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Best tax-saving options: Ranking of the top 10 instruments

ET assessed 10 tax-saving instruments on 8 parameters. Find out how the different options scored this year.

, ET Bureau|
Updated: Jan 22, 2020, 11.30 AM IST
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Top 10 tax-saving instruments
Top 10 tax-saving instruments
It is said that a yacht makes a man happy on two days: the day he buys it and the day he sells it. This applies to Gurgaon-based Deepika Chawla and her insurance policy as well. 3 years ago, she bought a Ulip with an annual premium of Rs 1 lakh. “I was in a hurry to invest because I had to submit proof of investments to my employer the next week,”she says.

The finance professional is now ruing her decision. She finds it difficult to set aside Rs 1 lakh for the policy every year. Moreover, her Ulip has underperformed the market. “I had chosen an aggressive allocation. While the Sensex has risen 16% every year since 2017, my Ulip value has not moved up so much,” she says. Chawla now wants to discontinue the Ulip, though she is not sure how much she will get back. “There will be some charges and penalties for termination, but I just want to close this policy,” she says.

This week’s cover story is meant for taxpayers like Chawla. We assessed 10 tax-saving instruments on eight key parameters— returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. Each parameter was given equal weightage and the composite scores determined their place in the ranking.

ELSS funds are again at the top spot, followed by NPS that ranked second. But Ulips have moved up even as small savings schemes, including PPF, NSCs, Senior Citizen’s Saving Scheme and Sukanya Samriddhi Yojana have slipped. Insurers have come out with Ulips that offer additional benefits and have more investor-friendly features.

It is ironical, however, that the most important part of a financial plan is again at the bottom. ET Wealth believes that life insurance is the lynchpin of a financial plan because it safeguards all goals. But traditional insurance plans don’t score very high as tax saving instruments. The returns are very low and high premiums prevent policyholders from investing for other goals.

ET-Wealth-tax-saving

  • ELSS funds
Returns: 13.18% for past three years
Rating: Five stars


ELSS funds continue to rule the roost in the Section 80C basket. And for good reason too. These funds have generated the highest returns among all tax-saving instruments. They also have the shortest lock-in of three years. Gains up to Rs 1 lakh are tax free, and regular harvesting of gains can help investors avoid tax on long-term capital gains. And all fund houses now offer the online investing facility.

However, ELSS funds may not suit everybody. Equity markets are looking overheated even as economic growth has slowed down. Analysts believe 2020 will see muted gains for equities and most planners recommend staggered investments in stock markets.

For ELSS investors, the best route is through monthly SIPs. But this may not be possible for taxpayers who have to show proof of Sec 80C tax-saving investments in a few days. They should ideally stagger the purchases over 2-3 tranches before the 31 March deadline.

It is important for investors to tone down their expectations of returns. ELSS funds may not be able to repeat the past performance in the coming years. In the current scenario, equity markets are poised for a correction and returns could remain flattish for a long period. Also, investors should not think that the three-year lock-in period denotes the ideal holding period of these funds. Don’t go for ELSS funds if you intend to hold for only three years.

Please keep in mind that all ELSS funds are not alike. Peek into the portfolios of the ELSS fund before you invest. Some funds allocate more to small- and mid-cap stocks. They will be more volatile but also more rewarding than other funds. Funds that line their portfolios with large-cap stocks are likely to deliver more stable but less spectacular returns.

The best ELSS funds
TURBO-CHARGED: ELSS funds have delivered the highest returns among all Sec 80C options
best-ELSS-funds
Data as on 31 Dec 2019
3-year and 5-year returns are annualised, Funds sorted on basis of 3-year returns Source: Value Research


  • National Pension Scheme
Returns: 9.33% for past five years
Rating: Five stars


Helped by the twin rallies in the equity and bond markets, NPS funds have generated very good returns in recent years. In the past one year, all asset mixes have generated double-digit returns. However, it is unlikely that the NPS funds will be able to repeat the performance in the coming years.

Even so, investors can expect better returns from NPS than pure debt products such as PPF or bank deposits. Also, since young investors are allowed to have a higher exposure to equities, they will find NPS particularly rewarding in the long term. Even a balanced portfolio or a small exposure to equities can generate good returns.

A lot of investors don’t want to invest in NPS because they feel the scheme has a very long lock-in period. The money is locked up till the investor retires at 60 years. However, experts say this lack of liquidity is actually a good way to enforce long-term savings.

