Tax saving offers

Dipankar Jakharia *

Years back, at a beauty pageant, the subject of my adulation was not the beauties. Don't get me wrong, but for me, every contestant was equally beautiful. When the results were declared, I couldn't help but admire the eyesight of the judges who could pick the best among the beauties that night.

Right now, anyone from the salaried class, who are preparing to return his/ her income tax, is in a dilemma as to where to invest to save tax. Frequent phone calls from agents, advices from friends and relatives and deadline to top it all are so confusing that you wish there was a judge to tell you which one is the best.

Yes, we are talking about investing in instruments which fall under Section 80C of income tax rules to save tax. The maximum limit to avail rebate is one lakh of investment in total. Let's try to pick these "beauties" here, one at a time.

The first contestant here is the Public Provident Fund (PPF). My view is that, first kitty to have in your bag to save tax should be your PPF. You can open an account in a post office branch or a bank. This year, the PPF will earn 8.7 per cent. The minimum deposit is Rs 500 in your PPF account in each year. Though the PPF account matures in 15 years, it also offers liquidity. You can withdraw after the fifth year. But withdrawals cannot exceed 50 per cent of the balance. The PPF is especially useful for risk-averse investors.

Our second contestant is Equity Linked Saving Scheme (ELSS), and needless to say, it is one of my favourite. The lock in period of ELSS is three years, and is the shortest among all our Section 80C contestants. "But one should not be encouraged to invest in ELSS taking a short term call", said Bibhas Das, a mutual fund distributor from Guwahati. He also said, ELSS as a sector has generated a healthy 17.5 per cent return over last five years.

But it's ability to generate a higher return is directly linked to the stock market and is not recommended for faint hearted. Like any equity mutual fund, the best way to invest in an ELSS fund is through Systematic Investment Plan (SIP), with a longer time horizon of seven years or more. I highly recommend ELSS to young tax payers, normally with a heavy burden of loans with little time to spare in their hands.

The third contestant in our list is Unit Linked Insurance Policy (ULIP). Yes it is in my list! Most of you must be in a shock seeing ULIP in my list. And I do admit for the first time, I am saying good things about ULIP. Gone are the days when 50-60 per cent of your first year premium was paid as commission to its agents. The 2010 guidelines have reformed the ULIP, turning it into a more customer- friendly investment.

Though an ULIP plan should not be your first insurance policy, you can consider buying one as an investment that also helps you save tax. 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 ULIP plan. An ULIP will yield good results only if you hold it for at least ten to twelve years. According to latest data ULIPs have generated a return of seven to 11 per cent in last five years.

The fourth contestant is bank FD and NSC. The current rate of return is 8.5 to 9.75 per annum. This is one of the most popular avenues I found people parking their money to save tax. Like PPF, this instrument is best for people adverse to take risk. To be eligible for tax gain the lock-in period is five years. To give more facilities to senior citizens, an additional 50 basis point is offered by almost all banks. But, interest earned is taxable.

The fifth contestant is a life insurance policy. Needless to say you will find the maximum number of citizens buying policies to save tax. If you do the internal rate of return of traditional policies, it is normally between 5.5 to seven per cent and no more. And it is one of the worst ways to save tax. Money-back and endowment insurance policies score low on the flexibility.

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. Insurance companies claim their products offer the triple advantage of life cover, long-term savings and tax benefits. That's not completely true. With ULIP commissions cap at six to seven per cent by IRDI, insurance companies have increased the agency payout in tradition policies. So beware of pushing sales from your Agents in the last munities.

Now, which among all of them would be the best choice is difficult for me to decide. Every product has its own pros and cons. But, what we at-least need is to have a prior idea what to expect. As for choosing the winner, I dare not try to be the judge. After all, who can be a better judge then the public himself. A well-informed, intelligent public. A tax-paying public!