Equity-linked saving schemes (ELSS) are the best way to save tax in 2017. The Economic Times assessed 10 tax-saving options on eight key parameters, including returns, safety , liquidity , costs, transparency , flexibility, ease of investment and taxability of income. ELSS funds scored highest, followed by the National Pension System (NPS) and Ulips at the second and third place, respectively .
The terrific returns generated by ELSS (CAGR of 18.7% in past three years and 17.46% in past five years) are not the only plus point of these funds. Their costs are very low (2.52.75% a year) and all charges, portfolios and transactions are in the public domain. Returns are tax free because long-term capital gains from equity funds are exempt and they have the shortest lock-in period of three years.
Investing in ELSS funds has now become very easy with the launch of the e-KYC facility. The whole process does not take more than 30-35 minutes. The Pension Fund Regulatory and Development Authority has made NPS investing completely paperless. Ulips can also be bought online with ease.
NPS, at the second place in the annual ranking, is a great way to save tax if you don’t mind locking up your money till you retire. Till last year, the taxability of the NPS was a big issue. But last year’s Budget changed the rules and made 40% of the corpus tax-free. The PFRDA wants that the balance 60% should also be exempt from tax. NPS is especially useful for investors who may have exhausted the `1.5-lakh investment limit under Sec 80C but want to save more. They can save more tax by investing `50,000 in NPS under Section 80CCD(1b).
Many readers may be shocked to see Ulips at number three. But the new online Ulips have very low costs, which leaves a lot on the table for the buyer. Aggressive Ulip plans have earned almost 12% annualised returns in the past five years. However, these numbers only indicate the rise in the NAV .Some Ulip charges are levied by cancelling units so the actual returns for investors may be lower.Even so, the income from these plans is tax-free under Sec 10(10d) and investors can switch from one fund to another without incurring a tax liability.
Provident Fund (PF) can also be a great way to save tax. Though an individual’s contribution to the PF is linked to the salary , one can increase the amount by opting for the Voluntary Provident Fund (VPF). Contributions to VPF are eligible for the same tax benefits as the PF. But as this option is not available at this point of the year, the Public Provident Fund (PPF) can be a suitable alternative. The interest rate is lower at 8%, but remains ahead of inflation. It is also higher than bank deposits and corporate FDs.
For many investors, ease of investment becomes paramount because they don’t have much time. Fixed deposits score very high on this front. Just a few clicks and your investment is done. Insurance agents also make the process very easy . They volunteer to do all the paperwork and the investor has to just sign on the dotted line. But the cost of this ease is very high. In the 30% tax bracket, the post-tax returns from fixed deposits are less than 5%. And insurance plans not only offer low returns of 5-6% but also force the buyer to continue investing for years. This is why these instruments figure lower down in our ranking.
A word of advice. Don’t go by the ranking alone. Some investment options may not be suitable for certain individuals.For instance, even though ELSS funds can offer terrific returns, senior citizens above 70 should steer clear of these schemes. They are better off investing in the Senior Citizens’ Saving Scheme, the PPF or tax-saving fixed deposits.