This article is written by Kamala Pulugundla.

Introduction

Given a choice, the majority of us would not like to pay tax on the income we earn. However, it is essential that we pay tax. As citizens of India, we are also consumers of the public infrastructure and facilities. Thus, it is our responsibility and duty to contribute towards its development and maintenance. This contribution can be made by duly paying the taxes on income to the government, after availing the benefits under the Income Tax Act, 1961 in the form of exemptions and deductions, as income tax is the major source of government revenue. 

The best time to plan investments, is the beginning of the financial year, which commences from April. This is because it will help you take planned and informed decisions rather than in a hurry. Early investments help you to earn compounded returns and help achieve long term goals. 

Following is a summary of tax saving investments for ready reference. It shall then be followed by a detailed analysis.

Summary:

Section / serial no	Particulars	Benefits	limitations
80C
1.1	Life Insurance Premium	Maturity proceeds tax tax-free u/s 10(10D) subject to conditions	Maximum deduction Rs. 150000
1.2	Public Provident Fund	Low risk and guaranteed returns Interest accrued exempt u/s 10(11) Maturity proceeds exempt u/s 10(11)	Maximum deduction Rs. 150000 Mandatory lock in period – 15 years
1.3	National Saving Certificate (NSC)	Interest received – deduction allowed u/s 80C Can avail secured loans against NSC	Maximum deduction Rs. 150000
1.4	Statutory Provident fund (SPF)/ Recognized Provident fund (RPF)	Interest on RPF exempt up to 9.5% SPF Interest fully exempt
1.5	Fixed deposits (FD) for a period of 5 years or more	Guaranteed returns Handsome interest depending on investment period Avail loans against FD
1.6	Notified bonds of NABARD	Tax free bonds. Thus no tax and TDS Secured, since backed by Government of India
1.7	Senior citizens saving scheme (SCSS)	Low risk, fixed income Maximum investment Rs. 15,00,000	Eligibility – individuals above the age of 60 years or retired at the age of 55 or later or under VRS Tenure – 5 years + 3 years Max deduction u/s 80C 1,50000
1.8	Unit Linked Insurance Plan (ULIP)	Maturity proceeds exempt u/s 10D. no long term capital gain	Maximum deduction Rs. 150000
1.9	Housing loan	Deduction in respect of principal amount repaid
1.10	Notified units of Mutual fund and ELSS	Consistent and regular returns subject to market risk.	Maximum deduction Rs. 150000 Lock in period of 3 years
80CCC	Contribution to Pension fund of LIC or other insurance company	Premium paid qualifies deduction Death benefit paid exempt u/s 10(20D) Commuted pension received is exempt	Maximum deduction Rs. 150000
3.80CCD	Contribution to Pension Scheme of Central Government/ New Pension Scheme (NPS)	Contribution qualifies for deduction maximum of Rs 1,50,000 Additional deduction of Rs. 50,000 granted u/s 80CCD(1) Employers Contribution can be claimed as deduction U/s 80CCD(2)
80CCE			Deduction u/s 80C + 80CCC + 80CCD(1) restricted to Rs. 1,50,000
80D	Medical Insurance Premium	Forced savings for securing health and saving tax

Detailed analysis

Specific Investments: Section 80C

Eligible Assessee: Individual and HUF

Aggregate maximum deduction that can be claimed for Investments u/s 80C: Rs. 1,50,000/-

Investments u/s 80C:

Life Insurance Premium (LIP):

Individual: can claim deduction for LIP paid for self, spouse and children. No deduction can be claimed in respect of LIP paid for parents.

Maximum premium that can be claimed as deduction:

If Policy issued before 01/04/2012:	If Policy issued after 01/04/2012:	If Policy issued after 01/04/2013 for a person with disability specified u/s 80U:
Lower of:	Lower of:	Lower of:
Premium paid	Premium paid	Premium paid
20% of sum assured	10% of sum assured	15% of sum assured

Example:

Premium paid: Rs. 20,000

Sum Assured: Rs. 1,35,000

Deduction Allowed will be as under:

If Policy issued before 01/04/2012:	If Policy issued after 01/04/2012:	If Policy issued after 01/04/2013 for a person with disability specified u/s 80U:
Lower of:	Lower of:	Lower of:
Premium paid: 20,000	Premium paid: 20,000	Premium paid: 20,000
20% of sum assured: 1,35,000*20% = 27,000	10% of sum assured: 13,500	15% of sum assured: 20,250
Deduction allowed: 20,000	Deduction allowed: 13,500	Deduction allowed: 20,000 (If the Policy was taken on after 01/04/2012 but before 01/04/2013, then maximum deduction allowed shall be 10% of sum assured i.e. 13,500.

