per annum (variable return)
e) Tax Treatment – i) Investment, Interest Earned and Maturity Amount are tax exempt upto 60% of total amount. Balance 40% amount need to be invested in purchasing annuities & will be taxable as per the income tax slab rates.
ii) Only Tier- 1 account of NPS investment is eligible for tax exemption. Tier – 2 account is fully taxable.
iii) If the total corpus amount from NPS is upto Rs 5 Lakhs, then the whole amount can be withdrawn & will be fully exempt from tax.

5. Unit Linked Insurance Plan (ULIPs) –

ULIPs offer both insurance coverage and investment exposure in equity.

a) Liquidity – Moderate Liquidity
b)  Lock-in-period – 5 years lock-in-period
c) Risk – Medium Risk
d) Returns – Variable Return depends on ULIP insurance product
e) Tax Treatment – i) Investment, Interest Earned and Maturity Amount are all tax exempt. However, if the annual premium exceeds Rs 2.5 lakhs in any financial year during the term of the policy, then any proceeds such as survival benefit, moneyback, maturity amount will be taxable in the hands of policyholder.
ii) No exemption will be allowed u/s 10(10D) of the income tax act even if premium amount is upto 10%/20% of sum assured of the policy.
iii) TDS @ 5% u/s 194DA will be deducted on the income portion (Amount Received – Premium Paid) if total received amount exceeds Rs 1,00,000.

6. Five Year Tax Saving Bank FD –

FD are considered as one of the safest tax saving schemes. It is also considered by investors as their emergency fund in case of any emergency situation arises to them. As the interest rates are fixed, it is safer.

a) Liquidity – Moderate Liquidity
b) Lock-in-period – 5 years lock-in-period
c) Risk – Very low Risk
d) Returns – Fixed Return (depends upon bank FD rate)
e) Tax Treatment – Investment and Maturity Amount are tax exempt. However, interest earned will be taxable as per income tax slab rate under the head income from other sources.

7. National Saving Certificate (NSC) –

NSC is a fixed income investment scheme that aims at the small & middle-income investors to invest & earned returns. It is considered as a low-risk investment.
a) Liquidity – Moderate Liquidity
b) Lock-in-period – 5 years lock-in-period
c) Risk – Low Risk
d) Returns – 7% per annum (Rates fixed by government quarterly)
e) Tax Treatment – Investment and Interest Amount in the first 4 years are tax exempt. However, interest earned in the 5th year will be taxable as per income tax slab rate under the head income from other sources.

8. Equity Linked Saving Scheme (ELSS) –

ELSS is the only tax saver mutual fund that offer 80C deduction under income tax act. Both Lumpsum & amount invested through a systematic investment plan (SIP) qualifies for deduction.

a) Liquidity – Slightly low Liquidity
b) Lock-in-period – 3 years lock-in-period
c) Risk – High Risk due to equity investment
d) Returns – 12% – 15% per annum (variable return depend on market fluctuation)
e) Tax Treatment – Investment amount is tax exempt u/s 80C of income tax act up to Rs 1.5 lakhs. However, returns earned will be taxable as Long Term Capital Gain (LTCG) u/s 112A under the head Capital Gain @ 10% over & above Rs 1 lakh in a financial year without indexation benefit.

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