It’s the last quarter of the financial year, and you’ll be thinking of ways to save on income tax. One of the most helpful sections of the Income-Tax Act is Section 80C that allows you a deduction of Rs 1.5 lakh. A very large number of tax-saving investment options are clubbed under Section 80C such as life insurance, five-year fixed deposits, PPF, EPF, Sukanya Samriddhi, National Savings Certificate, home loans, and pension plans. Which one of these many options is the right one for you?
How much do you need to invest?
There can be two possibilities. You’re just starting out in your financial life and haven’t made any tax saving investments yet under Section 80C. Or you may have been investing for some time. If you in the first category, let’s move on to the next sub-head. If you’re in the second category, take stock of tax-savings and 80C investments already done. For example, counting your home loan payments, EPF, children’s school tuition, and life insurance, you may have existing deductions of Rs 1.2 lakh leaving you just Rs 30,000 under the 80C limit. Let’s now look at what you need to do.
Have dependents? get life insurance
Life insurance is a must for anyone with financial dependents, or anyone repaying loans who wish to pass on debt-free assets to their heirs. If you have neither dependents nor liabilities, you may not need life insurance, so move on to the next point. If you do, you must calculate your life risks and buy an appropriate life cover. The first life cover for any person with dependents should be a term plan with a sum assured ideally 10-20x their annual income and a tenure till at least their retirement age.
For example, you’re 30 years old, earn Rs 5 lakh a year, and wish to retire at 60, so your minimum sum assured should be Rs 50 lakh for a minimum tenure of 30 years. With insurance out of the way, let’s look at investment options under Section 80C.
Do you have a risk appetite?
Risk appetite can be defined by how much money you can comfortably lose. The higher the risks, the higher the potential for returns. Under Section 80C, you have options that provide you low returns with low risk, and high returns with high risks. If you don’t have a risk appetite, move on to the next point. If you have a moderate risk appetite, you broadly have two options.
1) You can invest in ELSS mutual funds. ELSS funds have the lowest lock-in of all 80C investments: just three years. ELSS as a category of mutual funds have provided three-year returns of 8.41 per cent, five-year returns of 18.24 per cent, and 10-year returns of 11.95 per cent.
2) Invest in a ULIP, which mixes insurance and investment. However, as a life cover, it must be secondary to your term plan.
Don’t have a risk appetite?
There are several “safe” investments under Section 80C. First up, you have a whole set of options in small savings — basically, the government-backed investment options. PPF is the most rewarding option for investors in the general category. Then you have NSC, which is a five-year deposit.
Any persons raising a girl child can invest in the Sukanya Samriddhi Scheme.
And senior citizens can invest in the Senior Citizens Savings Scheme. Lastly, there is a less tax-efficient alternative to the NSC, which is the five-year deposit. All of these options can be availed at your local bank or post office.
Before you initiate any of these investments, be careful about the lock-in period. PPF and SSS have the longest tenures, which means they lack liquidity. However, they also provide triple-exempt returns.
* As per the CRISIL - AMFI ELSS Fund Performance Index for March 2018. Past performance does not guarantee future returns.
The writer is CEO, BankBazaar.com
