A quick analysis of popular 80C options
Here is an overview of popular tax-saving investments. Employ them to reduce your tax liability and grow your wealth
By Aarati Krishnan | Aug 23, 2019
We are almost halfway into the financial year, and while you should ideally plan your tax saving investments at the beginning of the year, starting now would be a smarter move than waiting till March 2020. This will allow you to already start earning returns, and in the case of ELSS funds, to benefit from the SIP (systematic investment plan) route.
If you are looking for an overview of all the popular 80C options, here it is.
Equity-linked savings scheme (ELSS)
Equity-linked savings schemes are specially notified tax-saving schemes from mutual funds which carry a three-year lock-in and are eligible for 80C benefits. Unlike other SEBI-approved categories of equity funds, ELSS funds are allowed to be managed as go-anywhere and do-anything funds. The flexible mandate makes the multi-cap ELSS a good choice for an investor's core portfolio.
|Open-end structure||As with all equity investments, they carry risks to capital|
|Monthly portfolio disclosures (making it among the most transparent of 80C options)||Depends on stock-market performance during the holding period for reasonable returns at the end of 3 years.|
|Mark-to-market daily NAV||SIP investments in ELSS extend the lock-in period as each instalment needs to complete the three-year lock-in.|
Employees Provident Fund (EPF)
If you are salaried, every month 12 per cent of your basic pay plus DA (dearness allowance, if any) is deducted towards your EPF contribution, which can be withdrawn as a lump sum at retirement. You can also voluntarily step up this contribution to a limit of 100 per cent of your basic salary plus DA.
|High fixed return with a completely tax-free status, which tends to beat most comparable fixed-income options. The EPF interest rate for FY19 has been proposed at 8.65 per cent, while the PPF offers 8 per cent.||Returns are declared from year to year based on an unpredictable surplus.|
|A part of the EPF corpus (15 per cent of the incremental corpus) is invested in the stock market via ETFs.||Illiquid|
|Puts your 80C investing on autopilot and forces you to save before you spend.||Carries complicated early withdrawal rules if you want to pull out money before you retire.|
Public Provident Fund (PPF)
Offered by India Post and the leading banks, the PPF, being a Government of India borrowing, is an ultra-safe retirement vehicle suitable for both the salaried and self-employed.
|Completely tax-free||Variable returns|
|Returns are announced by the Centre at the beginning of each quarter and apply to your entire outstanding balance.||Long lock-in of 15 years.|
|The rate for April-June 2019 is 8 per cent and beats returns from most other fixed-income avenues.||Early withdrawals (allowed after seven years) are subject to a cap of 50 per cent of the balance at the end of the fourth year.|
|Premature closure after five years is only permitted for specific end-use.|
National Pension System (NPS)
The NPS is a market-linked scheme regulated by the PFRDA for the accumulation phase of your retirement money. It allows subscribers to choose their private pension-fund manager from seven options and set their own asset allocation between equities, corporate bonds and government securities.
|Allows you to earn market-linked returns from a professionally managed portfolio for an ultra-low management fee of 0.01 per cent.||You have to use 40 per cent of your final maturity proceeds to buy an annuity, which leads to taxable income.|
|The only investment where apart from the Rs 1.5 lakh under 80C, you can claim tax breaks of an additional Rs 50,000 invested each year under Section 80CCD(1B).||Complicated early-withdrawal rules in case of an emergency.|
|Flexible. Allows you to vary your annual as well as monthly investments each year subject to a minimum of Rs 1,000.|
|Allows for switches between managers and assets.|
Insurance premiums on all the policies that cover your life and the lives of your spouse and children are eligible for 80C exemption. While all kinds of insurance plans which carry a life component are eligible for this deduction - traditional plans, ULIPs and pure term plans - note that the premium amount qualifying for the tax benefit is capped at 10 per cent of the sum assured in the plan.
|(in the case of traditional plans and ULIPs)|
|Tax breaks are a plus, considering pure term covers are bought primarily to protect dependents.||Make for poor investment choices as they lock you into large multi-year premium commitments that reduce your financial flexibility for an uncertain return.|
Deferred or immediate annuity plans
Annuity plans promise you regular monthly payouts from an insurer in return for an upfront lump-sum premium payment, which is exempt under 80C. While deferred annuity plans invest your money until retirement and pay you annuities at a future date, immediate annuities help you set up a pension immediately.
|Guarantees you a fixed monthly cash flow for life||Offers very low returns (lower than bank FDs) that do not rise with inflation.|
|Frees you of the need to actively manage your portfolio.||Forces you to lock in a lump sum with one insurer for perpetuity.|
|Annuity income is taxable in your hands at the slab rate.|
National Savings Certificate (NSC)
Offered by India Post, NSC is a five-year ultra-safe savings bond as it represents a Government of India borrowing. The interest (announced every quarter but applicable until maturity for the investor) is reinvested every year and paid out at maturity. The interest reinvested is eligible for 80C benefits, too. Investing now, you can lock into 8 per cent for the next five years.
|An uncomplicated scheme||Investments are locked in for five years.|
|Offers a competitive return when compared to bank deposits or other fixed-income options.||Interest rates are typically lower than those from the EPF or the Senior Citizens Savings Scheme.|
Tax-saving bank deposits
These are specially notified five-year plus fixed deposits offered by scheduled banks and come with an 80C benefit on your initial deposit. Minimum deposits usually start from Rs 1,000 and terms range from five to 10 years.
|A simple product where one can make one-off investments.||Unattractive interest rates. Current rates from leading banks hover at 6.5-7 per cent a year, far lower than rates on other fixed-income options.|
|Offers monthly, quarterly and annual interest-payout options||Early withdrawal by breaking the deposit is barred.|
Senior Citizens Savings Scheme (SCSS)
Offered by India Post and by leading banks, SCSS is open only to citizens over 60 years of age or those above 55 who have taken voluntary retirement. On opening an SCSS account, you can deposit up to Rs 15 lakh in total. The scheme has a five-year term extendible by three years. The interest rate is announced by the Centre at the beginning of each quarter.
|You can lock into the return at the time of entry until maturity. The current rate is 8.7 per cent (taxable).||Rs 15 lakh cap on investments per individual.|
|Good liquidity. Premature withdrawals are allowed one year after account opening with a penalty on interest rates, and require you to give up tax benefits.|
|Returns that are much higher than those from other small-savings schemes as well as bank options.|
|Safety is a given as it's a Government of India borrowing.|
Sukanya Samriddhi Yojana (SSY)
A scheme meant specifically for the parents of girl children to fund their education and wedding expenses, SSY is a post-office scheme that has to be opened in the name of your girl child within the first 10 years of her birth, with a minimum annual deposit of Rs Rs 250. The account matures when your daughter turns 21. Fifty per cent withdrawal is allowed for 'marriage' when your daughter turns 18.
|Offers fixed interest and is fully tax-free from investment to withdrawal. Currently, the interest rate is 8.5 per cent.||Illiquid|
|Flexibility to vary annual deposits.||Account has to be opened before your daughter turns 10.|