The NPS has also become more attractive in recent years due to changes in investment and tax rules. Now, 60% of the corpus withdrawn at the time of retirement is tax free. This has taken care of a major grouse that investors had against the pension scheme. The scheme has also allowed early withdrawals for specified reasons.

How NPS funds have performed
All investors have earned double-digit returns in the past one year
Aggressive-NPS

Balanced-NPS

Conservative-NPS

Ultra-Safe-NPS
Circles denote the best performing pension funds in that asset mix and period. Returns have been blended on the basis of the asset mix chosen by the investor Returns as on 30 Dec 2019. Source: Value Research

However, one big problem still remains. NPS investors are required to put at least 40% of the maturity corpus in an annuity to earn a monthly pension. This pension is fully taxable as income. The Pension Fund Regulatory and Development Authority is considering a proposal to replace this annuity with systematic withdrawals.

NPS can help save tax under three different sections. Firstly, contributions to the scheme can be claimed as deduction under the overall limit of Rs 1.5 lakh under Sec 80C. Secondly, there is an additional deduction of up to Rs 50,000 under Sec 80CCD(1b). Thirdly, if an employer puts up to 10% of the basic pay of the individual in NPS under Sec 80CCD(2), that amount will be exempt.

  • Ulips
Returns: 8.09% for past three years
Rating: Four stars


Ulips had once become a four-letter word. Even though the insurance regulator reformed the category with sweeping changes and capping of charges in 2010, the bad press they got in the previous decade stuck with Ulips for several years. After sustained reformation, they are now slowly making a comeback. New Ulips launched by insurance companies are very low on costs and compete with direct plans of mutual funds on charges.

But the problem of opacity remains. Fund management charges are built into the NAV, but Ulips have several other charges as well, which are levied by cancelling units. The units allotted to the policyholder gradually reduce to pay the various charges. So, the rise in the NAV is not a true indicator of the actual returns earned by the investor.

Some other aspects of Ulips have also not changed. Though these insurance-cum-investment plans are no longer as toxic as they used to be, bank executives and wealth managers continue to mis-sell them. The mis-selling is rampant in the January-March quarter when taxpayers are running around trying to invest in tax-saving options before the deadline expires.

How Ulips have performed
Long-term returns are not very impressive, possibly due to charges levied by Ulips.
Ulips
Data as on 2 Jan 2020, 3-year, 5-year and 10-year returns are annualised Source: Morningstar India

However, Ulips score high on the tax front. If the insurance cover is 10 times the annualised premium, the income from the Ulip is completely tax free under Section 10(10d). Ulips have another advantage over ELSS funds. Not only can an investor change his asset mix depending on the market situation, but switching from equity to debt or vice versa does not have any tax implications. For this reason, Ulip are often touted as a one-stop portfolio rebalancing tool.

Ulips also offer investors a wider choice of funds, including liquid funds that almost always give a low but positive return. A liquid fund is especially useful for policyholders whose goal is very near. At that stage, they don’t want a high return but conserve capital. This is something that NPS should also offer.


  • Public Provident Fund
Interest rate: 7.9% for Jan-Mar 2020 qtr
Rating: Four stars


Government bond yields have come down sharply in the past one year but the interest rates of small savings schemes have not been cut. This is possibly due to the prevailing political climate in the country where a rate cut would not go down well with common investors. As a result, the PPF is a far better option than bank deposits because the interest is tax free. The interest from fixed deposits is fully taxable, which brings down the post-tax returns to less than 5% in the highest tax bracket. At the same time, the PPF is unlikely to beat other investment options such as ELSS and NPS over the long term.

The PPF also scores high on safety, flexibility and liquidity. There is no need for a multi-year commitment. You need to invest only Rs 500 a year to stop the account from becoming dormant.

One can make partial withdrawals after the fifth year. Though this strategy is not recommended, taxpayers faced with a cash crunch can withdraw from their PPF account and then reinvest the money to claim deduction.

An account can be opened in a post office or designated branches of PSU banks. Some private banks also offer the facility to invest in the PPF now.

However, the ease of investment can be a problem. Not all banks offer the facility to invest online in the PPF. Dealing with obdurate post office staff, inconvenient timings and physical visit to the bank or post office branch can be a challenge.

