Is Tax man eating into your salary?

This is the Tax saving season. Most of us invest in eligible products to save tax especially u/s 80(C)

U/s 80(C), we can invest upto Rs. 1.5 Lakh and save Tax outgo of upto:

  1. 45000 if you fall in 30% Tax bracket
  2. 30000 if you fall in 20% Tax bracket
  3. 15000 if you fall in 10% Tax bracket.

Following products are eligible to save Tax u/s 80(C):

  1. PPF
  2. Premium for Life Insurance policy
  3. 5-year Fixed Deposit
  4. NPS
  5. NSC
  6. ULIPs
  7. ELSS
  8. Principal on Housing loan

The most favoured and the well-known option is the PPF. PPF currently offers an interest rate of 8.7%. Average inflation in India in the last 100 years has been around 8.26%. So, the net/real returns are 0.44% (8.7%-8.26%), which is as good as ZERO. Are these returns good enough?

If you take a personal loan from bank, we have to pay an interest of 14 – 18%. But if you deposit money in a bank, you will get around 7 – 7.5 % as interest. The difference b/w the 2 interest rates is called Net Interest Margin, which is the profit for Bank.

When you deposit money in a Bank, we think that we are making money @ 7% p.a. But if the inflation is @ 8.26%, our net/real returns are –ve. So, the truth is….we are not making any money by depositing in Bank. Instead the Bank is making money/profit by taking deposits at lower rate and by lending at a much higher rate.

Returns from other options viz. NPS, NSC, Insurance policies (including LIC policies which give 6% p.a) are in the same range i.e, 8%.

Some of us buy insurance policies as an investment to save Tax u/s 80(C). The actual motto behind an insurance policy is to provide back up (Sum assured) to your family incase of any accidental mishap to you. But insurance policies are being sold as an investment option in India and moreover to save Tax u/s 80(C). Is it good for investors?

So, avoid buying products which mix insurance and investment because they will neither give enough insurance coverage nor give enough investment returns. Best thing is to buy a Term insurance policy, which is a pure insurance policy where the premiums are very less.

Last option but not the least….in my view the best. ELSS is one of the options to save Tax. ELSS stands for Equity Linked Savings schemes. They are a type of mutual funds which are eligible for Tax saving u/s 80(C). If you observe the returns from various ELSS schemes in below table, you will understand why I called them the best option:

Scheme name P.A returns in last 3 yrs P.A returns in last 5 yrs P.A returns in last 10 yrs P.A returns Since inception
Axis Tax Plan

30

20

22

Franklin Tax Plan

24

15

18

26

ICICI Tax Plan

23

13

16

23

Birla Sunlife Tax plan

24

14

15

21

HDFC Tax Plan

19

9

16

28

You can see that the returns from ELSS are much higher than those from other options / products. ELSS beats inflation by a huge margin, which means your net/real returns are higher in ELSS. Your money is actually growing w.r.t inflation.

This Tax saving season, hope you select the best but lesser-known product (ELSS) against well-known products which don’t give real returns w.r.t inflation.

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