It’s Dec 2015…. Christmas is on the horizon but there is something else weighing on your mind, I am sure…

It’s the TAX guy who is bothering you… your Employer or your CA (depending on whether you are employee or own a business) is urging you to make Tax Saving Investment well before March 31st & as usual you are not sure which is the best Tax Saving Instrument for you…by nature we humans love procrastination & if allowed we can postpone a job till eternity…

But alas you have to make that important Tax Saving Investment well before March 31st else you shall have to pay more Income Tax; do I need to tell you which is better??? Paying Income tax or Investing to Save Tax???

Now let me make your life easy …The background first…

Sec 80C of The Income Tax Act 1961 allows an Income Tax assesse (Individuals & HUF) to invest in any of the approved Investment options up to Rs. 1,50,000 at any time during the Financial Year & claim Income tax deduction; a person in the 30% tax bracket can save tax up to Rs. 46,350 by investing Rs. 1.50 lacs…

Now here are the possible Investment Options that Sec 80C allows:

Investment OptionLock-in (Years)Returns per annum (pa)Are Returns Tax-Free?SLR Rank
Public Provident Fund (PPF)15 years; Partial Withdrawal after 7 yrs8.70% paReturns are Tax-freeSafety: HighLiquidity: LowReturns: Low & tax free
Employee’s share of PF Contribution (EPF)Withdrawal on change of Job8.70% paTaxableSafety: HighLiquidity: LowReturns: Low
Kisan Vikas Patra (KVP)Withdrawal after 2.50 years8.70% paTaxable but NO TDS Safety: HighLiquidity: LowReturns: Very Low
Life Insurance- Traditional PlansLong Term6 to 7.5% paTaxableSafety: HighLiquidity: Very LowReturns: Very Low
Life Insurance- ULIPsLong TermMarket Linked but very high ExpensesTaxableSafety: HighLiquidity: Very LowReturns: Very Low
Bank FDs5 Years8.40 to 8.50% paTaxableSafety: HighLiquidity: LowReturns: Very Low
National Savings Certificate (5 year NSC VIII)5 years8.50% paTaxableSafety: HighLiquidity: LowReturns: Very Low
Sukanya Samridhi accountLong Term9.20% paTaxableSafety: HighLiquidity: Very LowReturns: Very Low
Senior Citizens Saving Scheme (60 Yrs)5 Years9.30% paTaxableSafety:   HighLiquidity: LowReturns: Low
Equity Linked Savings Scheme (ELSS) or Tax Saving Mutual Funds3 yearsMarket-linked (Approx. 14% pa compounded)Returns are Tax-freeSafety:   LowLiquidity: MediumReturns: Very High & tax-free

Besides the above Investments, Sec 80 C also allows a deduction for certain Expenses like Principal Repayments on Loan for purchase of House Property & Children’s Tuition Fee Payment

Now have a hard look at the above table and evaluate all the Investment Options on 3 Important parameters namely :

  1. The Period of lock-in,
  2. Expected Returns per annum &
  3. whether the returns are Taxable or tax-free

There are only 2 Investment options u/s 80C that are tax-free namely PPF & “ELSS or Tax Saving Mutual Funds”…

PPF gives a fixed returns of 8.70% per annum (however the interest rate is not guaranteed anymore and can change each year) that is tax-free & hence the post tax return comes to 8.70% tax free which although is not very attractive & barely matches inflation however is better then most other options in the table above on a post-tax basis)

The other & most beneficial Tax saving investment option is ELSS or Tax Saving Mutual Funds…

It has the least lock-in period of 3 years, its returns after 3 years qualify as Long Term Capital Gain and hence are tax-free & above all it is the only option that gives you 100% exposure to Equity Markets & hence the returns are market linked…

Does it sound risky??? Ok Here is the Actual Past performance of ELSS or Tax Saving Mutual Funds:

Time PeriodAverage of all FundsMin. Returns (%)Max. Returns (%)Future Average value of Rs. 1.50 lacs after 3 years
Last 3 Years16.9%10.4%25.6%Rs. 239,625
Last 5 Years10.3%3.5%18.6%
Last 10 Years12.0%6.8%16.5%

Returns as on Dec 15th, 2015 Returns are annual compounding rates

One look at the table above is enough for one to choose ELSS or Tax Saving Mutual Funds as an Tax Saving investment of choice…the only Risk is if you are very adventurous & choose the worst performing scheme out of 75 ELSS or Tax Saving Mutual Funds available in the market…You need to invest 1.50 lacs in one or at max 2 good performing ELSS or Tax Saving Mutual Fund; so please take professional help while choosing the best Tax Saving Mutual Funds and invest and save tax @ Rs. 46,350…

ELSS or Tax Saving Mutual Funds v/s. PPF Performance

Time PeriodActual Average Returns –Tax Saving MFsFuture value of Rs. 1.50 lacs after 3 yearsPPF ReturnsFuture value of Rs. 1.50 lacs after 3 yearsExcess Returns from ELSS over PPF
3 Years16.9% per annumRs. 239,6258.70% per annumRs. 192,655Rs. 192,655

As you can see from the table above, had you invested in Tax Saving MFs 3 years back you would have earned returns equivalent to 2 PPFs almost…and those are returns from average funds, if you take professional help you can expect much better returns…

So Axe the Tax by investing in professionally chosen ELSS or Tax Saving Mutual Funds & maximize your gains @ save tax @ Rs. 46,350 at the same time…


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