Written by CA Pankaj Chhabra – 
& Megha Jain –
Are you a salaried individual and looking to save maximum tax? Then this article will be the best investment of your 2 minutes while reading this.
Indian Government has taken various initiatives for resident individuals by amending Finance Act, time to time, to encourage tax savings and investments.
These initiatives boost tax payer’s confidence in government and they get a sense of satisfaction by saving taxes on their hard-earned income.
If you are a salaried individual and your total income is exceeding the basic exemption limit of Rs. 2.5 Lakhs, then you must know the various deductions an individual can claim to save maximum taxes on his/her income.
Income Tax Department has introduced various deductions under different sections of the Income Tax Act, 1961. One of the most popular and favourite sections is 80C, as it allows deductions up to Rs. 1.5 lakhs every financial year along with an additional deduction of Rs. 50,000 under its subsection 80CCD(1b).
Section 80C and its Subsections
Section 80C of Income Tax Act, 1961, states that a resident Individual or HUF (Hindu undivided families) can claim a maximum tax deduction of Rs. 1.5 Lakhs from the total taxable income in a Financial Year while filing Income Tax Return (ITR).
Only resident Individuals or HUFs can claim these deductions. Companies, Partnership Firms, Trusts, NGO, or any other assessee can not take advantage of the deduction available under this section.
Section 80C includes the following subsections: 80CCC, 80CCD (1), 80CCD (1b), 80CCD (2).
The overall limit including the subsections for claiming deduction is Rs.1.5 lakhs except an additional deduction of Rs. 50,000 offered under subsection 80CCD (1b).
| 80C
|
Allows deduction for investment in ELSS (Equity-linked saving scheme-tax saving mutual funds), PPFs, EPFs, ULIPs, tax saving FDs, Principal amount payment towards home loans, tuition fees for children’s education, Sukanya Samriddhi Yojana (SSY), Senior citizen saving schemes (SCSS), Infrastructure bonds etc. |
| 80CCC
|
Premium paid towards the life insurance policy up to the maximum limit of Rs. 1.5lakhs is applicable for tax exemption under 80CCC. It offers deduction on amount paid for any life insurance annuity plan. |
| 80CCD (1)
Employee’s contribution to NPS
|
Maximum deduction allowed under 80CCD (1) is least of the following-
· 10% of salary- if taxpayer is an employee · 20% of gross total income- in case of self-employment · Max. Limit is Rs. 1.5lakhs. |
| 80CCD(1b) | Additional deduction of Rs. 50,000 is allowed for amount deposited to NPS account (National pension Scheme).
Contribution made towards the Atal Pension Yojana is also eligible for tax deduction under section 80CCD (1b) of the IT Act. |
| 80CCD (2)
Employer’s contribution to NPS |
Allows deduction up to 10% of basic salary + dearness allowances under this section. Only allowed to salaried individuals and not self-employed. |
POPULAR SCHEMES AVAILABLE UNDER SECTION 80C
ELSS TAX SAVING FUNDS
Equity linked saving schemes are mutual funds that allow you to save tax by investing in equity and equity-related instruments on investments up to Rs. 1.5lakhs.
Liquidity – Have a minimum lock-in period of 3 years.
Rate of Return– In long-term they may give returns around 10-14% P.A.
Tax treatment – Capital Gains earned is taxed @10% if the gains exceed the threshold limit of Rs. 1 lakh (LTCG- long-term capital gain).
To Read more about ELSS Fund
TAX SAVING FDs
Tax saving FDs are like regular fixed deposits but come with a lock-in period of 5 years and tax break under section 80C on investments up to Rs. 1.5lakh
Liquidity – Minimum lock-in period of 5 years
Rate of interest – Interest rate ranges from 5.5% to 7.75% across different banks.
Tax treatment – Interest earned is taxable.
PPF (PUBLIC PROVIDENT FUNDS)
PPF are long-term investments backed by government of India. One has to open a PPF account and the amount deposited during a year will be claimed under section 80C deductions.
Liquidity – PPF accounts have a lock-in period of 15 years and can be further extended for 5 more years. Partial withdrawals are allowed after 7 years.
Rate of interest – Current rate of interest is 7.1%.
Tax treatment – Interest earned is tax-free.
EPF (EMPLOYEE PROVIDENT FUND)
It is a retirement benefit scheme that is available to all salaried employees. It amounts to 12% of basic salary + dearness allowances that is deducted by an employer and deposited in the EPF.
Liquidity – Can withdraw after 2 months of leaving the job if no other job is joined within those 2 months with an employer covered PF Act.
Rate of interest – Interest rate is 8.10% for the FY 2022-23.
Tax treatment – Entire PF balance is tax-free, if withdrawn after continuous service of 5 years. However, if the EPF contribution is above Rs. 2.5 lakhs in any year, the interest earned on such excess contribution is taxable.
NPS (NATIONAL PENSION SCHEME)
NPS is a pension scheme that has been started by the Government of India. It is a voluntary, defined contribution savings scheme designed to allow the unorganised sector and working professionals to have pension after retirement. RS. 50,000 deduction is available for NPS contribution in addition to the section 80C limit of Rs. 1.5lakhs.
Liquidity – Partial withdrawals are allowed after 10 years under some special conditions.
Rate of interest – Return rates range between 12-14%.
Tax treatment – Employer contributions are tax-free, subject to 10% of the basic salary + dearness allowances.
ULIPS (UNIT LINKED INSURANCE PLANS)
A ULIP is an insurance plan that offers the dual benefit of investment to fulfil your long-term goals, and a life cover to financially protect your family in case of an unfortunate event. Part of the investment is used to provide insurance and rest is invested in stock markets.
Liquidity – Interest rate varies as it is invested in stock markets
Rate of interest – The rate of interest varies between 12-14%.
Tax treatment – The investment and the returns are tax-free but if the annual premium exceeds Rs. 2.5lakh in a year, then proceeds of such ULIPs are taxable.
SUKANYA SAMRIDDHI YOJANA
Sukanya samriddhi yojana is a scheme by Indian government for the betterment of girl child in the country where parents/guardians can open an account in the name of a girl child till she attains the age of 10 years.
Liquidity – Up to 50% of the deposit amount can be prematurely withdrawn once the girl reaches the age of 18 and fully after the age of 21.
Rate of interest – 7.6% per annum for 2022-23.
Tax treatment – Investment and maturity amount are tax-free
Related Topics: Mutual Funds | Taxation on Mutual Fund | Market Outlook in 2023
