Here’s everything you don’t know about 80C
ELSS is just the tip of the iceberg
If I were to ask you, right now, to stop reading this and come up with an analogy that helped draw parallels with tax saving investments, then, what would you come up with?
Go on, take a minute to think over it.
Done?
In the time that you took to think over it, which we all know you didn’t, if you came up with anything at all, then, I’d be more worried than impressed. Because, that was a pretty peculiar question, one I expected nobody to answer.
Moving on.
If you’re still wondering about what the analogy would be, then, let me put you out of your misery.
It would be apt to compare tax saving investments (aka 80C in India) to an iceberg. Not the sort that sunk the titanic, but just a plain old iceberg, chillin’ all day long and hiding more than what meets the eye.
Tax saving investments in India, 80C, for most young people seem to live and die with ELSS (Equity Linked Saving Schemes) mutual funds. While, ELSS might be the newest kid on the block, there are other investment vehicles which come under 80C, on which this articles aims to shine a light on.
Before we get into the thick of things, lets get our fundamentals right.
What’s a tax saving investment?
Let’s say your yearly salary is Rs. 10,00,000–10 lakhs if you’d didn’t want to count the zeroes. Now in a world without tax saving investments you would be paying taxes on your entire salary, your net taxable income.
Now, look at the world around you, a world which allows people to make tax saving investments. In this scenario, the government provides the citizens with various investment schemes, where if you invest a certain amount of money, the same amount would be reduced from your net taxable income i.e. you would end up paying a lesser amount of tax.
Sounds good right?
Now, let’s talk about numbers, in India, according to section 80C of the tax code, you’re allowed to invest a maximum of 1.5 lakhs every year in these government approved schemes. So, what this means is that you have an opportunity to reduce your net taxable income by a maximum of 1.5 lakhs.
It’s a win win for you, you get to save some money and also earn substantial returns on them. But you cannot be the only one benefitting from all this, wondered who else might be winning with you?
Why do tax saving investments exist?
For development.
Every organisation needs money to expand and serve more people, and also to make more money. There are multiple routes to find this money: private investors, going public, offering bonds, and taking loans. And the government also has many such enterprises that need expansion money. So, where does it get it from?
From you.
There are two ways in which this happens: they either take it from you in the way of taxes, or they make you willingly give them that money in the form of tax saving investments.
What’s coming next should clear the air up.
When you invest in tax saving schemes, you’re essentially lending money to the government, which in turn, lends it to it’s entities. These can be government run banks, transportation, public services, etc.
And as is the nature of all investments or loans, the party infusing the capital does so to earn some interest, also referred to as returns.
So these returns go to the government, which, keeps a bit of it as commission and passes on the remaining to you, the investor.
So, either directly or otherwise, the government is making sure that you contribute to the nation’s development.
Smart, isn’t it?
Why does 80C make for a compelling choice?
Because the gains here are two fold.
One, you’re reducing the amount of tax you pay.
And two, you’re ensuring that the amount you save is not just sitting idle, but instead it’s growing.
Different schemes that fit the bill
Before we dive into this, let’s address the general theme here.
Almost all of these schemes have a lock in period, i.e. money once invested cannot be pulled out before the prescribed amount of time has elapsed.
The returns from these investments, in most cases, are not taxed.
Lastly, most of these schemes promise a fixed rate of return, but the rate of return can be revised. Which means, it’s guaranteed that your money will earn as much as they have promised for the period that they have promised it for, but, they can promise different rates of returns for different periods in the future.
PPF
PPF stands for Public Provident Fund, it’s retirement oriented investment scheme and therefore has longer lock In periods.
Duration- 15 years lock in and can be extended 5 years at a time.
Returns- fixed rate of returns which can be revised in the future
Max deposit limit of 1.5lakhs per year.
EPF
If you’re employed, then, it’s highly likely that you have a EPF account. Here, the employer and you, both, contribute 12% of your salary to aid in your retirement.
And the money that goes in here can be claimed as an exemption under 80C.
Lock in- 5 years and you can make partial withdrawals
Returns- fixed rate of returns which can be revised in the future
Tax Saving FDs
These are a type of fixed deposit that is offered at most banks and money saved here is eligible for tax emption. And the maximum allowable amount is 1.5lakhs every financial year.
ELSS
These are probably one of the most famous schemes in this department. They’re mutual funds that invest your money in equities and other instruments.
They’re relativley riskier means of investment in this list, but also keep in mind that the other’s aren’t very risky to begin with.
Lock in period of 3 years.
Taxation- all withdrawals with gains under 1 lakh in one financial year are exempted from taxation. Any amount greater than 1 lakh is taxed at10%.
Life Insurance Premiums
Premiums paid towards life insurance policies are exempted from taxation, however there’s a caveat, only an annual premium of upto 10% (of the policy’s total sum assured) is exempted from being taxed.
Unit Linked Insurance Plans
If you’ve ever watched an LIC ad then, chances are, you’ve heard of the term ULIP, which stands for the name of this section. It’s just a fancy name for a scheme that behaves just like a mutual fund, but also provides you with insurance cover. In other words, the money you invest in it will grow, while providing you with insurance cover.
These schemes have different lock in periods and again the tax exemption is capped at 1.5 lakhs.
When it comes to insurance, there are many different kinds of schemes and all have different investment goals as well as lock-in periods.
This isn’t the complete list of investments, there are a few more schemes, but, those aren’t geared towards younger people like us. For now, these many options should suffice.
So, what was the point of all this?
Every year, when the time comes to invest in tax saving schemes it’s easy to go with ELSS, but there’s a reason why there are so many options.
Everybody has different investment objectives and needs, and obviously, just one scheme doesn't fit all. So, armed with this knowledge you can, hopefully, be able to better evaluate your requirements and find the means of investment that works for you.
You’re part of an exclusive club now
Not many people have a clear idea about all the things that you just learnt about and that too at your age, assuming that you’re relatively young.
Now, empowered with this knowledge, you’ll find your self cruising more effortlessly through the financial part of adulting than your peers.
Which brings us to the most important responsibility that all members of this club have, that is to educate people around you on financial literacy and give them the same gift of empowerment that you have received.
Why does Let’s Talk Money exist?
To empower you.
Because, we understand the impact that the knowledge of a new tool or skill can have on somebody’s life.
And, financial literacy is one of those tools. It holds the potential, if harnessed, to change the entire course of a person’s life. Which is why we are working towards making the conversation around it more fun and engaging so that we can empower as many people as we can.
Taxes are confusing, aren’t they?
This article and the continuing series that follows should help you navigate the confusion, smartly.
What you need to know before putting your money into mutual funds
Have you made your first investment yet?
If not, read the series of articles covering why you should invest to how you can get started.
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