Tax Planning with Section 80C

Tax planning entails making investments and contributions that help minimize the tax liability. Traditionally, most of us invest only instruments that provide tax saving benefit. Aversion for taxes ranks as one of the most universal emotions. But, does this fit well with our overall financial planning goals?

“I am proud to be paying taxes in the United States.

The only thing is I could be just as proud for half of the money.”

– Arthur Godfrey

Beginning of new financial year from April 1st, both salaried and self employed individuals need to do their tax planning for optimum tax savings. Minimizing tax liability is just one aspect of tax planning. The more important and often ignored one is wealth creation. Investing in stipulated avenues and making contributions towards specified purposes, offers ample opportunities for creating wealth. In the Indian context, investment avenues that provide tax benefit under Section 80C are most popular as far as tax planning for individuals is concerned. In this article we will look at some quick facts about some of these investment avenues. But first, lets us revisit Section 80C.

How Section 80C works?

Certain investments and contributions have been specified as eligible ones for Section 80C. These investments/contributions are eligible for deduction from gross total income. And a reduction in gross total income, leads to a reduction in the tax liability. Finally, the deduction limit for Section 80C has been pegged at Rs 100,000 per annum. In other words, investors can make investments/contributions of upto Rs 100,000 every year and reduce their tax liability.

The eligible avenues under Section 80C :

Payment of life insurance premium
Contribution to employee provident fund (EPF)
Repayment of principal amount on housing loan
Payment of tuition fees
Investments in Public Provident Fund (PPF)
Investments in National Savings Certificate (NSC)
Investments in tax-saving fixed deposits
Investments in tax-saving mutual funds (ELSS)
Investments in Infrastructure Bonds

What should investors do?

Clearly, Section 80C has a lot to offer to investors. Investors on their part need to make the most of it. To begin with, they need to give the tax planning exercise its due importance. Enough thought should be put into the exercise and appropriate choices must be made from the various Section 80C avenues.

Conducting tax planning in the conventional manner i.e. invest the money in any avenue is flawed. The right approach to tax planning includes carefully assessing one’s needs and objectives and then allocating monies in line with these objectives.

A quick overview of investment avenues covered under Section 80C is enclosed for your decision making. The point to note here is that payment of life insurance premium also qualifies for a Section 80C deduction, but I have not included it in the comparison here as Insurance serves a purpose that is far more critical than just tax savings or investments, and should be viewed as a risk cover rather than investment.

Tax-saving avenues: An overview

Public Provident Fund (PPF)

Tenure (years) : 15
Min. investment (Rs) : 500
Max. investment (Rs) : 70,000 (Maximum investment indicates upper limit for the purpose of claiming tax benefits under Section 80C)
Safety/Rating : Highest Safety
Return – CAGR (%) : 8.00%
Interest frequency : Compounded annually
Taxation of interest : Tax-free

National Savings Certificates (NSC)

Tenure (years) : 6
Min. investment (Rs) : 100
Max. investment (Rs) : 100,000 (Maximum investment indicates upper limit for the purpose of claiming tax benefits under Section 80C)
Safety/Rating : Highest Safety
Return – CAGR (%) : 8.00%
Interest frequency : Compounded Half Yearly
Taxation of interest : Taxable

Equity Linked Savings Scheme (ELSS)

Tenure (years) : 3 years lock-in period
Min. investment (Rs) : 500
Max. investment (Rs) : 100,000 (Maximum investment indicates upper limit for the purpose of claiming tax benefits under Section 80C)
Safety/Rating : High Risk as the Mutual funds invest in Equities.
Return – CAGR (%) : 12.00 – 15.00% Approximate returns. ELSS is a market-linked investment avenue and returns are not assured.
Interest frequency : No assured dividends/returns
Taxation of interest : Dividend & capital gains tax free, however a Securities Transaction Tax (STT) of 0.025% is charged on redemption

Infrastructure Bonds

Tenure (years) : 3 years lock-in period
Min. investment (Rs) : 5000
Max. investment (Rs) : 100,000 (Maximum investment indicates upper limit for the purpose of claiming tax benefits under Section 80C)
Safety/Rating : Individually rated by Credit Rating Agencies, normally AA/AAA rated indicating the degree of safety regarding timely payment of interest and principal, with AAA being the highest rating.
Return – CAGR (%) : 5.50 – 6.00%
Interest frequency : Options available
Taxation of interest : Taxable

Tax-saving Fixed Deposits

Tenure (years) : 5 years
Min. investment (Rs) : 100
Max. investment (Rs) : 100,000 (Maximum investment indicates upper limit for the purpose of claiming tax benefits under Section 80C)
Safety/Rating : Highest for Public Sector Banks however can be individually rated by Credit Rating Agencies for different types of banks, normally safety ratings are high.
Return – CAGR (%) : 6.00 – 8.50%
Interest frequency : Options available
Taxation of interest : Taxable

Conclusion

Tax-planning helps investors rationalize their tax liability. Investments and contributions of upto Rs 100,000 under Section 80C are eligible for tax benefits. Investors must give the tax-planning exercise due thought and make the most of the opportunities afforded by Section 80C. It would be fair to state that Section 80C has ushered in a new era in tax-planning. More importantly, tax planning can aid in wealth creation which we will discuss in detail in another article. The onus to gain from it is on the investors.