Benefits

1. Deduction u/s 80C as specified above from the gross total income
2. U/s 10(10D) the proceeds on maturity are Tax-free subject to certain conditions:

Conditions u/s 10(10D): 

1. If the premium paid is within the above limits, then the proceeds on maturity are completely tax free.
2. If the premium paid exceeds the above limits, then taxability would be as under:

Receipts before 01/09/2019	Receipts after 01/09/2019
Entire sum assured taxable TDS applicable u/s 194DA: 1% on sum assured i.e. proceeds on maturity	Amount taxable: Maturity proceeds less premium paid TDS applicable u/s 194DA: 5% on Maturity proceeds less premium paid

Note: No TDS of proceeds on maturity is less than Rs. 1,00,000.

Amount deposited in Public Provident Fund (PPF)

(Contribution made in respect of resident assessee, spouse and children. Thus NRIs are not eligible to open a PPF account. However, existing accounts on their name can continue.)

Benefits:

1. Deposits in PPF account qualify for deduction u/s 80C
2. Low Risk and guaranteed returns as this plan is mandated by the government.
3. The annual contribution starts as low as Rs. 5,00 with a maximum cap on annual contribution of Rs.1,50,000.
4. Benefit of availing loans against the investment amount.

Note: 

1. Loan can be availed any time between 3rd and 6th year from the date of activation of the PPF account.
2. The maximum amount that can be availed as loan is 25% of the amount available in the PPF account.
3. The maximum period of loan availed as above is 3 years or 36 months.
4. Total interest accrued on investment in PPF is also exempt u/s 10(11).
5. Entire proceeds received on maturity also exempt u/s 10(11)
6. A further extension of 5 years is available after maturity.
7. Investment in PPF can be made in installments as well. A maximum of 12 installments is allowed in a year.

Limitations:

1. Mandatory lock in period of 15 years is imposed on the principal amount i.e. amount deposited. However, partial withdrawal is allowed in case of emergencies. Such a withdrawal can however be made only after 5 years of the activation of the PPF account. 50% of the total balance can be withdrawn in a single transaction permitted in a financial year.
2. Funds cannot be liquidated before the maturity.

 Investment in National Saving Certificate (NSC)

NSC is an Indian Government Savings bond, primarily for small savings and low risk appetite investors. It is a popular Income Tax saving instrument in India.

 Term: 5 – 10 years

Benefits:

1. Qualify for deduction u/s 80C
2. Interest received thereon on such Investment also allowed as deduction u/s 80C as the same gets accrued and reinvested, except in the year of maturity
3. Can be used to avail secured loans.

Maximum Limit: Rs. 1,50,000

Taxability:

Interest income accrued needs to be disclosed in the Income Tax Return and claimed as deduction every year except in the year of maturity. In the year of maturity, the interest income is taxable under the head Income from Other Sources.

Contribution towards Statutory provident fund (SPF), Recognized provident fund (RPF)

Benefits:

1. Deduction u/s 80C
2. You can transfer your old pension fund account to your new employer
3. Interest on RPF is exempt upto 9.5%. Interest exceeding 9.5% will be added to the employee’s salary.

Interest from SPF: fully exempt

Taxability:

Proceeds on termination of service or withdrawal is tax free provided, one has been in continuous service for not less than 5 years u/s 1(11) and 10(12). Service rendered to the previous employer is also considered. Benefit of exemption is also available if the continuous service is less than 5 years due to reasons beyond the control of the employee (illness, discontinuance of employer’s business, etc.)

If the above condition is not satisfied, then the amount of proceeds are taxable.

Applicability of TDS u/s 192A if proceeds are not exempt: 10% (TDS not applicable if proceeds are less than Rs. 50,000.

