For a private employee in India, with an income of INR 6.5 lacs per annum, to minimize IT under 80C, which investment is most beneficial?
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4 Answers
Best of all the options is Provident Fund. Amount invested, interest and maturity is all exempted from income tax. Interest amount compounds annually. As a private employee, you would already have EPF (Employee Provident Fund) to which you are contributing through your employer involuntarily every month, you can also voluntarily (VPF) increase the contribution based on your needs, you can check with your employer (finance team) on the same.
There is also PPF (Public Provident Fund) which is provided by the major banks directly to individuals. Advantage of PPF is that the contribution could be flexible unlike EPF where the amount is constant every month. Minimum contribution could be as low as Rs. 500 per annum while maximum is 1.5L. Only one PPF account is allowed per individual. PPF also has the advantage over EPF that it is not impacted by your job change. Lock in Period is 15 years while loan (after 3 yrs) and withdrawal (after 7 yrs) options are available. Interest rate is set every year by govt of India.
While life insurance is critical, it is not an investment. ELSS/Mutual Fund is a good option to grow wealth but contributions are at market risk and other savings bonds are not as flexible as PPF. NPS also has links to market. Home loan is not an applicable investment option for everyone.
Contribution to PPF is recommended irrespective of the need to utilize the 80C limit, since it is a much needed risk free retirement corpus for individuals.
You can also invest 1.5 lakhs per year in tax-saving schemes such as Equity Linked Savings Scheme (ELSS). ELSS has a lock-in period of 3 years. ELSS funds are tax saving mutual funds, in which majority of the funds are invested in ""equity schemes"".
Edited: Please note Long-term Capital Gains (LTCG) tax are applicable on ELSS.
to minimize IT under 80C, which investment is most beneficial?
All are same. You can invest into any of the instruments under 80C and investments upto 1,50,000/- are deducted from Income. Depending of you tax bracket; the tax savings is 10% to 33%.
See the link on Income Tax India
Section 80C provides deduction to Individual/HUF in respect of various items like life insurance premium, investment in Public Provident Fund, investment in NSC, investment in notified units of mutual funds, deposit in Sukanya Samriddhi account, investment in mutual funds, amount paid for tution fees, repayment of principal component of housing loan, investment in Post Office Time Deposit Scheme, Senior Citizens Saving Scheme, etc.
Section 80C has a limit of Rs. 1,50,000/- towards tax exemption which includes a contribution towards your Provident fund in addition to other options like National Savings Certificate (NSC), National Pension Scheme (NPS Employee Contribution), Life Insurance Premium that you pay for self or dependents, Home loan principal repayment in case you have a home loan (Interest amount up to Rs. 2,00,000/- comes under section 24(B)). Refer here or Dheer's answer with the link for the list.
Among this list, NPS is unique, in the sense that it could also assist you in getting an additional tax exemption of Rs. 50,000/- under Section 80CCD-1B as Additional Employee Contribution. So in addition to your existing exemption under 80C, you have the option for getting Rs. 2,00,000/- tax exemption.
Refer the NPS FAQ for details on minimum contribution per year, withdrawal etc. (While the question is specifically about 80C, I feel it necessary to include this information as there are people unaware of this option).
In some companies there is also an option of Employer Contribution (up to 10% of your salary) towards NPS where your taxable income would be calculated after deduction of the employer contribution, this might aid in keeping you within specific tax slabs as your salary grows over time.
