Elss

SUMMARYMost of the tax saving instruments under Section 80C are savings-oriented instruments, with returns after
adjusting for inflation either in the negative or slightly positive. The exceptions to this are the Ulips and the ELSS Mutual
Funds.
Most of the tax saving instruments under Section 80C are savings-oriented instruments, with returns after adjusting for inflation either in
the negative or slightly positive. The exceptions to this are the Ulips (Life and Pension Funds) and the ELSS Mutual Funds. The advantage
with ELSS compared to the Ulips is the frequency (mostly a single or a monthly investment for a year) and term for investment, for getting
good returns.
What is an ELSS?
An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of 80% in equity shares. The balance 20% can be in
debt, money market instruments, cash or even more equity. There is a three year lock-in period for the ELSS mutual funds. Post the 36
months, the funds remain invested and work like any other open-ended mutual fund.
Why an ELSS?
It has been an established fact that in the long run, equity gives a much higher inflation adjusted returns when compared with any other
investment, except for maybe real estate. The top five ELSS funds have given returns from 22% to 26% compounded annually over the past
five years. This is again higher than the market (Nifty) returns over the same period, which is at 19%.
ELSS is part of the Section 80C instruments that are cumulatively eligible for a deduction from income up to Rs 1 lakh. This gives tax payers
benefits from 10% to 30% (excluding the educational cess) based on their current tax slab.
The return (maturity and the dividend,if opted for, from the ELSS is also tax free under the present EEE (Exempt-Exempt-Exempt) regime.
The three year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund, one tends to withdraw in case of any
monetary requirement. The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable
investments as they do not have to worry about sudden redemption pressures. The above logic is proved in the higher returns achieved by the
ELSS funds when compared to market returns. Wealth creation because of this is much better than most of the other MFs. Only some sector-
based MFs have given better returns than the ELSS fund in the past five years.
Options with the ELSS
Salaried people with a tight budget can opt for a monthly investment (SIP using ECS). The automatic investment from the bank




Among various avenues of investments in capital market mutual funds are prominent investment options for investors across
the globe. There are different types of mutual funds prevailing in the market which broadly can be classi fied into Equity, Debt
and Balanced mutual fund. A mutual fund with certain terms and conditions like lock in period, income tax benefits etc. is
known as ELSS or equity linked savings scheme.

What is ELSS?
1. Introduction to ELSS
ELSS is a type of mutual fund. Going by its name ELSS invests a majority of its corpus in equity and equity related products.
An investment in ELSS comes with a lock in period and has tax benefits attached to it. It is suitable for investors having a
high risk profile as returns in ELSS fluctuate depending upon the equity market and there are no fixed returns. ELSS
schemes are open ended, that is, investors can subscribe to the fund at any day. NAV or the price of the fund is declared on
every business day.

2. Mutual funds Vs ELSS (difference between ELSS and Mutual fund)
a. Tax Free: - There is no ceiling for investments in ELSS however investments in ELSS qualify for tax deductions
under sec 80C of the income tax act subject to a maximum of Rs 100000 in a financial year whereas investments under
normal mutual fund do not qualify for income tax deductions. Any dividend received or long term capital gain earned by the
investor is tax free. Long term capital gain arises on selling units of mutual fund after 1 year of purchase. Since there is a
lock in period of 3 years every investor will realize long term capital gain/loss on selling their holdings
b. Lock In: - ELSS has a lock in period of 3 years unlike other kinds of mutual funds.

3. Options while making an investment in an ELSS
a. Growth option In growth option income earned by the fund is not distributed to unit holders, Investor do not earn
any dividend during the time it holds the fund. Any income/profit earned by the fund increases the NAV of the fund and vice
versa. Whenever the investor sells its holdings he will realize long term capital gain/loss.

b. Dividend option In this option the fund distributes income earned by the fund to the investors as dividends. The
date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any
dividend received by the investor is not liable for tax in the hands of investors.
c. Dividend reinvestments option If the investors choose this option the dividends declared by the fund are reinvested.
For example an investor is holding 10000 units of a fund and the fund declares dividend @ 1.5 per unit, the total dividend of
15000 (10000*1.5) will be reinvested on behalf of the investor as a fresh purchase. The investor can claim deductions to the
tune of dividend received which is Rs 15000 in this case