Fixed Deposits (FDs) in a Scheduled bank or Post office for 5 years or more

Benefits:

1. Deduction u/s 80C of the investment amount
2. Non-volatile investment with guaranteed return
3. Considerable interest rates

Limitation

1. Premature withdrawal not allowed
2. Loan cannot be availed against these tax saver FD’s

Taxability:

Interest earned on these FDs is taxable under the head income from other sources.

Applicability of TDS: 10% –

1. In case aggregate interest on FDs from a single bank exceeds Rs. 40,000 (w.e.f 011/0402019. Earlier the limit was Rs. 10,000)
2. In case of senior citizens, the above limit is Rs. 50,000

Deposits in notified bonds of NABARD

Benefits:

1. Deduction of investment amount u/s 80C.
2. NABARD issues tax free bonds thus there is no Tax and consequently no TDS under the Income Tax Act, 1961.
3. These bonds are backed by Government of India.
4. These bonds are mostly AAA or AA rated by CRISIL and are thus highly secure.
5. Considerable annual coupon rate/ interest and such interest is tax free.
6. NABARD tax-free bonds are proposed to be listed on stock exchange. Thus, the investor has the option to sell in the secondary market, if he wishes to exit.

Taxability:

NABARD also issues zero- Coupon Bonds. That is no interest/ coupon will be payable during the life of the bond. Such bonds are issued at deep discount and generally redeemed at par or face value. On maturity, the difference between the maturity value and issue price is treated as capital appreciation. If the holding period is more than one year, it shall be a long term capital gain at the rate of 10% without indexation benefit and 20% with indexation benefit as per section 112 of the Income Tax Act, 1961. This generates considerable tax efficiency as against other non-interest paying bonds or zero coupon bonds, where the differential amount is treated as interest instead of capital appreciation, and hence taxed under Income from other sources and taxed at regular slab rates along with other income.

Deposit in Senior Citizen Saving Scheme (SCSS)

Eligibility: 

1. Individuals above the age of 60 years.
2. Individuals who retired at the age of 55 years or later but before 60 years under superannuation or Voluntary retirement Scheme.
3. Retired defense personnel on satisfaction of certain terms and conditions.

Not eligible – NRIs, Person of Indian Origin, any member of a HUF

Benefits:

1. Low risk, fixed income investment, interest being paid quarterly
2. Moderate return. Current interest rate is 7.4%
3. It is similar to FDs but unlike FDs it is a government backed security and hence more secure.
4. Investment in this account can be made of an amount as low as Rs. 1,000, maximum investment cap being Rs. 15,00,000.
5. SCSS accounts can be held either individually or jointly with a spouse.
6. Premature termination is possible. However, it attracts a penalty of 1% – 1.5% of the deposit amount. No penalty will be charged if the investor is deceased before maturity.

Tenure of Deposit: 5 years with a further extension of 3 years

Taxability:

Interest Income which is credited to savings account of the same bank linked to it, shall be subject to tax at regular slab rates. TDS at the rate of 10% u/s 194A applicable if the total interest in a fiscal year exceeds Rs. 50,000.

Maximum deduction u/s 80C: Rs. 1,50,000.

Contribution to Unit Linked Insurance Plan (ULIP)

ULIP is a plan in which the policyholders pay either an annual or monthly premium. A small amount of this premium goes towards securing the life of the investor, and the balance amount is put into investments in stock, bonds, and mutual funds. Thus, it acts as both life insurance cover, as well as an investment plan. However, investments made are subject to capital market risks.

Benefits:

1. Deduction u/s 80C of the premium amount paid.
2. Dual benefit of protection and Investment.
3. ULIPs offer a range of high, medium and low risk investment options for varied risk appetite investors.
4. Maturity proceeds are exempt u/s 10D. Thus, there is no Long term capital gain tax.
5. Allows you to switch between fund options with no additional charges up to 12 switches in a year.
6. Partial withdrawal allowed in case of unforeseen future events.
7. Benefit of market linked growth without actually participating in the stock market.
8. Availability of top-up facility. Thus, an investor can voluntarily invest an amount over and above the premium amount, when the ULIP is performing well.

Maximum deduction u/s 80C: Rs. 1,50,000.

