Many taxpayers rush in to invest in tax saving instruments at the end of the year. They find themselves trapped in a dilemma situation because the deadline is approaching fast and they don’t have enough time to analyze what shall be the right product bouquet for tax saving based on their individual needs & requirements. In this state of confusion & rush they buy what they get easily.

Are you also confused??

If Yes, please go through my cover story to know which is the best option for you. I have ranked 9 of the most common investments under Section 80C on Six basic parameters: Risk, Return, Tax Implication, Safety, Flexibility and Liquidity. Each instrument has its own merits & demerits.

RATING: 1——–ELSS FUNDS———-RETURNS: 19.8 % (Past five years)
  • Investment in ELSS could provide capital growth over the long term since they invest in the equity market
  • An investment made in ELSS is eligible for tax exemption up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961
  • ELSS has the lowest lock-in period of 3 years as compared to other investment avenues
  • Since it is an equity linked scheme earning potential is very high.
  • Investor can opt for dividend option and get some gains during the lock-in period.

Equities over a longer time frame have the potential to outperform traditional instrument .

RATING: 2———-PUBLIC PROVIDENT FUND———-RETURNS: 8.10%
  • One of the general advantages of PPF is that there is no specific eligibility for opening a PPF account.  Any Indian national, irrespective of age and income class can open a PPF account in any bank or post offices .
  • There is a lock-in period of 15 years attached to PPF accountss.
  • Unmatched Rate of Interest @ 8.10 currently.
  • PPF enjoys EEE tax exemptions under Section 80C of Income Tax.  An EEE tax exemption means that the annual investment in your PPF account, the interest earned on your PPF account and the lump sum proceeds out of your PPF account are all exempted from Income Tax.
  • Operating a PPF account is as easy as maintaining your normal saving account.  You can deposit any amount falling within Rs 500 and Rs 1.5 lakh anytime during the fiscal year.
  • You can take loans or make partial withdrawals against your PPF account.
RATING: 3———-UNIT LINKED INSURANCE PLANS(ULIPs)———–RETURNS: 7.2 – 11.8 %(Past five years)
  • There’s a good reason why this most hated investment is so high on our rating scale. For many policyholders, Ulips denote the costly mistake they made a few years ago.
  • The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly investment. Though a Ulip should not be your first insurance policy, you can consider buying one as an investment that also helps you save tax. Of course, it also offers a life cover, but the stress is on investment, not protection.
  • Under the new Ulip rules, you cannot take a premium holiday. If you stop paying the premium, the policy will be discontinued. Also, you need to take a long-term view when you buy an insurance plan. A Ulip will yield good results only if you hold it for at least 10-12 years. Before that, the plan may not be able to recover the charges levied in the first few years. This is why short-term plans of 5-10 years usually give poor results, which pushes investors to dump them within 3-4 years of buying.

Buyers must also understand that a Ulip is not necessarily an equity-linked investment. You can also invest your Ulip corpus in debt funds. Instead of investing in the equity option, put your corpus in the debt fund. You can start shifting the money to the equity fund when the prospects look rosier. Only a Ulip allows you to switch from debt to equity, or vice versa, without incurring any capital gains tax. It is best to invest in a plain vanilla Ulip that allows you to choose your investment mix and also offers online transaction facilities.

RATING: 4———–VOLUNTARY PF———-RETURNS: 8.8 %

It is a type of investment option wherein a person (salaried employee) can contribute more than the normal compulsory deduction of 12% of your basic salary. This 12% is the one which employer deducts from your basic salary every month toward Employees’ Provident Fund (EPF). Only salaried employees in India can open VPF account. And employers are not under obligation to contribute.

