Tax Saving Alternatives

The final call to lower tax outgo this financial year

FY24 is drawing to a close on March 31. If you haven't made your tax-saving investments yet, here is a quick summary of your 80C options to reduce your taxable income.

Tax saving investments: Final call to save tax this year

dhanak हिंदी में भी पढ़ें read-in-hindi

No one likes a "we-told-you-so" smartypant. So, we'll avoid saying that the best time to start tax-saving investments isn't when the financial year is concluding but rather at the beginning of the financial year.

Oops, while we just brought some boomer energy here, let's quickly move on to the matter at hand: How to save tax at the last minute!

What you must know

If you have opted for the old tax regime (not the new one), you can reduce your taxable income by up to Rs 1.5 lakh, all thanks to Section 80C of the Income Tax Act.

For instance, if you earn Rs 12 lakh annually, you can invest Rs 1.5 lakh in Section 80C investments, reducing your taxable income to Rs 10.5 lakh.

So, what are these 80C instruments?

  • Employees' Provident Fund: Your contribution to EPF - and not the employer's contribution - falls under Section 80C.

    So, if your EPF contribution is Rs 50,000 for the year, you still have another Rs 1 lakh to put in other tax-saving instruments to lower your taxable income. (Just a reminder, you can invest as much as Rs 1.5 lakh under Section 80C).
  • Life insurance: While buying insurance isn't an investment, it is imperative to get one if you have financial dependents.

    It's best to avoid endowment insurance plans or unit-linked insurance plans (ULIPs), as they fail to offer adequate insurance coverage or satisfactory returns.

    Always opt for term insurance plans . While these policies lack survival benefits, they provide substantial coverage at a reasonable cost.
  • Health insurance: By the way, buying a health cover can also help you reduce your taxable income. But this doesn't fall under Section 80C. It falls under Section 80D . Section 80D allows a deduction of up to Rs 25,000 (Rs 50,000 if any of the policyholders is a senior citizen) on premiums paid for a health insurance policy towards self, spouse and kids. Further, one can claim an additional deduction of a similar amount for the premium paid towards the health insurance policy of their parents.

    However, we thought we'd mention getting a health plan here because it is critical you get one.

Let's look at 80C tax-saving investments

While EPF is primarily a retirement solution, let's look at other wealth-creation options under Section 80C.

  • Tax-saving mutual funds (ELSS): Tax-saving funds should form the cornerstone of your 80C investments due to their transparency, strong regulation and promising long-term returns . (You may choose to go to the Tax Planning section of this page to get our recommended tax-saving mutual fund.) Moreover, they boast the shortest lock-in period of three years among all other tax-saving investment options.
  • National Pension Scheme (NPS): The NPS is a suitable and low-cost option. What's more, investing in it can reduce your taxable income by an additional Rs 50,000 .

    However, you must know that NPS locks your funds until you reach 60, with partial early withdrawals permitted only under specific circumstances. Additionally, upon retirement, you need to allocate at least 40 per cent of your NPS corpus toward purchasing an annuity.

    That said, if you are looking for an ideal retirement option that can double up as a tax-saving option, you should look at NPS.
  • Other options: Although the Public Provident Fund (PPF) provides a tax-free return of 7.1 per cent (subject to quarterly revisions), it has a lengthy lock-in period of 15 years.

    Meanwhile, for those seeking a product akin to fixed deposits but with a shorter maturity, the National Savings Certificate (NSC) and five-year bank and post office deposits are viable considerations.

Your 80C tax-saving options at a glance

Tax-saving mutual funds are the best wealth-creation tools; NPS is a pension product with part equity exposure; the rest are debt-oriented.

Product Lock-in period Annual returns Taxability of returns Minimum investment (Rs)
Tax-saving mutual funds (ELSS) 3 years 3Y: 18.52%*
5Y: 17.01%*
10Y: 16.45%*
Capital gains in excess of Rs 1 lakh in a year are taxed at 10% 5,000 in lumpsum 500/month
National Pension Scheme (NPS) Tier I Till 60 years of age; partial withdrawal allowed after 3 years Tier I equity plans
3Y: 17.45%*
5Y: 15.87%*
Tax-free withdrawal of up to 60% of the corpus 1,000/annum
Public Provident Fund (PPF) 15 years; early withdrawal after 5 years is allowed at a penalty 7.1%^ Tax-free 500/annum
Five-year bank FD 5 years 6.5%^^ Taxed as per the slab 1000
Five-year post office FD 5 years 7.50%^ Taxed as per the slab 1000
National Savings Certificate (NSC) 5 years 7.70%^ Taxed as per the slab 1000
Sukanya Samriddhi Yojana (SSY)(For girl child up to the age of 10 years) 21 years; partial withdrawal allowed after the girl turns 18 or passes 10th standard 8.2%^ Tax-free 250/annum
Senior Citizens Savings Scheme (SCSS)(For citizens above 60) 5 years; early closure is allowed at a penalty 8.2%^ Taxed as per the slab 1000
*Average returns of ELSS and NPS schemes as on March 22, 2024. ^Interest rate for the period January to March 2024. Subject to revision every quarter. ^^Rate of interest given by State Bank of India as on March 22, 2024.

Also read: Last-minute tax planning? Here's where you should invest

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