If you have opted for the old income tax regime and invested under Section 80C, your investments can do more than just reduce tax liability. Instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), and traditional life insurance policies can also serve as a financial cushion during temporary cash shortages.
Many taxpayers assume that money invested for tax-saving purposes remains completely locked until maturity. While that is partly true, certain rules allow loans or partial withdrawals under specific conditions. Understanding these provisions can help you manage liquidity without prematurely liquidating long-term investments.
Under Section 80C of the Income Tax Act, individuals can claim deductions of up to ₹1.5 lakh annually by investing in eligible instruments or making specified payments. Some expenses, such as term life insurance premiums or children’s tuition fees, do not generate returns. However, investment-based options like PPF, NSC, ELSS, and traditional life insurance policies accumulate value over time.
In situations of temporary financial stress, these investments may offer borrowing or withdrawal options—subject to eligibility conditions. Here’s a closer look at how each instrument works.
The Public Provident Fund is a long-term savings scheme with a 15-year maturity period. Investors can contribute up to ₹1.5 lakh per financial year and claim tax benefits under Section 80C.
Although PPF is designed for long-term wealth accumulation, it provides limited liquidity:
Loan Facility:
You can apply for a loan after the completion of one financial year from the end of the year in which the account was opened, but before five financial years have passed. The maximum loan amount is 25% of the balance available at the end of the second financial year preceding the year of application. For example, if you apply in the third year, the loan eligibility will be calculated based on the balance from two years earlier.
Partial Withdrawal:
After five financial years from the end of the year of initial subscription, partial withdrawals are permitted. The withdrawal limit is up to 50% of the lower of:
The account balance at the end of the fourth year preceding the withdrawal year, or
The balance at the end of the previous financial year.
Importantly, partial withdrawals do not need to be repaid. This makes PPF a structured but useful option for handling short-term liquidity needs.
The National Savings Certificate is another popular tax-saving instrument with a five-year maturity period. Generally, premature encashment is not allowed except in exceptional circumstances.
However, investors can pledge NSC certificates as collateral to secure loans from banks or non-banking financial companies (NBFCs). Typically, lenders offer 70% to 80% of the certificate’s face value as a loan. The interest rate depends on the lender’s prevailing terms and broader interest rate conditions.
By opting for a loan instead of early encashment, you can retain your investment, continue earning returns, and preserve your tax benefits under Section 80C.
The Equity Linked Savings Scheme is a tax-saving mutual fund with a three-year lock-in period—the shortest among Section 80C instruments. Since ELSS investments are market-linked, returns depend on equity market performance.
Once the three-year lock-in ends, investors are free to redeem their units at any time. However, redemption decisions should consider prevailing market conditions. If markets are volatile or returns are unfavourable, waiting may be a prudent choice.
An important strategy is that investors can redeem older ELSS units and reinvest the proceeds into a new ELSS scheme. This allows them to claim fresh tax deductions under Section 80C without deploying additional funds, provided eligibility conditions are met.
Additionally, some financial institutions may offer loans against mutual fund units based on their Net Asset Value (NAV), providing another liquidity option without immediate liquidation.
Traditional life insurance policies that build a savings component may also offer borrowing facilities. Once a policy acquires a paid-up or surrender value—usually after paying premiums for a minimum number of years (often five)—policyholders can take a loan against it.
The loan amount is generally a percentage of the policy’s surrender value. Interest rates and terms vary by insurer. This can provide short-term financial relief while keeping the policy active.
However, pure term insurance plans do not offer loan facilities because they do not accumulate any cash value. They are designed solely to provide life cover without an investment component.
While these options offer flexibility, financial experts advise using them cautiously. Loans against investments carry interest costs, and premature withdrawals may affect long-term wealth accumulation.
Before tapping into these instruments, assess:
The urgency of your cash requirement
The cost of borrowing
The potential impact on long-term financial goals
Section 80C investments are not just tax-saving tools—they can also act as a backup during temporary financial strain. By understanding the rules and conditions, you can address liquidity challenges without dismantling your long-term financial planning strategy.