4. Monthly investment in ELSS
Monthly investments on a pre specified date in mutual funds is possible through systematic investment plan (SIP). An
investor has the option of investing monthly in equity linked savings schemes with a minimum investment of Rs 500. This
type of investment is better suited to small investors who cannot invest a lump sum amount. SIP has the benefit of averaging
out the cost of investors. As the amount of investment is fixed the units purchases every month varies depending upon the
NAV of the fund. At a higher NAV the investor gets fewer units and more number of units at a lower price thus averaging out
the cost of investors

5. Advantages of ELSS over PPF and NSC
PPF and NSC are popular tax savings instruments issued by the Government of India. Public provident fund (PPF) has a
lock in period of 15 years; National savings certificate has a lock in period of 6 years in comparison to ELSS which has a
lock in period of 3 years only. PPF and NSC have a fixed rate of return somewhere close to 8% to 9% whereas return in
ELSS varies depending upon the market fluctuation, however past performance of some ELSS funds shows an average
return of 15% to 25% over a period of time.

6. Key points to remember
A Equity linked savings schemes is a type of mutual fund with 3 years lock in period and tax benefits attached,
B - There are three types of options in ELSS, dividend option growth option and dividend reinvestment option.0
C Tax benefits on investment in ELSS may soon be phased out with the introduction of direct tax code.
D Investors can opt for systematic investment plan. Minimum investment required in SIP is Rs 500. An investment through
SIP has a disadvantage as every monthly investment carries a lock in period.
E - If an investor chooses dividend reinvestment plan the dividend reinvested is considered as a fresh purchase and has a
lock in period of 3 years from the date of purchase so the dividend reinvested is further locked for a period of 3 years.
F ELSS has the potential to give higher returns as these funds invest in equity market which have given an average return
of 15 years in a long term scenario. Returns in ELSS also fluctuate depending upon the stock selection decision of the fund
manager.
G SIP helps in averaging out the cost of investors, however if the investor backs out from SIP when the markets are falling
he wont be able to average out his cost.

7. Top 5 ELSS
The top 5 ELSS funds presently are
Equity Tax Saving
3 months 6 months 1 yr 3 yr
Axis Tax Saver Fund (G) 1.3 8.5 4.7 -
Religare Tax Plan (G) -0.4 7.1 0.1 16
ICICI Pru Tax Plan (G) -5.7 -0.1 -3.4 12.5
Can Robeco Eqty TaxSaver
(G) -1.5 5 -1.1 19.4
HDFC Tax Saver (G) -3.4 1.2 -2.5 14.8

How to Apply for ELSS
To apply for ELSS an investor needs to comply with KYC regulations, Know your customer (KYC) is mandatory whereby
investor needs to provide some personal details like PAN no etc. KYC helps in reducing financial fraud. After complying with
KYC the investor can approach to Asset management companies for subscribing to ELSS, Investor has to provide a
photocopy of PAN Card along with the subscription form; the form should be filled properly and signed by the investor. The
subscription form and a cheque leaf of the investment amount should be submitted with the AMC. In case of SIP (systematic
investment plan) one additional form should be filled and signed by the investor. The Investor has to select a date of SIP
from the options provided in the form. The Installment amount will be deducted from the investors bank account on that day
of every month till further notice from the investor.

Criterias to chose ELSS
a) AUM Asset under management is the amount of money the fund is managing. Higher AUM implies that the fund
has many investors and has a good reputation.
b) Past performance If the fund is performing well in the past, it is expected that the fund will keep performing well in
the future. Generally we look at the past 3 yrs 5 yrs and 10 yrs return of the fund.
c) Sharpe ratio Sharpe ratio is used to calculate risk factor of the funds portfolio. Sharpe ratio of the fund should be
near 1.



5 questions to b asked

Equity-linked saving schemes are among the options that are eligible for tax benefits under Section 80C. Here are some facts that will help you make
better investment decisions.
1) What are the tax benefits?
Up to Rs 1 lakh invested in ELSS funds in a year is eligible for deduction under Section 80C. However, unlike the life insurance policies, you cannot
invest on behalf of a minor and avail of tax deduction. No tax is levied when you redeem your investment after the lock-in period.

