Death & Taxes are the only two things that are certain in this world. And yet we fear them both. While we do not have a solution for your fear of death, we can definitely help remove your fear of taxes. Read on—
We all know that Sec 80 C of The Income Tax Act allows us a deduction from total income up to a maximum of Rs. 1 lac if one has invested in a certain set of investment avenues during the financial year.

The Investment avenues &/or contributions allowed under Sec 80C can be broadly classified into following 4 categories:

  • I. Contribution to Life Insurance
  • II. Assured Return Schemes
  • III. Market Linked Schemes
  • IV. Other Contributions
Particulars of Investments / Contributions allowed U/s 80CExpected Rate of ReturnLock-in PeriodMin. / Max. InvestmentPremature Withdrawal
% per annumYearsRs. Per annumYes/No
I. Life Insurance Contributions
Life Insurance Premia (Term Plan, Money Back, Endow. Plans etc.)Depends on the plan & the term (in single digits)Depends on the plan & Term (Long Term -10+ years)Depends on the plan & Insurance coverDepends on the plan & term
II. Assured Return Investments
Public Provident Fund (PPF)8% pa15 YearsMin.-Rs. 700 pa Max – Rs. 70,000 paFrom 7th year onwards
National Savings Certificate (NSC)8% pa compounded Half yearly6 YearsMin. – Rs. 100 pa & Max – No limitNo
Post Office Time Deposits (POTD)1 Year- 6.25% pa2 Year – 6.50% pa3 Year – 7.25% pa5 Year – 7.50% pa1 to 5 YearsMin. – Rs. 200 pa & Max – No limitYes
Senior Citizens Savings Scheme (SCSS)9% pa (payable quarterly)5 YearsMin. – Rs. 1,000 pa & Max – Rs. 15 lacsYes
III. Market Linked Investments
New Pension Scheme (NPS)Market linkedLong TermRs. 6,000 pa minimumYes but only partially
Unit Linked Insurance Plans(ULIPs)Market linked5 yearsdepends on the scheme chosenYes
Tax Saving Mutual Funds (ELSS)Market linked3 YearsDeduction allowed for a Max. amount of Rs. 1 lacsNo
IV. Other Contributions
Tuition fees paid for children’s educationIt is an ExpenditureMaximum for 2 ChildrenNA
Principal component of your Home Loan repaymentMax. Rs. 1 Lac allowed u/s 80C

The right approach

Tax planning investments have to be planned in a way that it helps youcreate WEALTH and in the process help you reduce your tax liability as well. Further, your risk taking capacity & asset allocation should decide what tax planning instrument you choose. Last minute rush to buy insurance plans or investing in PPF disregarding your actual needs is not the right approach towards tax planning. A good financial advisor can help you decide on the right tax planning instruments for you based on your financial goals.
Steps to tax planning.
First step in your tax planning exercise, if you have a home loan, is to figure out the principal & interest component of your home loan because the amount of principal that you repay in a financial year qualifies for Sec 80C deduction (subject to Rs. 100,000 limit). Next step is to figure out your existing commitments towards Insurance, Pension plans or other tax saving instruments like ELSS, PPF, NSC, Infrastructure bonds etc. Tution fees of 2 of your children are also eligible for deduction u/s 80C.
Tax planning, your risk profile & asset allocation
The balance, if any, should be invested in a way that allows you to achieve your financial goals & suits your risk profile. If you are an investor not willing to take risks & happy with 7 to 8% returns, then assured return schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) & tax-saving fixed deposits are the ones for you.

If you are aiming for higher returns & willing to take higher risks, then Equity Linked Savings Scheme (ELSS) is the best option for you. But remember that ELSS or tax saving mutual funds are market linked and you need to stay invested for at least 5+ years to get good returns (lock-in only for 3 years). Investment in ELSS done via Systematic Investment Plan (SIP) helps you distribute your tax burden over 12 months which is better than having to pay the entire amount in Jan-Mar.
ELSS: A wonderful tool for tax planning If you have a investment horizon of 3 to 5 years & slight risk taking capacity, then Equity Linked Saving Schemes (ELSS) or Tax saving Mutual Funds (as it is commonly known) is your best bet amongst various investment avenues allowed u/s 80C, especially amongst the market linked ones.

Comparison of Expected Return from various Investment avenues u/s 80C:

Investment Avenues Eligible u/s 80CCategoryExpected Rate of ReturnEstimated Value of Rs. 1 lac investment after
3 Years5 Years10 Years
Public Provident Fund (PPF)Assured Return Scheme8% pa125,971146,933215,892
National Savings Certificate (NSC)8% pa
(compounded half yearly)
5 Year Post Office Time Deposits (POTD)7.5% pa124,230143,563206,103
Senior Citizens Savings Scheme (SCSS)9% pa129,503153,862236,736
Unit Linked Insurance Plans(ULIPs)Market linked Schemes15% pa*114,066150,852303,417
ELSS or Tax Saving Mutual Funds15% pa*152,088201,136404,556
  • * We have assumed 15% pa average (CAGR) return in market linked instruments
  • ** We have accounted for a 25% deduction of ULIP expenses. In real life it can be even more.

As is evident from the table above, a Rs. 1 lac investment in an ELSS or Tax Saving Mutual Fund shall net you Rs. 404,556 approximately after 10 years, a return of 4.05 times. No other investment avenue even comes close to this kind of return. Also, the lock-in period is just 3 years in an ELSS fund, a minimum lock-in period amongst all investment avenues.

Actual Performance of Top 10 ELSS Funds over various periods:

Top 10 Tax Saving Mutual Fund Schemes (ELSS)Annual Returns* over various period
ELSS Scheme 1128%17%25%41%26%
ELSS Scheme 193%18%25%38%20%
ELSS Scheme 1105%17%21%34%19%
ELSS Scheme 1147%16%21%40%19%
ELSS Scheme 185%12%15%27%16%
ELSS Scheme 192%4%16%30%15%
ELSS Scheme 1129%13%22%32%15%
ELSS Scheme 1107%12%18%30%15%
ELSS Scheme 193%9%18%35%14%
ELSS Scheme 1100%12%26%48%12%
  • Returns over 1 year are CAGR returns
  • *Data as on Mar 18, 2010.

To sum up:
As is very evident from the table above, over a medium to long term (3 to 5 years & beyond), Tax Saving Mutual Funds or ELSS is your best bet u/s 80C and beats any other investment avenue by a wide margin. However, a word of caution here. There are more than 35 ELSS schemes in existence at the time of writing this article and the tribe is growing. Not all ELSS schemes have done well. Consult a Mutual Funds expert while choosing the right ELSS schemes for you.
To conclude, one of the biggest mistakes that people make is that they invest to save tax. The right approach is to invest for achieving your financial goals keeping your risk taking capacity and asset allocation in mind and at the same time save tax. So choose your tax savings investments wisely.

(Mr. Nirav Panchmatia is a financial planner practicing under his firm “AUM Financial Advisors”. He is a CA & MBA Finance from Narsee Monjee, Mumbai having spent last 8 years in Mumbai working in leading financial institutions like Citigroup, ICICI Bank, IRIS, etc. He can be reached on 93237 39968 or on his email: [email protected]. The above article is meant for general reading only)

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