Although saving money is round the year activity for any earning individual, tax saving only gets in focus in the last three months of the FY. There are many reasons for this, and more than these there are many side-effects of this approach of investing. This article looks at the various Tax Saving Options and compares them on different parameters like Liquidity, Flexibility, Maturity Period, Volatility and Taxability.

Remember that your money is supposed to provide security and prosperity for you and your dependents in the present and in the future. Since investment instruments are like vaults where you park your hard-earned money for a better future, you should ensure, as much as possible, that these funds are available to you when you need and grow in value over time.

Therefore, when it comes to saving money for tax rebates, the objective of only ‘tax saving’ does not make any sense for long-term financial goals.

The money you invest to save tax will benefit you in the current assessment year, but can you ensure that it helps you in future as well?

Securing Your Future While Saving Taxes in The Present

It is possible to make sure that the money you invest now to save tax this financial year, also comes in handy in future if you decide objectively and not rush the decision. There are simple parameters you can use to judge whether the investment is going to save tax and provide for a future goal.

For example, the endowment plans can offer you definite returns for a fixed monthly investment, and you can claim the invested amount each financial year as a deduction from your taxable income. Also, the maturity proceeds you receive remain tax exempt.

The Parameters to Judge an Investment

You know your risk appetite. Even if you do not have a detailed personal risk assessment report in hand, you have an idea of where you should invest your money. The two factors you will be considering for your investments are these:

• The flexibility of Investment: Can you decide the amount and time of investment and the type of instrument you’d like to hold time to time? g. whether you can switch to a debt investment from equity or equity to debt.

Remember that the more risk you can take the higher your returns can be.

• Liquidity of Investment: How easily and quickly you can turn the investment into cash without losing much of its value?
• Time to Maturity or Holding Period: How many years do you need to formally stay invested? The shorter the maturity period the better.
• The uncertainty of returns or Volatility: How certain are you about the returns?
• And finally, we also test the ‘Taxability’ of the investments at the time of:

1. Investment: Whether the amount you invest is tax-free?
2. Interest Payment: Whether the interest accrued or dividend you receive is tax-free?
3. Maturity or liquidation: Whether the maturity proceeds are tax-free?

Let’s See How Different Tax Saving Options Fare on These Measures

Let us Consider some popular investment options for tax saving and evaluate their features on the three parameters we have selected. We assign ‘5’ for the best possible features in the category and ‘1’ to indicate the worse:

Tax Saving Options: Equity Linked Savings Scheme (ELSS)

Category	Product Features	Score
Flexibility of Investment	Minimum investment may be capped to Rs. 1000. Any amount can be invested anytime. ELSS only invests in equity. Therefore, no switch before 3 years is possible.	3
Liquidity	Units can’t be sold back to the fund before 3 years of holding. Though units can be sold on the exchange where Fund is listed, the price will be highly discounted. No Loan is available on the investment.	3
Volatility	Very volatile as it is an equity scheme	1
Maturity Period	Must be held for a minimum of three years, but due to equity holding should be held for more than five years.	4
Taxability	Invested amount can be used for reducing taxable income. Dividends received are tax-free. Maturity proceeds after three years are also tax exempt as long term capital gains on equity.	5
Total		16

Tax Saving Option: Unit Linked Insurance Plans (ULIP)

Category	Product Features	Score
Flexibility of Investment	Flexibility is low, as once the premium is decided on the policy, it must be paid, the only choice is the frequency which must be chosen in the beginning. You can switch between equity and debt multiple times. Thus, investment flexibility is good in this aspect	3
Liquidity	Money/unit balance cannot be withdrawn before 5 years of the policy are complete. There is no loan available within this period.	2
Volatility	Depends on the type of investment chosen. E.g. If you choose growth option the money is invested in equity funds which are the highly volatile investment, but wealth protection option gives you more debt investment.	3
Maturity Period	Maturity period depends on the policy period. However, the accumulated fund value can be withdrawn after 5 years.	4
Taxability	Investment, earnings, and maturity all are tax exempt	5
Total		17

Tax Saving Options:Tax Saving Fixed Deposits

Category	Product Features	Score
Flexibility of Investment	Money can be invested once in an FD. However, multiple FDs can be opened in a financial year. No option to switch to equity or other security before maturity.	2
Liquidity	FDs can’t be broken before 5 years.	1
Volatility	Returns are fixed at the interest rate decided in the beginning.	5
Maturity Period	Tenure for these Fixed Deposits is five years.	2
Taxability	Investment is tax-free, but interest and maturity values are taxable.	1
Total		11

Tax Saving Options: National Pension Scheme (NPS)