Since ELSS funds have more than 65% of their corpus invested in stocks, they enjoy the exemption from tax on long-term capital gains as is the case
with any other equity fund. The dividend income is also tax-free.
2) Will you get assured returns?
Since these are essentially diversified mutual funds, there is no guarantee on returns. The ELSS category has given an average return of 2.95% in the
past five years. The best performing fund increased an investment of Rs 10,000 to Rs 16,519 during this period, but the worst performing scheme
reduced it to Rs 5,991.
In the past three years, the average return has been 6.82%, while the best performing fund has given 13.5%. So, apart from the performance of the
broader market, your returns are dependent on the fund manager's ability to pick the right stocks. This also means you must select the fund after
proper research. Instead of picking a fund with high, but volatile, returns, choose one with a stable performance record.
3)What's the lock-in period?
The lock-in period is only three years, the shortest among all tax-saving options under Section 80C. You cannot redeem or switch to another option
during this period. In the case of SIPs, each instalment is treated as a separate investment and will have a three-year lock-in period. So, if you started
investing in an ELSS fund in April 2010, you can redeem the units bought in the first instalment only in April this year.
Those bought in May 2010 will be open for redemption only in May. The lock-in stipulation does not mean that the investor must compulsorily redeem
the funds after three years. Unlike Ulips and pension plans, there is no maturity date of an ELSS fund. If you want, you can remain invested for a
longer period. 4) Dividend, growth or reinvestment?
The dividend is only a profit-booking exercise since a fund's NAV reduces by the amount the investor receives as dividend. In the growth option, the
amount remains invested for the entire tenure.
The dividend option provides a periodic income to the investor, though there is no obligation on the part of the mutual fund to declare a dividend or
maintain its payout ratio year after year. The growth option has the potential to generate higher returns. Your choice should depend on your needs and
risk appetite. Avoid the dividend reinvestment option because you will find it difficult to exit the fund completely. There will always be some units that
have not completed the lock-in period.
5) How should you invest?
Unlike regular equity schemes, the ELSS funds have a lower investment threshold of Rs 500. You can invest a large amount at one go, but the best
way to invest in equity-oriented instruments is through regular monthly driblets called SIPs.


Scheme Name VRO Rating
1 Year
Returns
(%)
3 Year
Returns
(%)
5 Year
Returns
(%)
Reliance Tax Saver (ELSS)
Fund (G)

69.89 20.47 21.93
ICICI Pru Tax Plan-Reg (G)

52.02 16.92 21.70
Franklin India Taxshield (G)

35.22 15.10 18.16
Canara Rob Equity Tax
Saver
Fund-Reg (G)

33.69 13.61 18.11
(As of 15/07/2014


TOP INVESTMENT

Multiple options. Contradictory advice. And a deadline that's approaching fast. Many taxpayers find themselves in this situation at
the beginning of the year when they have to make tax-saving investments.

Are you also confused? Before you make a choice, go through our cover story to know which is the best option for you. We have
ranked 10 of the most common investments under Section 80C on five basic parameters: returns, safety, flexibility, liquidity and
taxability. Every investment has its pros and cons.

The PPF may not have a very high return, but its tax-free status, flexibility of investment and liquidity by way of loans and
withdrawals, gives it the crown in our beauty pageant. Equity-linked saving schemes come in second because of their high returns,
flexibility, liquidity and tax-free status. However, traditional insurance policies, an all-time favourite of Indian taxpayers, manage
the ninth place because of the low returns they offer and their rigidity.

Some readers might be surprised that the much reviled Ulips are in the third place. The Ulip remains a mystery and its returns are
seldom tracked. We checked Morningstar's data on Ulips and found that the returns have not been very good in the past 1-5 years.
Even so, it can be a useful instrument for the smart investor who shifts his money between equity and debt without incurring any
tax.

We have tried to separate the chaff from the grain by assigning a star rating to the various tax-saving options. Whether you are a
novice or a seasoned investor, you will find it useful. It will help you cut through the clutter and choose the investment option that
best suits your financial situation.

What the ratings mean:






PUBLIC PROVIDENT FUND

OUR RATING:




RETURNS: 8.7% (for 2013-14)

This all-time favourite became even more attractive after the interest rate was linked to bond yields in the secondary market.



The PPF is our top choice as a tax saver in 2014. It scores well on almost all parameters. This small saving scheme has always been a
favourite tax-saving tool, but the linking of its interest rate to the bond yield in the secondary market has made it even better. This
ensures that the PPF returns are in line with the prevailing market rates.