Therefore, opt for a bank that allows online access to the PPF account.

  • Senior Citizens’ Saving Scheme
Interest rate: 8.6%, For Jan-Mar 2020 Qtr
Rating: Three stars


The Senior Citizens’ Savings Scheme (SCSS) offers assured returns and regular income to investors. Backed by the government, the scheme scores high on safety and liquidity. The interest is paid every quarter. Like the PPF, the interest rates are linked to government bond rates but have not been cut, possibly due to political reasons. The SCSS has a five-year lock-in but premature closure is permitted with a penalty. One can also make withdrawals subject to conditions and penalties.

The interest earned from the scheme is tax free up to Rs 50,000, which makes this the best tax saving option for senior citizens. However, there is a Rs 15 lakh overall investment limit per individual. Though the scheme is open only to investors above 60, in some cases, where the investor has opted for voluntary retirement and has not taken up another job, the minimum age is relaxed to 58 years. There is also no age bar for defence personnel. They can invest in the scheme even before 60 as long as they satisfy other requirements.

The SCSS account can be opened at any head post office or general post office. Select branches of several designated nationalised banks also offer the facility. These include Andhra Bank, State Bank of India, Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India, Vijaya Bank and IDBI Bank.

ICICI Bank is the only private bank that offers the SCSS. Like in case of the PPF, choose a bank that offers the online facility.

  • NSCs
Interest rate: 7.9%, For Jan-Mar 2020 Qtr
Rating: Three stars


The National Savings Certificates (NSCs) used to be a very popular tax-saving instrument but went out of fashion after bank fixed deposits came under the Sec 80C umbrella. But falling bank deposit rates have brought NSCs back into focus. NSCs also offer assured returns. Unlike the PPF, the interest rates will not change once you invest. Also, unlike an insurance policy, NSCs do not require a multi-year commitment. However, the interest earned is fully taxable as income.

The interest rate of the NSCs has been left unchanged this quarter. At 7.9%, it is a good option for those who just want to invest in a hurry and forget. Given that bank deposit rates are close to 7%, the NSCs are a much better option.

The best part is that the interest earned on the NSC is also eligible for deduction. Since it is reinvested, the taxpayer can claim deduction for it under Section 80C in the following years. Here’s how this works. Suppose an investor buys Rs 50,000 worth of NSCs in January 2020 and claims deduction under Sec 80C for the year 2019-20.

One year later, the investment would have earned an interest of about Rs 3,950. The investor can claim deduction for this Rs 3,950 for the year 2020-21. The next year, the investment would earn about Rs 4,200 in interest. This can be claimed as a deduction in 2021-22.

This is especially useful for investors in the 5% tax bracket who are not able to fully exhaust the Rs 1.5 lakh investment limit under Sec 80C. The tax deduction available on the interest effectively makes it tax free for such investors. What’s more, these can be used as collateral for loans.

These NSCs are also suitable for senior citizens who want to invest in a safe optionbut have exhausted the Rs 15 lakh limit of the Senior Citizen’s Saving Scheme. Since there is no restrictions on investments in NSCs, these taxpayers can use this instrument to save tax. The only problem is that NSCs are only available at post offices. However, an investor can get the NSC transferred from one post office to another. Transfer of certificate from one individual to another is also possible.

  • Sukanya Samriddhi Yojana
Interest rate: 8.4%, For Jan-Mar 2020 Qtr
Rating: Three stars


This is a great way to save for your daughter. But the Sukanya Samriddhi Yojana can be opened only for girls below the age of 10. Like other small saving schemes, the interest rate is linked to the government bond yield and is subject to change every quarter. It will be 8.4% till March and could change in April, though it seems unlikely that the government will cut rates in the current situation.

The Sukanya scheme offers a higher rate that the PPF. Just like the PPF, the interest earned is tax free and there is an annual cap of Rs 1.5 lakh on the investment. Accounts can be opened in any post office or designated banks with a minimum investment of Rs 1,000.

A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed Rs 1.5 lakh in a year. This restriction has brought down the overall score of the scheme in the ranking.

The good part is that the rules ensure the investment is not used for other purposes. The account is opened in the name of the child and the maturity proceeds have to be used for her education and marriage.

