Sunday, January 10, 2016


Choose the tax-saving instrument that best suits your needs and financial goals
Do-it-yourself tax planning can be rewarding and challenging.

Rewarding, because you can choose the tax-saving instru ment that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters--returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.

While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!


ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency . The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund.Last year was not good for equities, and even top-rated ELSS funds lost money.However, the funds are miles ahead of PPF in 3and 5-year returns.

The SIP route is the best way to contain the risk of investing in equity funds.However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.

SMART TIP Opt for the direct plan. Returns are higher because charges are lower.


The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What's more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.

SMART TIP Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.


The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of `50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity . Right now, the income from annuities is taxed at the normal rate.

SMART TIP Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.


It's been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.

SMART TIP Allocate 25% of your pay hike to VPF . You won't notice the deduction.


This scheme for the girl child is a grea way to save tax. It is open only to girls below 10. If you have a daughter tha old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Ac counts can be opened in any post office or designated branches of PSU banks with a minimum `1,000. The maximum investment in a financial year is `1.lakh and deposits can be made for 1 years. The account matures when th girl turns 21, though up to 50% of th corpus can be withdrawn after sh turns 18.

SMART TIP Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.


This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a `15 lakh overall investment limit.

SMART TIP If you want ot invest more than `15 lakh, gift the amount to your spouse and invest in her name.


Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the `15 lakh limit in the Senior Citizens' Saving Scheme.

SMART TIP Invest in FDs and NSCs if you don't have time to assess the other options and the deadline is near.


Pension plans from insurance compa nies still have high charges whic makes them poor investments. The also force the investor to put a large portion (66%) of the corpus in an an nuity . The prevailing annuity rates ar not very attractive. Pension plan launched by mutual funds have lowe charges, but are MFs disguised as pen sion plans. Moreover, they are debt oriented plans so they are not eligibl for tax benefits that equity plans enjoy for tax benefits that equity plans enjoy.SMART TIP Invest in plans from mutual funds.They offer greater flexibility than those from life insurers.


Traditional life insurance policies re main the worst way to save tax. Still millions of taxpayers buy these poli cies every year, lured by the "tripl benefits" of life insurance cover, long term savings and tax benefits. Actu ally, these policies give very little cover A premium of `20,000 a year will ge you a cover of roughly `2 lakh. The re turns are very poor, barely 6% if yo opt for a 20-year plan. And the tax-fre income is a sham. Going by the index ation rule, if the returns are below th inflation rate, the income should any way be tax free. The problem is tha once you sign up for these policies, the become millstones around your neck

-SMART TIP If you can't afford to pay the pre mium, turn your insurance plan into a paid-up policy.

Akbar Badruddin Jiwani  
Mobile: 09323500008
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