This year, the PPF will earn 8.7 per cent, 25 basis points above the average benchmark yield in the previous fiscal year. The
benchmark yield had shot up in July and has mostly remained above 8.5 per cent in the past six months. Although the yield is
unlikely to sustain at the current levels, analysts don't expect it to fall below 8.25 per cent within the next 2-3 months. So it is
reasonable to expect that the PPF rate would be hiked marginally in 2014-15.

The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. However, the commission
payable to an agent for opening this account has been discontinued, so you will have to manage the paperwork yourself. The good
news is that some private banks, such as ICICI Bank, allow online investments in the PPF accounts with them. There's flexibility
even in the quantum and periodicity of investment.

The maximum investment of Rs 1 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just
make sure you invest the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome,
penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. However, this facility is
no longer available to HUFs.






The PPF also offers liquidity to the investor. If you need money, you can withdraw after the fifth year, but withdrawals cannot exceed
50 per cent of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. Also, only one
withdrawal is allowed in a financial year.

You can also take a loan against the PPF, but it cannot exceed 25 per cent of the balance in the preceding year. The loan is charged at
2 per cent till 36 months, and 6 per cent for longer tenures. Till a loan is repaid, you can't take more. If you dip into your PPF
account, be sure to put back the amount at the earliest. Withdrawing from long-term savings is not a good strategy if you do it
frequently. It can dent your overall retirement planning.

The PPF is especially useful for risk-averse investors, self-employed professionals and those not covered by the Employees Provident
Fund and other retiral benefits.

BRIGHT IDEA: Invest before the 5th of the month if you want your contribution to earn interest for that month as well.

ELSS FUNDS

OUR RATING:




RETURNS: 17.5 per cent (Past five years)

The potential for high returns, wide choice of funds and flexibility make these funds a good tax-saving
option for equity investors.

Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-
saving options under Section 80C. However, this should not be the most important reason for investing in
this avenue. Being equity funds, these schemes can generate good returns for investors over the long term.
In the past five years, this category has created wealth for investors with average returns of 17.5 per cent.






However, this potential to earn high returns comes with a higher risk. There is no guarantee that your
investment will generate positive returns after the 3-year lock-in period. The category has generated an
average return of 2 per cent in the past three years. Even the best performing funds have churned out
disappointing returns. The returns will naturally mirror the performance of the stock markets. Therefore,
only investors who have the stomach for a roller-coaster ride should consider this option.

Should investors avoid ELSS now, especially since the stock market is close to its all-time high? Not really,
because the stock market has returned to the previous high after a 6-year gap and, therefore, is not
overvalued at all. "Since the stock market is reasonably valued now, ELSS should generate good returns
for investors who can remain invested for 5-7 years," says Gajendra Kothari, managing director and CEO,
Etica Wealth Management.

Though the large-cap Sensex and Nifty are at higher levels, the mid-cap and small-cap indices are at much
lower levels. This means there is enough value in midcap stocks, which should help the fund managers do
well in the coming years. Selecting the right scheme is crucial since there is significant variation in the
returns of different schemes.

Though past performance is an important parameter, also take into account the track record of the fund
house and fund manager. Once you select a scheme, decide whether you want to go for the dividend or
growth option. There is no difference in the tax treatment of the two options. The decision should be
based on the cash-flow requirements of the investor. If you opt for the dividend option of the fund, you
might get some portion of the money back within 1-2 months. Dividends from mutual funds are tax-free
so there is no tax liability as well. Avoid the dividend reinvestment option for ELSS schemes because the
lock-in period will prevent you from exiting fully.

Though the ELSS funds invest in equities, they are different from other open-ended diversified equity
funds. Due to the lock-in period, the ELSS fund manager does not have to worry about redemption
pressure from investors. This gives him the freedom to invest in shares as per his conviction and hold
them for longer periods.

In the past few years, the ELSS category has consistently outperformed the large and midcap sub-category
of diversified equity funds (see graphic).







ELSS funds offer tremendous flexibility to investors. As mentioned earlier, the 3-year lock-in period is the
shortest. Since there is no tax on gains from equity funds after a year, an investor can safely recycle his
investments every three years and claim tax benefits on the reinvested amount.

Young taxpayers, who have taken huge loans and don't have enough surplus to save tax, will find these
schemes very useful. If you can help it, don't exit the scheme after three years just because lock-in period
is over. Studies show that equities give better returns in the long term. The minimum investment is also
very low.

