If you are earning income which is liable to be taxed under the Income tax Act, then I will tell you how you can pay significantly lower income tax. Income tax is reduced when you claim deduction under chapter VI-A. Section 80C is the most popular deduction in income tax Act. In this article, we have compared various 80C Deduction instruments such as ELSS Vs PPF, NPS Vs PPF, EPF Vs PPF, NSC Vs PPF, and Life Insurance.
If you are an employee or plan to be one in the future, you can save on income tax by investing in the right places. Section 80C of our Income Tax Act provides us many instruments and ways where you can invest to pay less tax. It is covered under chapter VI A of income tax Act and known as ‘Deduction’.
If you invest in these instruments, you will get a deduction from your income. So that you don’t have to pay tax on the amount which are invested in these instruments. So basically you are saving on your income tax by way of deductions under chapter VI A of income tax Act..
Section 80C of income tax says that if you invest a total of Rs. 1.5 lakhs in specific instruments and securities, then you won’t have to pay tax on that amount. So I am going to tell you about those specific investments to reduce income tax. And will also tell you about the most popular and the safest options among these.
Being an employee, the first option in section 80C deductions is EPF ie. Employees’ Provident Fund.
Comparison: ELSS Vs PPF, NPS Vs PPF, EPF Vs PPF, NSC Vs PPF
EPF vs PPF: Income tax deduction for EPF
EPF ie. Employees’ Provident Fund is one of the older and popular schemes introduced by the Government of India.
You can apply for an EPF if you draw a salary and this option is available for those employees where employer is registered under EPF Act.
As per this scheme, 12% of the salary that you draw is invested in EPF, while your employer invests an additional 12% on your behalf. So in total, 24% of your salary goes into EPF.
Of the 12% that you pay, you don’t have to pay tax on your (employee’s contribution to EPF). The maximum limit of deduction under income tax for EPF is Rs. 1.50 lakhs per year. And the amount that the employer pays on your behalf, you don’t have to pay tax on any of it.
So you save a lot on your income tax if you invest 12% of your salary in EPF. Once you invest in EPF, you earn an interest on your EPF balance every year.
The exact interest rate on EPF is decided by the EPFO every year and may fluctuate a little, In the Financial year 2019-20, it was 8.50%
EPF Lock-in Period: When can you withdraw the money from EPF?
Generally, there is a lock-in period of 5 years. Which means you cannot withdraw the money before 5 years. Even after 5 years, there are a few conditions limiting the amount of money you can withdraw, according to the reasons for withdrawal.
For example, if you need money for your child’s education or marriage, then you can take withdraw money from your EPF account. But generally this policy was made by the Government to provide for you after your retirement.
EPF is for Retirement
When you stop working, you can withdraw your money from EPF. That was the purpose for which it was created and named after. While you are an employee, you invest in Employees’ Provident Fund Scheme, and when you retire and stop drawing a salary, you can use this Fund.
Investing in EPF is very simple. Simply go to your employer and ask them to register you for an EPF, if they haven’t already. Once that is done ask for the UAN number. After which, download the Umang app.
Umang app was introduced by the Government and it shows the monthly balance of your EPF account and the interest earned. You can go to this section of the app. This app was created by the Government rather than a private company.
If you are a salaried person, and you can afford to save 24% of your salary, this is a good option for saving and you should definitely go for it.
ELSS Vs PPF: Income Tax Deduction on PPF
Similar to EPF, another amazing scheme by the government for income tax saving is PPF ie. Public Provident Fund. PPF is applicable for everyone and it is very simple.
Basically you can invest Rs. 1.5 lakhs in a year per person. And you can get a very good interest on PPF balance. The interest rate on PPF is decided by the government quaterly.
You can start a PPF account for every person in the family, even if you have kids of less than 18 years old, and invest Rs. 1.5 lakhs per year in the PPF account on their behalf.
For example, if you invest Rs. 1.5 lakhs every year for 10 years, and the interest rate remains 7.6%, after 10 years your investment amounts to Rs. 15 lakhs. But you get Rs. 23 lakhs. So you can see the huge difference between Rs. 15 lakhs and Rs. 23 lakhs So I will recommend that you should definitely go for a PPF.
PPF follows EEE model, which means you get tax deduction at the time of investment, Interest earned on PPF is exempted and withdrawal from PPF is also exempted.