  • Maximum Amount Contribution to VPF
  • 100% of Basic Salary and Dearness Allowance
  • Benefits of Investing In VPF
  • You can contribute more than 12 % (in fact, your whole salary) in VPF. This includes basic salary plus dearness allowance. So it becomes a better solution for securing you financial future.
  • Investments in VPF are made from your pre-tax income.
  • Employees contribution is eligible for deduction under section 80C of the Indian Income Tax., subject to a maximum of INR 1 Lakh.
  • Redemption:It is tax free unless withdrawn before the expiry of 5 years.
RATING: 5———–SENIOR CITIZEN’S SAVING SCHEME———–RETURNS: 8.6%
  • This remains the best way for retirees to save tax, though the Rs 15 lakh investment limit is a damper.
  • The interest rate is 100 basis points above the 5-year government bond yield.
  • Unlike the PPF, the change in interest rate does not affect the existing investments.
  • As a tax-saving tool, the scheme scores over bank fixed deposits and NSCs because the quarterly payment of the interest provides liquidity to the investor. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.
  • This aspect of the SCSS, and the fact that it is an ultra safe scheme backed by the government, makes it an ideal option for retired taxpayers looking for a steady stream of income.
  • The interest earned is fully taxable, retired people usually don’t have a high tax liability. Keep in mind that the basic tax exemption for senior citizens is higher at Rs 2.5 lakh. For very senior citizens, it is even higher at Rs 5 lakh.
  • Although the scheme is for senior citizens (60 years), even those above 55 years can invest if they have taken voluntary retirement. Retired defence personnel can join irrespective of their age if they fulfil other conditions.
RATING: 6———–NEW PENSION SCHEME(NPS)———-RETURNS: 4.2% – 10.2%(past 3 years)
  • Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. However, even though the fund management charges have been raised from the ridiculously unviable 0.0009 per cent to a more reasonable 0.25 per cent, the pension fund managers are not hard selling the scheme.
  • While the returns from the E class (equity) funds are in line with the market returns, those from the G class (gilt) funds are quite a disappointment. Government employees, who have a chunk of their pension funds in the G class schemes of LIC Pension Funds and SBI Pension Funds, would be especially hit. The redeeming feature is the high returns churned out by the C class (corporate bond) funds. However, these bonds carry a higher risk.
  • The scheme scores high on flexibility. The minimum annual contribution is Rs 6,000, which can be invested as a lump sum or in instalments of at least Rs 500. There is no upper limit. The investor also decides the percentage of the corpus that goes into equity, corporate bonds and government securities, the only limitation being the 50 per cent cap on exposure to equity.
  • One of the most outstanding features of the NPS is the ‘lifecycle fund’. It is meant for those who are not financially aware or can’t manage their asset allocation themselves.
  • Another positive feature of the NPS is the wide choice of funds for the investor. Though you can switch from one fund manager to the other only once in a year, it is still better than investing in a Ulip or a pension plan where you are stuck with the same fund manager for the rest of the tenure.
  • Another unique feature of the NPS is the tax benefit it offers under the newly added Section 80 CCD(2). Under this section, if an employer contributes 10 per cent of the salary (basic salary plus dearness allowance) to the NPS account of the employee, the amount gets tax exemption of up to Rs 1 lakh. This is over and above the Rs 1.5 lakh tax deduction under Section 80C. It’s a win-win situation for both because the employer also gets tax benefit under Section 36 I (IV) A for his contribution.
  • By putting in money in the NPS, the employer can provide an additional tax benefit to the employee by simply reorganizing the salary structure without incurring any additional cost to the company (CTC). The wart in the NPS is the lack of liquidity. You cannot access the funds before you turn 60. On maturity, at least 40 per cent of the corpus must be used to buy an annuity. Some see this as a positive feature that prevents premature withdrawals.
RATING: 7———-NSCs AND BANK FD’s———–RETURNS: 7% – 8%
  • There are many misconceptions about bank fixed deposits in the minds of investors. Many think that up to Rs 10,000 interest from bank deposits is tax-free, as announced in the budget two years ago. This is not true. The newly introduced Section 80TTA gives a deduction of up to Rs 10,000 on interest earned in the savings bank account, not on fixed deposits and recurring deposits.
  • Also, the nomenclature ‘tax-saving deposits’ means you save tax under Section 80C. It does not mean that these deposits are tax-free. The interest earned on deposits is fully taxable at the normal tax rate applicable to you.
  • In the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of the tax-free PPF.
  • The misconception is that there is no need to pay tax if TDS has been deducted by the bank. You may have to pay tax even if TDS has been deducted. TDS is only 10 per cent (20 per cent if you haven’t submitted your PAN details), and if you are in the 20-30 per cent bracket, you need to pay additional tax.
  • The interest on NSCs is also taxable but very few taxpayers include it in their returns. However, with the integration of tax records, a taxpayer may not be able to escape the tax net easily.
RATING: 8———-LIFE INSURANCE POLICIES (traditional plans)———-RETURNS: 4.5% – 7.5%
  • Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will find the tax-free corpus appealing.
  • Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly by ensuring a higher surrender value and larger life covers, they are still the worst way to save tax
  • These policies are not as illiquid as they appear. You can easily get a loan against your endowment policy from the LIC. The terms are quite lenient and repayment can be done at your convenience. Insurance companies claim their products offer the triple advantage of life cover, long-term savings and tax benefits. That’s not true. Traditional plans give a low life cover of 10 times the premium.
  • For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give niggardly returns. The internal rate of return (IRR) for a 10-year policy comes to around 5.75 per cent. For longer terms of 15-20 years, the IRR is better at 6.5-7.5 per cent. As for the tax benefit, there are simpler and more cost-effective ways to save tax, such as 5-year bank FDs and NSCs. If the taxability of the income worries you, go for the tax-free PPF.
  • However, traditional insurance policies still make a lot of sense for the HNI investor who is more concerned about the tax–free corpus under Section 10(10d) than the deduction under Section 80C. Even for such investors, a Ulip will make more sense as they will have control over the investment mix. The opacity of the traditional plan is best avoided, but your agent might not be very keen to sell you a Ulip this year because his commission has been cut to 6-7 per cent of the premium.
RATING: 9———-PENSION PLANS———-RETURNS: 6% – 8%
  • After a hiatus of 2-3 years, pension plans are making a comeback, but the high charges mean lower returns for investors.
  • The charges of these plans are significantly higher than those of the NPS. While the NPS has a fund management charge of 0.25 per cent, a typical pension plan from a life insurance company charges almost 3-4 per cent.
  • Insurers argue that the low-cost NPS is good only on paper because there are so many hurdles to investing in the scheme.
  • A few mutual funds also have pension plans. The Templeton India Pension Plan is one of the oldest schemes in the market and offers deduction under Section 80C. It is a debt-oriented fund that invests 30-40 per cent of its corpus in equities and the rest in debt. But at 10.7 per cent, its 5-year annualised returns are nothing to gloat about. A better option would be a combination of an ELSS scheme and any of the debt instruments that offer tax deduction.
RATING: 10———-RGESS: RAJIV GANDHI EQUITY SAVINGS SCHEME