Though regular equity mutual funds have a minimum investment of Rs 5,000, you can put in as little as
Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan or an insurance policy, there is no compulsion to
continue investments in subsequent years. Since ELSS funds are a high-risk investment and their NAVs
are volatile, you need to stagger your investment over a period of time instead of going for a lump-sum
investment at the end of the financial year. This is more important at this juncture when the benchmark
indices are trading close to their all-time high levels.

Your best option is to take the SIP route. This may not be possible now because you have less than three
months before the 31 March deadline. At best, you can split the investment into three tranches. Before you
take the plunge, remember that your investment should be guided by your overall asset allocation. If your
exposure to equities is lower than what you want, go for the ELSS fund. If your portfolio already has too
much equity, avoid investing in these funds.

BRIGHT IDEA: Don't invest a lump sum. Split investments in ELSS funds into three SIPs starting from
January till March.

RGESS: An avoidable option for the first-time equity investor

The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional tax savings under
the newly introduced Section 80 CCG. If you invest in the RGESS options, you can claim a deduction of 50
per cent of the invested amount. The maximum investment is Rs 50,000, so the maximum deduction
availed of can be Rs 25,000. This is over and above the Rs 1 lakh limit available under Section 80C.

The scheme permits investments in the BSE-100 or CNX 100 shares, shares of Maharatna, Navratna or
Miniratna PSUs, or in designated equity mutual funds and ETFs. Should you invest in it to avail of this
benefit? We would not advise investing directly in shares just to claim tax deduction. In fact, the first-time
investors are better off taking the mutual fund route.

If you do opt for any RGESS fund or ETF, your investment is locked in for three years (fixed lock-in period
during the first year, followed by a flexible lock-in period for the two subsequent years). Under the flexible
lock-in option, you are allowed to sell your RGESS shares or mutual funds units and reinvest the proceeds
in any other RGESS instrument. This will enable you to get rid of the underperforming investments and
shift to better options. However, in the absence of an SIP facility, you are exposed to market timing.

Also, the maximum tax saving you can get through this scheme is Rs 7,725 for those in the 30 per cent
income tax bracket. In the 20 per cent bracket, the maximum saving is Rs 5,150, while you save only Rs
2,575 in the 10 per cent bracket. This is not much considering the risk you are taking by investing in
equities. Besides, investors will also need to open a demat account to invest in the RGESS, which would
incur annual charges.

ULIPs

OUR RATING:




RETURNS: 7.2-11.8 per cent (Past five years)

Don't go by the past record. The new Ulip is a good way to invest in the equity and debt markets for tax-
free returns.



There's a good reason why this most hated investment is so high on our rating scale. For many
policyholders, Ulips denote the costly mistake they made a few years ago. But that was a different era,
when companies were gobbling up 50-60 per cent of the premium in the first few years in the guise of
charges.


The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly investment. Though
a Ulip should not be your first insurance policy, you can consider buying one as an investment that also
helps you save tax. Of course, it also offers a life cover, but the stress is on investment, not protection.
Don't buy a Ulip (or any other insurance policy, for that matter) if you are not sure whether you can
continue paying the premium for the entire term. If you end it prematurely, be ready to pay surrender
charges.

Your insurance policy should not impinge on other financial commitments. It's easy to set aside a big sum
when you are young because your liabilities are limited, but this changes and expenses shoot up when you
start a family or buy assets. If the premium is very high, the policyholder may find it difficult to pay it year
after year.

Under the new Ulip rules, you cannot take a premium holiday. If you stop paying the premium, the policy
will be discontinued. Also, you need to take a long-term view when you buy an insurance plan. A Ulip will
yield good results only if you hold it for at least 10-12 years. Before that, the plan may not be able to
recover the charges levied in the first few years. This is why short-term plans of 5-10 years usually give
poor results, which pushes investors to dump them within 3-4 years of buying.



Buyers must also understand that a Ulip is not necessarily an equity-linked investment. You can also
invest your Ulip corpus in debt funds. Right now, debt funds are looking attractive because of the
possibility of a drop in bond yields, while the equity markets are looking overheated. Instead of investing
in the equity option, put your corpus in the debt fund.

You can start shifting the money to the equity fund when the prospects look rosier. Only a Ulip allows you
to switch from debt to equity, or vice versa, without incurring any capital gains tax. It is best to invest in a
plain vanilla Ulip that allows you to choose your investment mix and also offers online transaction
facilities.

