The tax payer’s Bible

Keep this list of the smartest tax saving instruments by your bedside and ward off your tax worry demons

woman calculatingA common folly several individuals make while planning their taxes is that they invest in tax instruments only to save tax. This philosophy makes them select wrong options. Or else, they opt for options that everyone invests in just to get the tax hassle over with. The right approach is to plan your taxes in way that gives you maximum benefits and fits in your overall financial plan as well.

Here is a brief overview of the tax saving options available. Bear in mind though that the maximum limit for availing tax rebate is Rs 1 lakh combining sections 80C, 80CCC and 80CCD.

The 80 C basket

The tax-saving options under Section 80C come under two heads—investments and expenditures.

Investment-related avenues

Equity Linked Savings Schemes [ELSS]: These are equity mutual funds with a lock-in period of three years. Is it a good option? Yes. Although these invest in equities they have the best potential returns over a long period of time. A good choice if retirement is years away for you. Systematic investment in ELSS averages the volatility and gives better returns over the long run. Also, the dividend paid is tax-free. If you are opting for ELSS select the Growth or Dividend Payout option and not the Dividend Reinvestment option, as the dividend reinvested will fall in the three year lock-in loop.

Public Provident Fund [PPF]: PPF falls under Exempt Exempt Exempt [EEE] regime where, invested money up to Rs 70,000 is exempt every year – [the first E]; the interest earned at 8 per cent per annum is exempt [the second E]; lastly even the amount received on maturity is exempt[ the third E]. Is it a good Option? Yes; It’s the best among all assured return investments. And a very lucrative retirement planning or long-term savings tool.

Employment Provident Fund [EPF]: This option is available only for the salaried, where EPF is automatically deducted from the pay. While both you and your employer contribute towards it, you’re your share is eligible as deduction u/s 80C. Is it a good option? Yes. The current rate of interest is 8.5 per cent per annum and tax free.

National Savings Certificate [NSC]: This is a 6-year small savings instrument with 8 per cent rate of interest, compounded half yearly. The interest is payable only at maturity and keeps getting reinvested till then. The interest is eligible for deduction under section 80C, only if you have not already reached your Rs 1 lakh ceiling. Also, from the year in which you have invested in an NSC, just the interest income will be eligible for deduction. Is it a good Option? Only as a last resort, as although interest becomes eligible for deduction u/s 80C in the following years, it is also taxable under the head of interest income. Net effective rate is not very attractive.

5 year Post Office Time Deposit: Of all the post office investment options, only the 5 year time deposit qualifies for deduction under section 80C. The rate of interest is 7.5 per cent per annum and compounded quarterly. Hence, the effective rate of interest comes to 7.71 per cent, and is completely taxable. Is it a good option? Only as a last resort or if you are nearing retirement.

5 year Fixed Deposit: Bank fixed bank deposits [FDs] with a lock-in period of five years are eligible for deduction. The interest rates are similar to non-tax saving fixed deposits and interest is taxable. Also, you do not have the option to exit the FD under any circumstance before five years. Is it a good option? As a last resort.

Life Insurance premium: This is one of the most popular instruments. Although life insurance is necessary, do not avail it for its investment benefits, but for its risk cover. Is it a good option? Yes. Take care, however, that your premium amount does not exceed 20 per cent of the sum assured; the excess premium is not be eligible for deduction under section 80C.

Pension plans: These are eligible for deduction under section 80CCC [which comes under the limit of Rs 1 lakh]. The scheme falls under EET. This means that although the investment amount and interest earned are exempt from tax, the pension on withdrawal, is taxable. Is it a good option? Not a smart option.

Select options depending upon your age, financial goals and risk profile.


Home loan: Repayment of the principal sum borrowed for purchase or construction of a house is available as deduction. This deduction is only available once you get the possession. If the property is under construction, you will be able to avail tax benefits only if the construction is completed within three years.

Up to Rs 1.5 lakh of the amount paid towards the interest of the home loan is eligible as deduction under section 24(b) of Income tax act. The interest component is considered for deduction even if it is not paid during the year. Once again, the purchase/construction of the house has to be completed within three years from the end of the financial year in which the money was borrowed.

Expenses incurred on purchase of the house: All expenses incurred while purchasing a house—stamp duty, registration fees and any other expenses are available as deductions u/s 80C, in the year in which they incur.

Tuition fees: Expenses incurred on education of children are considered but only for two children and for the purpose of full time education only.

Sheetal Jhaveri
Sheetal Jhaveri holds MBA[Finance] and CFP degrees and is also certified by AMFI and IRDA. She runs her own financial consultancy in Mumbai and writes on finance for several leading publications. Besides her profession, she loves to travel, read and paint.


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