Category	Product Features	Score
Flexibility of Investment	Any amount starting from a minimum of Rs.500 can be invested any number of times throughout the year. The minimum annual contribution is Rs.6000 The option to switch is inbuilt. The investor has less flexibility to decide the maximum risk under the tax saving (retirement) option.	4
Liquidity	Withdrawal is only possible at retirement, resignation or death of the account holder. Partial withdrawal is allowed only after 10 years. Loans are not available.	1
Volatility	NPS portfolio has a maximum of 50% exposure to equity. Therefore, it is less volatile than ELSS but more volatile than PPF, NSC or bank FD	2
Maturity Period	Depends on the age of the accountholder. Though for investors below 40 years of age, it is longer than 20 years	2
Taxability	Investment up to Rs. 200,000 can be claimed for tax saving purpose. Interest accrued is not taxable. However, maturity proceeds can be partially taxable.	4
Total		13

Tax Saving Options: Public Provident Fund (PPF)

Category	Product Features	Score
Flexibility of Investment	A minimum of 12 contributions of Rs. 500 are required in a financial year. No option to switch to equity from PPF before maturity.	3
Liquidity	Loan facility is available from the 3rd financial year of the account. Partial withdrawal is allowed after 5th year.	2
Volatility	Very little. Only interest on the account is revised each year by central govt. to match the debt market scenario.	4
Maturity Period	15 years	1
Taxability	Investment, interest and maturity proceeds are all tax-free.	5
Total		15

Tax Saving Options: National Savings Certificate (NSC)

Category	Product Features	Score
Flexibility of Investment	Minimum of Rs. 100 can be invested, any number of times in a financial year. No option to switch to equity of other debt investment before maturity	4
Liquidity	The certificate can be liquidated anytime, however, will receive a lower interest or no interest. The loan can be taken from financial institutions by pledging the certificate.	3
Volatility	Nil	5
Maturity Period	Five years	2
Taxability	Interest and maturity value is taxable, but TDS is not deducted.	1
Total		15

Tax Saving Options: Life Insurance Policies

There are many types of life insurance policies available, some of which like ULIP, as seen above, come with an investment option and provide maturity value. But, most of the time, it is not possible to achieve adequate life cover under ULIPs, Endowment and Moneyback policies without committing huge amounts as annual premiums.

Category	Product Features	Score
Flexibility of Investment	The premium amount must be paid for the continuation of the policy. Life policies (except ULIP) do not give the option to switch to high-risk investments.	2
Liquidity	Policy can be surrendered in the second year onwards. But surrender value can be very low. Loans may be available in the later stage of the policy.	2
Volatility	Nil	5
Maturity Period	As per Policy Term. Minimum Policy Term can be 5 years.	2
Taxability	Interest and maturity are tax-free.	5
Total		16

Life Insurance as Tax Saving Investment

While you build your wealth and ensure that your family’s future goals are looked after, life insurance on your life is also important. There are two types of life insurance investments, and both make your money eligible for tax savings in the year you invest in it. One is the simple ‘Term Plan’ other is ‘Endowment and Money Back Plan.’

Term Plan

The difference between term and endowment/moneyback plans is that term plan consists of only life cover. You can get a term life cover for a nominal amount of premium. This will ensure that your nominee gets the sum assured in the event of your untimely death. But if you survive the tenure of the policy you do not receive any maturity value.

But, you will have an adequate amount of life cover for a nominal annual premium.

Endowment & Moneyback Plans

With endowment and moneyback plans, you get a life cover as well as a guaranteed (and some additional unguaranteed bonus, if you choose) maturity amount. Meaning, while the sum assured you have bought will be paid to the nominee in case of your demise, the maturity amount will be paid to you if you survive the policy tenure.

There are guaranteed returns in endowment and moneyback plans, but the premiums are higher than term plans for the same amount of cover. These plans are a better provider of security and assured returns over a long period, and you can be sure to meet your goals in future with these.

What Should You Do?

Recommended investment plan is that you have adequate life cover using a ‘Term Plan’ and invest the remaining amount in Endowment or Moneyback plan to meet your future goals.

For example: You need to invest up to Rs. 150,000 this year to maximize your tax savings. You need a life cover of Rs. 1.5 crore to make sure that your family is provided for even in your absence. If you buy a term cover of Rs. 1.5 cr. And you are 35 years old the premium would be approximately Rs. 35,000 (even lower if you buy term plans online); i.e. you still need to save additional Rs. 125,000. This amount can be used for investment in various plans for your financial goals through endowment plans, ULIPs, ELSS, etc.

Remember that no investment is always bad or always good. Therefore diversification is the best way to maintain and grow your wealth, and keeping your family’s future safe with an adequate term insurance cover.

Summary of Ranks of Tax Saving Options

Now let us consolidate and see how each instrument fared in different category and overall:

Rank	Investment	Flexibility of Investment	Liquidity	Volatility	Maturity Period	Taxability	Total Score
1	ELSS	3	3	1	5	5	17
2	ULIP	3	2	3	4	5	17
3	Life Insurance	2	2	5	2	5	16
4	PPF	3	2	4	1	5	15
5	NSC	4	3	5	2	1	15
6	NPS	4	1	2	2	4	13
7	Tax Saving FDs	2	1	5	2	1	11

To learn more about your tax liability and the income tax slab for the Assessment Year 2017-18 click here.