Do you often wonder if you are doing enough to save tax? Worry not, you are alone. Every year several investors look for investment options under section 80C to lower their tax outgo. However, one should look for tax saving investments that not only help to save tax but also generate wealth. Before zeroing out among options under 80C, an investor should consider various factors such as liquidity, lock-in period, safety, and returns.

It comes as a shock to several people that they might not require to invest in tax saving investments. Let’s understand why:

Tax saving investments decrease your taxable income:

Tax saving investments aid only if you have a large taxable income. Usually, taxsaving investments begin to matter once an investor’s CTC (cost to company) is equal to greater than 5 lakhs p.a.

Your entire salary is not taxable

Several CTC components of a salary are not taxable. They are:

  1. House Rent Allowance (HRA): Some rules apply but usually 90% of the rent you pay
  2. PF employer contribution is exempted from taxable income
  3. A standard deduction of Rs50,000 from income is available to all salaried employees

Some components of your salary will help you to get a tax break

An employee’s contribution to EPF is counted towards Section 80C deduction of Rs1.5 lakh p.a.

You might have existing commitments that will lower your taxable income

  1. Payment of tuition fee for your child of up to Rs1.5 lakh can be claimed as deduction under Section 80C for a maximum of 2 children.
  2. Home loan principal repayment of up to Rs1.5 lakh is calculated towards Section 80C deductions.
  3. Home loan interest payments of up to Rs2 lakh for a self-occupied home can be deducted from your taxable income.
  4. Medical insurance premium paid up to Rs25,000 is reduced from your taxable income.
  5. Life insurance premium – Whatever amount you pay is counted towards Section 80C limit of Rs1.5 lakh.

Where should you invest to save tax?

If your income is still taxable after taking all these factors into account, you can invest in various tax saving investments.

An investor can choose between various 80C tax saving options such as National Savings Certificate (NSC), Public Provident Fund (PPF), Bank Fixed Deposits (FD), ELSS funds, etc. Among all the tax saving investments, ELSS funds enjoy the lowest lock-in period of 3 years, as opposed to 5 years and 15 years lock-in period by other tax saving investments. ELSS funds are known as tax saving mutual funds as these mutual funds qualify for a tax deduction of up to Rs1.5 lakh under Section 80C of the IT Act, 1961. An investor can save up to Rs46,800 each year by investing in these mutual fund tax saver. ELSS funds offer dual benefits of tax saving and providing significantly higher returns. Happy investing!