INTRODUCTION
Understanding how investments can lower tax liabilities is critical for successful personal finance planning. Individuals can drastically reduce their taxable income by strategically using deductions, lowering the amount of tax they owe. This article examines the different methods by which investments can be used to achieve tax benefits, with a focus on the provisions under Section 80C of the Income Tax Act of 1961.
Deductions are the claims that are applied to your taxable income to reduce the tax a person has to pay. It is used for income arising from various sources like PPF, Life insurance premiums, FDs, Senior citizen savings schemes, home loans, education loans, health insurance and investments on taxable income.
It is to be noted that a tax deduction is different from a tax exemption. A tax deduction is a sort of partial relief provided to the person on the taxable income whereas tax exemption may also include absolute relief from taxes. It means that the person will not be paying tax at all on that particular income.
SEVERAL TYPES OF DEDUCTIONS ARE MENTIONED UNDER 80C
Section 80C[1] talks about how tax can be saved by investments through various schemes which include the following:
Equity Linked Saving Schemes (ELSS) are a type of mutual fund investment that offers tax benefits and the potential for high returns, with a maximum allowable deduction of ₹150000 per annum. The Public Provident Fund (PPF) is a long-term savings instrument with a lock-in period of 15 years, and its interest and matured amount are tax-free. Contributions to the Employees Provident Fund (EPF) are eligible for deductions under Section 80C. Payments for life insurance policies are also deductible. The repayment of the principal amount of a home loan is covered under tax benefits. The Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme designed for the girl child. Investment in the National Savings Certificate (NSC) enjoys tax advantages. Lastly, the Senior Citizens Savings Scheme (SCSS) is a savings scheme specifically designed for senior citizens. All these instruments provide various benefits and are designed to cater to different needs and preferences of investors.[2]
Apart from the investment deduction, there are other Deductions as well which are provided under the Income Tax Act, of 1961
- Section 80CCC[3]: This section stipulates deductions for contributions to pension funds.
- Section 80CCD (1)[4]: Section encompasses investments in Atal Pension Yojana. It also considers other notified pension schemes. The deduction under Sections 80C 80CCC and 80CCD (1) may amount to ₹2 lakhs.
- Section 80CCD (1B)[5]: This unique sub-section provides an additional deduction. The citizens can deduct a sum of ₹50,000 for contributions. These contributions must be towards the National Pension System and must exceed the 80C limit.
- Section 80CCD (2)[6]: The subset discussed here correlates with the employer’s contribution. The contribution is towards the National Pension System.
Out of all the investment criteria that are mentioned under the Equity-linked savings scheme (ELSS), funds are a great option for saving tax.
Because only mutual funds that come under Section 80C of the Income Tax Act, of 1961 are eligible for deductions. You can claim a rebate on taxes up to ₹1,50,000 by investing in ELSS annually and save as much as ₹46,800 a year. Three years is the shortest locking term among all tax-saving investments. It means that your money gets blocked for a relatively short time which gives more flexibility than other options. Approximately 65% of their portfolio is invested in equities and equity-related instruments (like listed shares). [7]So, these funds expose themselves to the possibility of earning higher returns compared with other 80C options such as PPF or FDs. There is no cap on the upper limit; you can put any amount in them. Moreover, they offer facilities like starting with small monthly investment amounts and then increasing them over time. Investing in ELSS funds yields dual benefits. It can lead to tax deductions and the accumulation of wealth over time. The portfolio is mainly made up of equities. It also includes some exposure to fixed-income securities. One should aim for an investment horizon that is longer than five years. This will help to balance the market volatility that comes with equity exposure. ELSS funds do not assure returns—their performance hinges on the underlying securities.[8]
THE REASON WHY INVESTMENT FALLS UNDER DEDUCTIONS
Investments are touted among common people for myriad reasons. Primarily they allow individuals to accumulate wealth. This is achievable through mechanisms such as compound interest and dividend reinvestment, capital gains and appreciation. They also offer a safety net for the future. This ensures financial stability and security. Investments are a vital part of retirement planning. They provide a source of income for life’s later years. Investments can also serve to safeguard savings from inflation’s erosive effects; this is particularly true for investments that yield higher returns. Moreover, investments can assist individuals in achieving financial goals. Be it buying a house or funding education, investments play a significant role. Hence the importance of investment cannot be discounted. It’s a tool for accumulating wealth, preparing for retirement and realising financial aspirations.[9]
Deductions are provided for investments. This is done to encourage savings and stimulate economic growth. They incentivise individuals to save and invest. This leads to wealth accumulation over time. These investments contribute to capital formation which stimulates economic growth. Deductions also support financial goals making it easier for individuals to achieve milestones. Examples of such milestones are buying a house or funding an education. By providing deductions for investments, the government encourages individuals to create a safety net for their future. This ensures their financial stability and security. Deductions for investments in pension funds or retirement plans are also provided. This facilitates retirement planning. This helps individuals plan for a financially secure retirement. In essence, these deductions are a form of indirect government support. They encourage financial prudence and economic growth.[10]
CONCLUSION
Investments play an important role in shaping a person’s financial future by providing opportunities for wealth accumulation, financial stability, and retirement savings. Recognising the value of investments, the government offers tax breaks to encourage individuals to save and invest. These deductions not only reduce tax liability but also promote economic growth by increasing capital formation. ELSS, PPF, EPF, and other investment options covered by Section 80C of the Income Tax Act of 1961 provide significant tax benefits. ELSS funds, in particular, stand out for their high returns and flexibility. However, it is important to note that these funds do not guarantee returns, and their performance is determined by the underlying securities. In essence, strategic investments can provide two benefits: lower tax liability and long-term wealth accumulation. As a result, understanding the various investment options and their tax implications is critical for successful financial planning. It’s not just about lowering taxes; it’s about ensuring a secure financial future.
Author(s) Name: Reet Parihar (Lovely Professional University, Punjab)
Reference(s):
[1] Income-tax Act 1961, s 80C
[2] Ibid
[3] Income-tax Act 1961, s 80CCC
[4] Income-tax Act 1961, s 80CCD(1
[5] Income-tax Act 1961, s 80CCD(1B)
[6] Income-tax Act 1961, s 80CCD(2)
[7] ‘ELSS Funds’ (Groww) < https://groww.in/mutual-funds/equity-funds/elss-funds> accessed 04 May 2024
[8] ‘Why are ELSS Mutual Funds the Best Tax-Saving Option?’ (ClearTax, 16 March 2023) < https://cleartax.in/s/elss> accessed 04 May 2024
[9] ‘What Are Tax Deductions? Definition And Common Examples’ (Pay Stub)
< https://getpaystub.vercel.app/posts/tax-deduction> accessed 04 May 2024
[10] Lana Dolyna, ‘9 Reduction Tax Tactics for High-Income Earners in 2023 + FAQs’ (Tax Shark, January 2023)
< https://taxsharkinc.com/tax-reduction-tactics-for-high-income/> accessed 04 May 2024