1.9. Housing Loan

Benefits:

1. Deduction in respect of interest paid on housing loan is available u/s 24 with a cap of Rs. 2,00,000 if the property is self-occupied. There is no limit on deduction under this section if the property is let-out.
2. Deduction in respect of Principal amount is available u/s 80C.

1.10. Notified units of Mutual fund

Benefits:

1. Deduction /us 80C of the amount invested, maximum cap being Rs.1,50,000.
2. Consistent and regular returns.
3. Offers varied types of investment plans to suit investor needs and long term goals.

Taxability:

1. Taxation of Dividend:

Up to financial year 2020-2021	From financial year 2020-2021
Concerned mutual fund was subject to Dividend Distribution Tax (DDT) u/s 115R	Mutual funds no longer liable to deduct DDT u/s 115R
Income received was exempt in the hands of investor u/s 10(35)	Dividend Income taxable at regular tax rates. TDS provisions are also applicable.

1J. Notified Pension Scheme of UTI or Mutual Fund

NOTE: aggregate amount of deduction /s 80C in respect of all the above schemes shall not exceed Rs. 1,50,000.

Contribution to Pension fund of LIC or other insurance company u/s 80CCC

Eligible assessee: Individual

Maximum amount of Deduction u/s 80CCC: Rs. 1,50,000

Benefits

1. Premium paid qualifies for deduction u/s 80CCC subject to maximum of Rs. 1,50,000
2. Death benefit paid under LIC Pension Plan is exempt u/s 10(10D)
3. Commuted pension received from such funds is exempt. Whereas, uncommuted pension received is taxable

Contribution to Pension Scheme of Central Government / new Pension Scheme (NPS): section 80CCD

Eligible Assessee: Individual

Amount of deduction:

1. 80CCD(1)

Salaried employees	Other Individuals
Lower of:	Lower of:
Employees contribution	Assessee’s contribution
10% of salary (Basic + DA)	20% of Gross Total Income

1. 80CCD(1B): Additional deduction of Rs. 50,000 shall be allowed other than contributions covered u/s 80CCD(1)
2. 80CCD(2): Employers contribution to NPS for the benefit of the employee:

Employers contribution is first taxed as salaries and thereafter allowed as deduction u/s 80CCD(2)

Deduction:

Lower of – 

Employer’s contribution

10% salary (Basic + DA)

80CCE: Aggregate deduction /s 80C + 80CCC + 80CCD(1) is restricted to a maximum of Rs. 1,50,000

Tax planning advice: Since 80CCD(1B) is not covered under 80CCE limit, it is advisable to first exhaust Rs. 50,000 deduction available u/s 80CCD(1B) and the balance u/s 80CCD(1).

Section 80D: Deduction in respect of medical Insurance Premium, central government health scheme, preventive health check-up and medical treatment

Eligible assessee: Individual & HUF

Deduction in respect of premium paid for:

In case of individual: self, spouse, dependent children and parents

In case of HUF: Any member of HUF

Amount of Deduction:

Particulars	Individual		HUF
	Self, spouse, dependent children	parents	Members
A Medical insurance premium	Yes	Yes	Yes
Central Government health scheme	Yes	No	No
Preventive health check-up	yes	yes	no
General deduction i +ii + iii	Max Rs. 25000	Max rs. 25000	Max rs. 25000
Additional deduction when policy taken on life of senior citizen	Max 25000	Max 25000	Max 25000
B. Medical Expenditure of senior citizen and mediclaim premium not paid for such person	Max deduction: 50,000	Max deduction: 50,000	Max deduction: 50,000
Maximum deduction (A+B)	Max deduction: 50,000	Max deduction: 50,000	Max deduction: 50,000

Benefits

1. Acts as both forced savings for securing health and savings in tax.

 Important pointers to be kept in mind while planning investments:

1. Check for existing tax-saving expenses like LIC Premiums, children’s tuition fees, Home loan repayment, etc.
2. Deduct the above amount from Rs. 1,50,000 to arrive at balance investment to be made, if the aggregate of the expenses in pt.1 is below Rs. 1,50,000
3. Choose appropriate tax-saving investments based on your risk-taking capability and short-term and long term fund requirements and goals.

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