BRIGHT IDEA: Opt for the liquid or debt fund and then shift to the equity option as per your reading of
the market.



VOLUNTARY PF

OUR RATING:




RETURNS: 8.5 per cent (for 2013-14)

This little used option is available only to salaried taxpayers covered by the Employees' Provident Fund.

The contribution to the Employees' Provident Fund (EPF) is a compulsory deduction, as also an
automatic tax saver. However, you can contribute more than 12 per cent of your basic salary that flows
into the EPF every month. This voluntary contribution will earn the same rate of interest, will fetch you
the same tax benefits under Section 80C and the maturity corpus will also be tax-free.

A key disadvantage is the limited liquidity that the Provident Fund offers. You cannot access the money
till you retire. A one-time withdrawal is allowed in special circumstances, such as medical emergency,
purchase or construction of a house, or a child's marriage. However, it may not be possible to opt for the
VPF at this juncture.


Companies typically ask their employees to submit the VPF mandate at the beginning of the financial
year. Ask your company if you can start contributing to the VPF from this month onwards. Once you have
opted for the deduction, you cannot discontinue it till the end of the financial year, except in extraordinary
circumstances. While the VPF gets tax deduction and the maturity corpus is also tax-free, you will have to
pay tax on the interest if you withdraw the money within five years. So, opt for it only if you are sure that
you can remain invested for the long term.

Another drawback is the possibility of a lower interest rate for the PF in the coming years. The rate is
announced by the EPFO Trust after examining the interest earned by the EPF corpus. It is likely to be 8.5
per cent for the current financial year, but there is no certainty that this will be maintained over the longer
term.

Contributing to the VPF is suitable for taxpayers in their 50s, who want to aggressively save for their
retirement but don't want to invest in market-linked options or tax-inefficient fixed deposits.

BRIGHT IDEA: Channelise at least 10 per cent of your increment to the VPF every year. The higher
savings will not pinch you.





SENIOR CITIZEN'S SAVING SCHEME

OUR RATING:




RETURNS: 9.2 per cent (for 2013-14)

This remains the best way for retirees to save tax, though the Rs 15 lakh investment limit is a damper.

With four stars, this assured return scheme is the best tax-saving avenue for senior citizens. However, the
Rs 15 lakh investment limit somewhat curtails its utility as a tax-saving option. The interest rate is 100
basis points above the 5-year government bond yield.

Unlike the PPF, the change in interest rate does not affect the existing investments. This year, the interest
rate has been cut by a marginal 10 basis points to 9.2 per cent. Many grey-haired investors may not be
enthused by this. Banks are offering up to 10 per cent to senior citizens right now, almost 50-60 basis
points higher than what they give to regular customers.

There's a good reason for this pampering. Senior citizens have a bulk of their investments in fixed
deposits, which makes them prized customers for banks. So, if you do not consider the tax deduction
under Section 80C, this option is not as lucrative as bank FDs. However, as a tax-saving tool, the scheme
scores over bank fixed deposits and NSCs because the quarterly payment of the interest provides liquidity
to the investor. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of
when you start investing.





This aspect of the SCSS, and the fact that it is an ultra safe scheme backed by the government, makes it an

ideal option for retired taxpayers looking for a steady stream of income. Though the interest earned is
fully taxable, retired people usually don't have a high tax liability. Keep in mind that the basic tax
exemption for senior citizens is higher at Rs 2.5 lakh. For very senior citizens, it is even higher at Rs 5
lakh.

The only glitch is the Rs 15 lakh investment limit per individual. If a person parks Rs 15 lakh of his retiral
benefits in the scheme, he will be able to claim deduction for only Rs 1 lakh. Although the scheme is for
senior citizens (60 years), even those above 55 years can invest if they have taken voluntary retirement.
Retired defence personnel can join irrespective of their age if they fulfil other conditions.

BRIGHT IDEA: If you have Rs 15 lakh to invest in the scheme, stagger the investments over 2-3 years to
claim more tax benefits.

NEW PENSION SCHEME

OUR RATING:




RETURNS: 4.2-10.2 per cent (past 3 years)

The low-cost retire
ment product is a good option fro those saving for retirement, but watch out for the limited liquidity it
offers.



Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an
ideal investment vehicle for retirement planning. However, even though the fund management charges
have been raised from the ridiculously unviable 0.0009 per cent to a more reasonable 0.25 per cent, the
pension fund managers are not hardselling the scheme.

If you want to save tax through the NPS this year, be ready to do a lot of legwork and paperwork before
you can get to invest in this unique pension plan. The returns from the NPS funds are a mixed bag (see
table).

While the returns from the E class (equity) funds are in line with the market returns, those from the G
class (gilt) funds are quite a disappointment. Government employees, who have a chunk of their pension
funds in the G class schemes of LIC Pension Funds and SBI Pension Funds, would be especially hit. The
redeeming feature is the high returns churned out by the C class (corporate bond) funds. However, these
bonds carry a higher risk.

The scheme scores high on flexibility. The minimum annual contribution is Rs 6,000, which can be
invested as a lump sum or in instalments of at least Rs 500. There is no upper limit. The investor also
decides the percentage of the corpus that goes into equity, corporate bonds and government securities, the
only limitation being the 50 per cent cap on exposure to equity.





One of the most outstanding features of the NPS is the 'lifecycle fund'. It is meant for those who are not
financially aware or can't manage their asset allocation themselves. It is also the default option for
someone who has not indicated the desired allocation for his investments. Under this option, the
investor's age decides the equity exposure. The 50 per cent allocation to equity is reduced every year by 2
per cent after the investor turns 35, till it comes down to 10 per cent. This is in keeping with the strategy
to opt for a higher-risk, higher-return portfolio mix earlier in life, when there is ample time to make up for
any possible black swan event.

Gradually, as the investor approaches retirement, he moves to a more stable fixed-return, low-risk
portfolio. This automatic rejigging of the asset allocation is a unique feature of the NPS. No other pension
plan or asset allocation mutual fund offers such a facility to investors. There are a few funds based on age,
but they are one-size-fits-all solutions, not customised to the individual's age.

Another positive feature of the NPS is the wide choice of funds for the investor. Though you can switch
from one fund manager to the other only once in a year, it is still better than investing in a Ulip or a
pension plan where you are stuck with the same fund manager for the rest of the tenure. IDFC Pension
Fund quit the NPS last year, but two well-regarded entities HDFC Pension Fund and DSP Blackrock
Pension Fund have joined the club.

Another unique feature of the NPS is the tax benefit it offers under the newly added Section 80 CCD(2).
Under this section, if an employer contributes 10 per cent of the salary (basic salary plus dearness
allowance) to the NPS account of the employee, the amount gets tax exemption of up to Rs 1 lakh. This is
over and above the Rs 1 lakh tax deduction under Section 80C. It's a win-win situation for both because
the employer also gets tax benefit under Section 36 I (IV) A for his contribution.

By putting in money in the NPS, the employer can provide an additional tax benefit to the employee by
simply reorganising the salary structure without incurring any additional cost to the company (CTC). The
wart in the NPS is the lack of liquidity. You cannot access the funds before you turn 60. On maturity, at
least 40 per cent of the corpus must be used to buy an annuity. Some see this as a positive feature that
prevents premature withdrawals.

BRIGHT IDEA: Get your company to opt for the Section 80CCD(2), under which you can save more tax
trhough the NPS

NSCs AND BANK FDs

OUR RATING:




RETURNS: 8.5-9.75 per cent

They appear attractive, but taxability of income takes away some of the sheen from these instruments.



There are many misconceptions about bank fixed deposits in the minds of investors. Many think that up
to Rs 10,000 interest from bank deposits is tax-free, as announced in the budget two years ago. This is not

true. The newly introduced Section 80TTA gives a deduction of up to Rs 10,000 on interest earned in the
savings bank account, not on fixed deposits and recurring deposits.





Also, the nomenclature 'tax-saving deposits' means you save tax under Section 80C. It does not mean that
these deposits are tax-free. The interest earned on deposits is fully taxable at the normal tax rate
applicable to you. You have to mention this interest under the head 'Income from other sources' in your
income tax return. Keep in mind that this tax is payable every year on the interest that accrues in that
financial year, even though you get the amount on maturity.

So don't get misled by the high interest rates offered on the 5-year bank fixed deposits. The post-tax yield
may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as
attractive as the yield of the tax-free PPF.

