When the end of financial year is round the corner and the deadline of March 31 is hovering over the mind of individual taxpayers so that they can invest the minimum amount required to reduce their income tax liability by max possible amount.
Even though this is a yearly exercise, but every time the individual taxpayer faces the dilemma whether they are using the right tax saving option, whether their returns on such tax saving instruments are well enough and most importantly whether the money invested will be available to them at the time of their financial needs.
In this article we will try to cover the maximum popular tax saving instruments and draw out a comparison among them on the different parameters.
B. What to evaluate?
While choosing any instrument or scheme an individual would certainly having some basic questions through which he/she evaluates the scheme according to his requirement. Some of these parameters are as below-
i) Return of the scheme-
This question has always been the primary factor over deciding any scheme or instrument as to what will be the return on the investment. A scheme having a higher return will always entice more as compared to lower returns.
ii) Lock-in period-
This is also an important factor as in most of the tax saving scheme the withdrawal is allowed only after the expiry of a certain period or maturity of the instrument is after a longer time frame. So, an instrument with easy withdrawal option will be more convenient to go with.
iii) Risk associated-
Mostly, this parameter remain unchecked while selecting the scheme or instrument. A person always looks for the higher returns but mostly forget to check the risk involved. Today, most of the schemes are directly or indirectly linked with the capital markets so they entail the similar kind of risk with them. Therefore, past returns (usually referred as CAGR) cannot be said to be guaranteed returns.
iv) Taxability of Returns and maturity amount-
This is also an important parameter because higher pre-tax returns may lose their shine once they reach the hands of taxpayer as they might face the taxability under the Income Tax. Similarly, it is also important to check whether maturity amount is exempt or taxable. Most attractive scheme are those which are in “EEE” category. The E denotes as-
1st E- Exemption/deduction for investment (Most of the schemes u/s 80C)
2nd E- Returns earned on scheme is tax exempt
3rd E- Final maturity amount received is tax exempt
Therefore, the schemes can be of the nature- EEE, ETE, EET, ETT
This is also getting very crucial parameter in today’s era where people are more financially literate. Knowing where your money is invested and how it’s performing over the period and what are the expenses incurred by the scheme managers to earn the returns are the things which count under this parameter. So an instrument where you can track your invested portfolio and its return will be more trustworthy.
C. Comparison of various instruments & schemes-
|Name of Scheme or Instrument||Risk &
|Investment amount||Lock in period
|Fixed Deposits||6-8% return
|Max up to 1.5 Lacs||5 years||ETT||Highly Transparent|
|ELSS Mutual Funds||10-30% Return High Risk||Max up to 1.5 Lacs||3 years||ETT (Capital
gains up to 1 Lacs exempt in a year,
taxable @ 10%)
|PPF||7-9% return No risk||Min 500 Max up to 1.5 Lacs||15 years
(Partial withdrawals allowed from 7h year)
|NPS||13-18% return Moderate risk||Min 1000 Max up to 2 Lacs||Till the age of 60 years||Corpus- EEE Pension-EET||Highly Transparent|
Yojana (SSY) Available for Girl child only
|7-8% Return No Risk||Min 250 Max 1.5
|21 Years (Premature withdrawal allowed for
Higher education &
(i) There are various other schemes such as Atal Pension Yojana, Post Office Monthly Income Scheme, Senior Citizen Saving Scheme, Kisan Vikas Patra etc. But over the time such schemes are losing the traction due to very low rate of return involved. These schemes are generally in nature of ETE and entail very low risk.
(ii) The return percentage are on average estimation basis only and they fluctuate over a period of time.
From the above it can be noted that while choosing the tax saving instrument all the parameters are equally important. A person aging 25-40 years might be able to take greater risks and can go for ELSS Mutual funds, whereas a person who is more keen to earn a fix rate of income or pension will opt for Fixed deposits or monthly income saving scheme. Therefore, it is very important to evaluate every parameter according to the requirements. Once, all the parameters are explored and carefully evaluated then a person will excel for sure in the Tax Saving which is an art of Investing.
Disclaimer- Although the above document has been prepared after due research and extensive care has been taken while preparation of this document. However, author does not take any responsibility for any decision taken basis this document. It is advised to approach a professional consultant before arriving at any conclusion based the above.