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The government, in order to encourage savings, gives tax breaks to certain financial products as discussed in Section 80C of the Income Tax Act. These investments are often referred to as 80C investments.

Up to a limit of Rs 1 lakh, the money that you invest in these products is deductible which means that you don’t have to pay income tax on it. Thus if you are in the 30 per cent tax bracket and you invest the maximum allowed you save Rs 30,000 in taxes.

There are a wide range of investments you can make to claim the Section 80C benefit. To keep things simple we will focus on two categories: Small savings schemes and ELSS (equity linked savings schemes). Other 80C products include your provident fund, the repayment of principal on your home loan and your life insurance premium.

Small savings schemes

These include the public provident fund (PPF) and National Savings Certificate (NSC). They offer a return of around 8 to 8.5 per cent which is quite low compared to typical returns in equity products. Furthermore, there is a relatively long lock-in period, 15 years for the PPF and 6 years for the NSC. Their main advantage is that they offer a guaranteed return unlike equity-based products.

Equity linked savings schemes

These are basically mutual funds which are specially created to provide tax benefits. As with regular mutual funds there is no guaranteed return and you can lose money in a period of falling stock prices as has happened in the first half of 2008. However, ELSS usually provides a higher return than small savings schemes and also a lower lock-in period of three years.

Examples of ELSS include Franklin India Taxshield and HDFC Taxsaver. As with regular mutual funds, these schemes pursue a range of investment strategies: For instance, some may focus on large cap stocks while others may focus on small and mid cap stocks. It makes sense to invest in more than one scheme to diversify some of your risk. See all of the ELSS available here

Other saving schemes

Subscription to any notified bonds of National Bank for Agriculture or Rural Development (applicable from assessment year 2008-2009).

Amount in fixed deposits of 5-years or more with a scheduled bank in accordance with a scheme framed and notified by the Central Government (applicable from assessment year 2007-2008).

5-year time deposit in an account under Post Office Time Deposits Rules 1981.

Any sum paid as tution fees for the admission or otherwise to any university/college/educational institution in India for full time eduction for any two children of the taxpayer.

Life insurance premium subject to 20 per cent of sum assured.