And the best thing is that on the Rs. 23 lakhs that you withdraw, you do not have to pay any tax. But if you had invested the same amount in some other place, like in a fixed deposit or stock market, you would have had to pay tax on the returns. That’s a big difference.
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how to register for PPF
So how do you register for a PPF? It is very easy, you can go to any post office or a designated bank to register for PPF.
There are no set rules about how you have to invest in the PPF. You can deposit a certain sum monthly or yearly The lock-in period for PPF is 15 years. It is a long term investment.
If you want to withdraw the full amount from the PPF account then you can do so only after 15 years. You can make partial withdrawals before the 15 years but only after the maturity period.
Read this, If you want detailed guide on Public Provident Fund (PPF Account)- Eligibility, Documents, How to open, Tax benefits: Guide
Another major advantage of EPF and PPF is that they are Government schemes. And are the safest options to invest because of zero risks. The market may fluctuate but your money will be safe. The returns in the stock market or any other place are unpredictable. But here the return is fixed and the risk is zero.
What is ELSS for Section 80C deduction
The third method of investment in a tax saving scheme is ELSS. Which is Equity Linked Saving Schemes. ELSS is a type of mutual fund and is also covered under chapter VIA for deduction under Section 80C.
If you invest money in ELSS, Upto Rs. 1.5 lakh of the investment per year will be exempt from tax. But it is linked with the market, so the returns will fluctuate with the market.
Potentially, it can give returns much higher or lower than EPF or PPF, because it depends on the market.
How can you invest in ELSS (Equity Linked Savings Scheme) ?
Investment in ELSS is done same as Mutual Funds. You can go through an Asset Management Company, or use an app like the Groww app. So you can look into different types of ELSS funds and check their reviews. Before investing you should check the historical performance of all the mutual funds. That is the return rate of the mutual fund in the last few years. You can check this for every mutual fund.
However, you cannot predict the future of the market based on historical performances, but you can get an idea of what kind of returns to expect. For example, assume that you invest Rs. 2 lakhs in an ELSS which increases to Rs. 2.5 lakhs after 3 years. You do not have to pay tax for Rs. 1.5 lakhs of it, nor on the interest that you earn in the 3 years.
However, there is a new tax of 10% introduced in 2018, Long Term Capital Gains tax. It will be applicable on the amount that you withdraw, in case if it exceeds more than Rs. 1 lakh. There will be no taxes other than this.
The lock-in period for ELSS (Equity Linked Savings Scheme) is 3 years.
NPS vs PPF: Best investment for 80C deduction
NPS vs PPF is explained: NPS Vs PPF: Which one is better Retirement Plan with Tax Saving Benefits
Income tax Deduction on Life Insurance
The fourth option for tax savings is Life Insurance. But life insurance is not considered an investment, because you do not invest in life insurance for the returns. You invest in life insurance for security.
If you invest in life insurance, it is also included for deduction under section 80C. You do not have to pay tax on Rs. 1.5 lakhs of your investment.
My suggestion while taking life insurance would be to take pure insurance, Known as “Term Insurance”. Nowadays, there are many life insurance companies that collaborate with the banks, and try to sell schemes where they show high returns of an investment to you. However, stay away from these things because they have high risks and hidden charges.
Unfortunately, Rs. 1.5 lakhs limit under section 80C is for the total investment. This means, for example, if you invested Rs. 10 lakhs in EPFs, PPFs, Life Insurances, and ELSS, then out of the Rs. 10 lakhs, only Rs. 1.5 lakhs per year would be exempt from tax.
Similarly, there is a section 80D for health insurance, whose maximum limit is Rs. 50,000. If you invest up to Rs. 50,000 in health insurance it will be tax-free.
If you have kept your money in a normal savings bank account, and you get interest on it at around 3-4%, the interest that you get there is exempt from tax till Rs. 10,000. This is defined in section 80TTA. This is a new section in the Income Tax Act, which states that the interest from saving account will be exempt from tax till RS. 10,000.
These were the most popular ways of saving taxes, which is recommended by the Government itself. If you want to know more about these methods and the benefits applicable to a salaried person, then Read: All Income Tax Deductions under Chapter VIA to lower taxes. Hope the above comparison between ELSS Vs PPF, NPS Vs PPF, EPF Vs PPF, NSC Vs PPF is useful.
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