The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional tax savings under the newly introduced Section 80 CCG. If you invest in the RGESS options, you can claim a deduction of 50 per cent of the invested amount. The maximum investment is Rs 50,000, so the maximum deduction availed of can be Rs 25,000. This is over and above the Rs 1 lakh limit available under Section 80C.

  • The scheme permits investments in the BSE-100 or CNX 100 shares, shares of Maharatna, Navratna or Miniratna PSUs, or in designated equity mutual funds and ETFs. Should you invest in it to avail of this benefit? We would not advise investing directly in shares just to claim tax deduction. In fact, the first-time investors are better off taking the mutual fund route.
  • If you do opt for any RGESS fund or ETF, your investment is locked in for three years (fixed lock-in period during the first year, followed by a flexible lock-in period for the two subsequent years). Under the flexible lock-in option, you are allowed to sell your RGESS shares or mutual funds units and reinvest the proceeds in any other RGESS instrument. This will enable you to get rid of the underperforming investments and shift to better options. However, in the absence of an SIP facility, you are exposed to market timing.
  • Also, the maximum tax saving you can get through this scheme is Rs 7,725 for those in the 30 per cent income tax bracket. In the 20 per cent bracket, the maximum saving is Rs 5,150, while you save only Rs 2,575 in the 10 per cent bracket. This is not much considering the risk you are taking by investing in equities. Besides, investors will also need to open a demat account to invest in the RGESS, which would incur annual charges.

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