The second misconception is that there is no need to pay tax if TDS has been deducted by the bank. You
may have to pay tax even if TDS has been deducted. TDS is only 10 per cent (20 per cent if you haven't
submitted your PAN details), and if you are in the 20-30 per cent bracket, you need to pay additional tax.
Ignore mentioning the interest income in your return at your peril. The TDS is credited to your PAN and
reported to the tax authorities. If there is a mismatch in the TDS details in the tax records and in your
return, you will surely get a tax notice.

The Central Board of Direct Taxes has a computer-aided scrutiny system (CASS), which flags any
discrepancy in the tax return filed. Check the TDS in your Form 26AS, which has details of the tax
deducted on your behalf. It can be easily checked online. It is easier if you have a Net banking account
with any of the 35 banks that offer this facility. Otherwise, you can go to the official website of the Income
Tax Department and click on 'View your tax credit'. The first-time users will have to register, but it takes
less than 5 minutes to log on and view your details.

The interest on NSCs is also taxable but very few taxpayers include it in their returns. However, with the
integration of tax records, a taxpayer may not be able to escape the tax net easily. For instance, if you have
claimed tax deduction under Section 80C for investments in NSCs or FDs in one year, the tax department
may want to know why the interest earned is not reflecting in your tax returns for subsequent years.

BRIGHT IDEA: Don't try to avoid the TDS by investing in FDs of different banks. You will have to pay
the tax later anyway.



LIFE INSURANCE POLICIES

OUR RATING:




RETURNS: 5.5-7.5 per cent

Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will
find the tax-free corpus appealing.

Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly by
ensuring a higher surrender value and larger life covers, they are still the worst way to save tax. The tax
saving is only meant to reduce the cost of insurance. It is not the core objective of the policy. Money-back
and endowment insurance policies score low on the flexibility scale. Once you buy a policy, you are
supposed to keep paying the premium for the rest of the term. This can be a problem if you took the policy
only to save tax.

However, these policies are not as illiquid as they appear. You can easily get a loan against your
endowment policy from the LIC. The terms are quite lenient and repayment can be done at your
convenience. Insurance companies claim their products offer the triple advantage of life cover, long-term
savings and tax benefits. That's not true. Traditional plans give a low life cover of 10 times the premium.

For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give niggardly returns. The
internal rate of return (IRR) for a 10-year policy comes to around 5.75 per cent. For longer terms of 15-20
years, the IRR is better at 6.5-7.5 per cent. As for the tax benefit, there are simpler and more cost-effective
ways to save tax, such as 5-year bank FDs and NSCs. If the taxability of the income worries you, go for the
tax-free PPF.

However, traditional insurance policies still make a lot of sense for the HNI investor who is more
concerned about the tax--free corpus under Section 10(10d) than the deduction under Section 80C. Even
for such investors, a Ulip will make more sense as they will have control over the investment mix. The
opacity of the traditional plan is best avoided, but your agent might not be very keen to sell you a Ulip this
year because his commission has been cut to 6-7 per cent of the premium.



PENSION PLANS

OUR RATING:




RETURNS: 7-10 per cent

After a hiatus of 2-3 years, pension plans are making a comeback, but the high charges mean lower
returns for investors.



Pension plans offered by life insurance companies made a comeback in 2013. However, the charges of


these plans are significantly higher than those of the NPS. While the NPS has a fund management charge
of 0.25 per cent, a typical pension plan from a life insurance company charges almost 3-4 per cent. This
difference can snowball into a wide gap over the long term, reducing the returns of the pension plan
investor by a significant margin.

Insurers argue that the low-cost NPS is good only on paper because there are so many hurdles to investing
in the scheme. A pension plan from an insurer is costlier but you don't have to go around in circles trying
to invest in it. That's true to a great extent. Even after four years of launch and offering additional tax
benefits, the NPS has not been able to attract investors in hordes. However, the solution is not a high-cost
pension plan.

A few mutual funds also have pension plans. The Templeton India Pension Plan is one of the oldest
schemes in the market and offers deduction under Section 80C. It is a debt-oriented fund that invests 30-
40 per cent of its corpus in equities and the rest in debt. But at 10.7 per cent, its 5-year annualised returns
are nothing to gloat about. A better option would be a combination of an ELSS scheme and any of the debt
instruments that offer tax deduction.

BRIGHT IDEA: It is not a good idea to invest a large sum in the equity option at one go. Opt for the
liquid or debt fund instead.