Some experts feel that the 100% debt based Sukanya Samriddhi Yojana is not a good option for a longterm goal. They say that if the child is 5-6 years old, the need for money will arise only after 15 years. With such a long time in hand, investors would be much better off by doing SIPs in a pure equity or aggressive hybrid fund. Therefore, don’t depend entirely on the Sukanya Samriddhi money for your daughter’s education.

Use it in conjunction with SIPs in equity or hybrid funds. That way, you can have a balanced allocation for the education and marriage goals for your child.

  • Tax saving FDs
Interest rate: 6.5-7.6% Prevailing rates
Rating: Two stars


Interest rates have declined in the past one year and banks are offering very low rates now. Tax reduces the returns further because income from fixed deposits is fully taxable. The post-tax returns for investors in the 30% tax bracket is barely 5%. However, tax-saving bank fixed deposits are a good choice for investors who left their tax planning for the last minute. Instead of running around searching for the best investment option or putting money into a multi-year insurance policy, they can invest in bank fixed deposits to save tax.

The best tax-saving FDs
Tax-saving-FDs
Since interest is fully taxable, the post-tax returns for investors in the highest tax bracket are barely 5%.

The interest rates are not as high as small savings instruments (PPF and NSCs offer 7.9%), these bank deposits offer the convenience of online banking. If someone has to show proof of investment this week, all he has to do is log on to his Netbanking account. A few clicks of the mouse is all it will take to invest in a tax saving fixed deposit. What’s more, this can be done 24x7 and from anywhere. Even if his bank has closed for the day or the investor has to go out of town, he can easily open a fixed deposit using Netbanking. Senior citizen taxpayers who don’t want to stand in a queue in a post office will also find this useful.

However, there is a high price to be paid for this convenience. The interest earned on bank deposits is fully taxable, which brings down the post-tax return for those in the higher income bracket. Please note that you cannot invest in a FD in somebody else’s name using your Netbanking account.

  • Pension plans
Returns: 7.5-9% for past three years
Rating: Two stars


The tax benefits offered by the NPS and the returns generated by the scheme have pushed pension plans from insurance companies into the background. Insurance companies want that these plans should also get an additional deduction of Rs 50,000 for contributions under Section 80CCD(1b). Also, the NPS offers more tax breaks if employers contribute to the scheme on behalf of the employee. However, pension plans are not eligible for these deductions.

Besides the uneven playing field, these pension plans are not very cheap. They have high charges compared with the ultra low-cost NPS. Also, their opaque structures and charges are not very clear.

Given that these plans are for the long term and require a multi-year payment, investors should go for them only after reading the features and benefits in detail. If you are in a hurry to invest, don’t opt for these plans this year.

Another problem with pension plans is that the pension from the annuity is fully taxable as income. Since the pension is a mix of the principal and gain, the investor ends up paying tax on the principal portion as well. Insurance companies want this rule to be changed so that pension plans become more popular with investors.

  • Life insurance
Returns: 4.5-5%, for a 20-year plan
Rating: One star


It is no surprise that the traditional life insurance plans are at the bottom of the ranking this year as well. As we have said earlier, life insurance is critical because it helps protects all other goals of the individual. However, this purpose is better served by a low-cost pure protection term plan than by a traditional endowment policy or a money back plan. These plans have very high premiums and offer very low returns. Yet, millions of policies get mis-sold as tax saving instruments every year.

The problem with traditional policies is that they fall between two stools. They don’t offer the insurance cover that a person actually needs. An individual should ideally have a life cover of at least 6-8 times his annual income. By this yardstick, someone earning Rs 50,000-60,000 a month should have a life insurance cover of roughly Rs 40-50 lakh. However, if he goes for an endowment plan for this life cover, he would have to shell out an annual premium of close to Rs 4-5 lakh. On the other hand, a term plan of Rs 40-50 lakh will cost barely Rs 7,000-8,000 a year.

However, the insurance agents don’t say all this when selling a policy to you. They just harp on the fact that the insurance premium is eligible for tax deduction under Section 80C and income from the policy is tax free under Section 10(10d).However, the insurance agents don’t say all this when selling a policy to you. They just harp on the fact that the insurance premium is eligible for tax deduction under Section 80C and income from the policy is tax free under Section 10(10d).

Also Read

Best tax saving investment for my retired mother

Best tax saving investment for my retired mother

Why ELSS is the best tax-saving option for you

Why ELSS is the best tax-saving option for you

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