The tax savings investment deadline for the financial year 2016-2017 is round the corner. It is only natural that you are wondering which options are best suited to your needs. In fact, the range of tax-savings products on offer is seemingly unending which makes selecting a product difficult. Add to this, the complication that some products, such as ULIPs and ELSS, have multiple providers – the combination is enough to make a novice investor’s head spin. In the following sections, we will discuss three key criteria that you as an investor can use in order to select the tax saving investment option that works for you.
If you have invested before, you probably realise that your tax-saving investment will not be available for liquidation for a predetermined period of time. This period is termed as the lock-in period and each type of tax saving investment option has a different a lock-in period. A shorter lock-in period is usually preferred as it gives the investor an option to liquidate the deposit faster so that it may be used for other purposes. The shortest lock-in period of 3 years is currently applicable to ELSS (Equity Linked Savings Schemes) and RGESS (Rajiv Gandhi Equity Savings Scheme), which is one of the key reasons for the popularity of these schemes. Other leading schemes such as PPF and NSC have much longer lock-in periods of 5 years and up to 10 years, respectively. However, in case of PPF, partial withdrawals and loans against invested amount can be obtained from the 6th year onwards.
Risk vs. Returns
In the world of investment, a higher level of risk is preferred by individuals only if there is the potential of higher returns. In case of tax-saver investments too, you have to decide how much risk you are willing to take in order to receive commensurate returns. In terms of risk, ELSS mutual funds are considered to be in the moderately high to high risk bracket and they have historically provided returns of about 15%, which is substantially higher than other popular tax saving investments. On the other hand, options such as PPF and bank tax-saver fixed deposits (tax saver FDs) feature much lower risk but offer returns in the range of 7%-8% per annum. So in case you have a high risk appetite and want higher returns, then tax saver mutual funds are definitely a better fit for you than PPF or bank tax saver fixed deposits.
This one is a bit trickier, not all tax saver investments offer the same level of tax exemption. The all-round tax savings are generated when an investment is classified as EEE i.e. the principal invested, the interest/profit earned and the maturity amount are all tax exempt. Examples of EEE investments include ELSS mutual funds and PPF investments. In case of fixed deposits, the interest earned is taxable as per your applicable tax bracket, while in the case of NPS (New Pension Scheme), as per current rules, 40% of the maturity value is tax exempt and the remaining 60% is taxable as per your applicable income bracket.
When choosing your tax saving investment options, the old saying “don’t put all your eggs in one basket” holds true. It is always a best practice to distribute your investment (tax saving or not) across multiple categories so as to balance your risk with your prospective returns. In the following table, we have compared some of the key tax-saving options across multiple comparison categories.
Table1. Comparison of Leading Tax-saving Investments Across Key Criteria*
|Investment Option||Lock In Period||Risk Index||Expected Returns||Tax Treatment|
|ELSS Mutual Fund||3 years||High||High||EEE|
|PPF||5 years (partial withdrawal 6th year onwards)||Low||Low||EEE|
|NPS||5 years/10 years||Low||Low||40% of Maturity amount tax exempt|
|RGESS||3 years||High||High||EEE (under section 80CCG)|
|Bank Tax Saver Fixed Deposit||5 years||Low||Low||Interest on deposit is taxable|
|ULIP||5 years||Low||Low||EEE (Features Insurance cover not applicable to other products in this list)|
*The facts and figures mentioned above are indicative and subject to change.