You have come to the right place.
It’s quite incredible how many people are not aware of the tax saving investments deduction under section 80c or don’t take full advantage of their 80c limit of Rs 1.5 lakhs.
What are Income Tax Deductions and What is Section 80C Deduction ?
Let’s say you earn Rs 10 lakhs per annum as your gross salary.
The government gives you a standard deduction of Rs 2.5 lakhs and this is how you pay tax on your salary:
1.) Upto Rs 2.5 lakhs: Tax is Rs 0
2.) Rs 2.5 to 5 lakhs: Tax is 5% or Rs 12,500
3.) Rs 5 to 10 lakhs: Tax is 20% or Rs 1 lakh
Total Approximate Tax Paid: Rs 112,500 or roughly about Rs 9000 per month.
This is on the assumption that no income tax deductions Under Section 80C have taken place.
Just like the standard deduction of Rs 2.5 lakhs, the government gives you an additional deduction of upto Rs 1.5 lakhs if you invest Rs 1.5 in eligible products like PF / PPF / ELSS mutual funds or 5 year FDs.
That means, based on your tax bracket, you can save quite a lot of money as follows:
Tax Bracket of 10%: Annual Saving of ~Rs 15,000/
Tax Bracket of 20%: Annual Saving of ~Rs 30,000/
Tax Bracket of 30%: Annual Saving of ~Rs 45,000/
That means, if you are in the top tax bracket and are not taking advantage of Tax saving investments under section 80c deduction, you are essentially giving the government about Rs 4000 for free every month.
How To Save Income Tax ?
First determine how much money you can save and then invest in appropriate products.
Most people put their money in a lumpsum in PPF or the Public Provident Fund. However, investing in ELSS Mutual Funds for tax saving investments is a much better. Here are 3 reasons why ELSS is better than PPF :
1.) Most people already have PF or EPF deducted as part of the salary. PPF was designed for those who don’t get PF from their employers
2.) Returns: PPF will give you about 7% returns while you can earn ~15% annual returns in ELSS mutual funds
3.) Lockin Period: PPF has a lockin period of 15 years, while ELSS mutual funds have a lockin period of only 3 years.
ELSS Mutual Funds are part of the growth asset class the difference in returns along with the power of compounding over the long term result in a huge difference.
E.g. If you invest Rs 10000 per month in tax saving investments, here is how much money you can have after 15 years in:
- In PPF, you can have about Rs 35 lakhs ( ~ 8% annual returns )
- In ELSS Mutual Funds, you can have about Rs 65 lakhs ( ~ 15% annual returns )
That’s a difference of 30 lakhs over the years.
You can invest either via one time Lumpsum or via regular monthly installments ( SIPs ) and If you have never invested in ELSS Mutual Funds for Tax Saving Investments under section 80c, we recommend you try at-least for a year.
If you already know how much to invest for Tax Saving Investments Under Section 80C, we can help you make your investments online .