Tuesday, February 2, 2010

Section 80 C: A Tax Saving Tool (Part 1)

Section 80C is the refuge that all of us take to protect our hard earned money against the sword called TAXES. But it is important to know this section intoto to get the full benefits. Here is my humble attempt at this:

Section 80C offers you a deduction of upto Rs 1 Lakh from the total income for a year. This money needs to be spent/invested on the instruments mentioned under this section. Here are some of the instruments that can be used to garner this deduction. I'll list only the instruments with fixed returns in this post.
  • Public Provident Fund (PPF): From Rs 500 to a maximum limit of Rs 70000 each year. This has a lock-in period of 15 years. The current returns from this instrument are 8% p.a. which is again tax-free.
  • National Savings Certificate (NSC): From Rs 500 to any amount. Only Rs 100000 is considered for Tax exemprion though. It provides 8% p.a. with a lock-in of 6 years. The point to be considered here is that the returns are taxable and the after tax returns are approx 5.53%.
  • Employee Provident Fund: Your contribution as well as your employers contribution to your EPF are also considered under section 80C. You can withdraw money after 5 years but only under certain defined conditions. The returns are 8.5 % p.a. tax free.
  • Life Insurance - Endowment Plan: Endowment plans give you a life cover as well a fixed amount on maturity. Premiums are usually higher than the term plans. The returns vary from plan to plan and are usually lower than other instruments listed above.
  • Tax Saving Bank FD: The minimum investment is Rs 100 and varies from bank to bank. There is a lock-in period of 5 years. Returns are usually 6% to 8% p.a.
Wait for the next post where I'll talk about the market linked products.


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