Best investment options under Section 80C

to save tax


PPF
Rating: *****
The PPF is an all-time favourite investment option and the Budget has only made it more attractive by
enhancing the annual investment limit to Rs 1.5 lakh. The PPF offers investors a lot of flexibility. You
can open an account in a post office branch or a bank. The maximum investment of Rs1.5 lakh in a year
can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest
the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but
irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of
five years each. The PPF is useful for risk-averse investors, self-employed professionals and those not
covered by the EPF.


ELSS funds
Rating: *****
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-
saving options under Section 80C. But this should not be the most important reason for investing in this
avenue. Being equity funds, these schemes can generate good returns for investors over the long term.
The minimum investment in ELSS funds is very low. Though regular equity mutual funds have a minimum
investment of Rs 5,000, you can put in as little as Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan
or an insurancepolicy, there is no compulsion to continue investments in subsequent years. To make
most of ELSS funds, stagger your investment over a period of time instead of putting a large sum at one
go.


Ulips
?Rating: ****
The 2010 guidelines have made Ulips more customer-friendly. A new online Ulip
launched by HDFC Life charges only 1.35 per cent for fund management. There is no
other charge except for the risk cover provided by the policy. This makes the
click2invest policy even cheaper than direct mutual funds. Keep in mind that a Ulip
yields good results only if held for at least 10-12 years.


NPS
Rating: ****
Its low-cost structure, flexibility and other investor-friendly features make the New
Pension Scheme an ideal investment vehicle for retirement planning. The scheme
scores high on flexibility. The minimum investment of Rs 6,000 can be invested as a
lump sum or in instalments of at least Rs 500. There is no limit. The investor also
decides the allocation to equity, corporate bonds and gilts. Be ready for a lot of legwork
before you can buy.
Bank FDs and NSCs
Rating: ***
Don't get misled by the high interest rates offered on the 5-year bank fixed deposits.
Interest income is fully taxable so the post-tax yield may not be as high as you think. In
the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of
the tax-free PPF.
Life Insurance plans
Rating: **
Though the Irda guidelines for traditional plans have made insurance policies more
customer-friendly, they are still the worst way to save tax. The tax saving is only meant
to reduce the cost of insurance. It is not the core objective of the policy.
Pension plans
Rating: *
The charges of pension plans offered by life insurers are significantly higher than those
of the NPS. The difference can snowball into a wide gap over the long term. The other
problem is that annuity income is still not tax-free, which makes pension plans rather
unattractive for retirees.
SCSS
Rating: ****
This assured return scheme is the best tax-saving avenue for senior citizens. However,
the Rs 15 lakh investment limit somewhat curtails its utility. The interest rate is 100
basis points above the 5-year government bond yield. The interest is paid on 31 March,
30 June, 30 September and 31 December, irrespective of when you start investing.

How much more you need to save under
Section 80 C

The Budget has raised the maximum deduction under Section 80C, but this should not make you invest
at random.
Here are the Section 80C investments of four typical taxpayers. Only one of them actually needs to invest
more to save tax. Before you make the additional investment of Rs 50,000, use the column at the end to
calculate how much more you need to invest for saving tax.



10 best tax-saving investments

Multiple options. Contradictory advice. And a deadline that's approaching fast. Many
taxpayers find themselves in this situation at the beginning of the year when they have
to make tax-saving investments.
Are you also confused? Before you make a choice, go through our cover story to know
which is the best option for you. We have ranked 10 of the most common investments
under Section 80C on five basic parameters: returns, safety, flexibility, liquidity and
taxability. Every investment has its pros and cons.
The PPF may not have a very high return, but its tax-free status, flexibility of investment
and liquidity by way of loans and withdrawals, gives it the crown in our beauty pageant.
Equity-linked saving schemes come in second because of their high returns, flexibility,
liquidity and tax-free status. However, traditional insurance policies, an all-time favourite
of Indian taxpayers, manage the ninth place because of the low returns they offer and
their rigidity.
Some readers might be surprised that the much reviled Ulips are in the third place. The
Ulip remains a mystery and its returns are seldom tracked. We checked Morningstar's
data on Ulips and found that the returns have not been very good in the past 1-5 years.
Even so, it can be a useful instrument for the smart investor who shifts his money
between equity and debt without incurring any tax.
We have tried to separate the chaff from the grain by assigning a star rating to the
various tax-saving options. Whether you are a novice or a seasoned investor, you will
find it useful. It will help you cut through the clutter and choose the investment option
that best suits your financial situation.
1. PPF
RETURNS: 8.7% (for 2013-14)
This all-time favourite became even more attractive after the interest rate was linked to
bond yields in the secondary market.
The PPF is our top choice as a tax saver in 2014. It scores well on almost all
parameters. This small saving scheme has always been a favourite tax-saving tool, but
the linking of its interest rate to the bond yield in the secondary market has made it even
better. This ensures that the PPF returns are in line with the prevailing market rates.
This year, the PPF will earn 8.7 per cent, 25 basis points above the average benchmark
yield in the previous fiscal year. The benchmark yield had shot up in July and has
mostly remained above 8.5 per cent in the past six months. Although the yield is unlikely
to sustain at the current levels, analysts don't expect it to fall below 8.25 per cent within
the next 2-3 months. So it is reasonable to expect that the PPF rate would be hiked
marginally in 2014-15.
The PPF offers investors a lot of flexibility. You can open an account in a post office
branch or a bank. However, the commission payable to an agent for opening this
account has been discontinued, so you will have to manage the paperwork yourself.
The good news is that some private banks, such as ICICI Bank, allow online
investments in the PPF accounts with them. There's flexibility even in the quantum and
periodicity of investment.
The maximum investment of Rs 1 lakh in a year can be done as a lump sum or as
instalments on any working day of the year. Just make sure you invest the minimum Rs
500 in your PPF account in a year, otherwise you will be slapped with a nominal, but
irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can
extend it in blocks of five years each. However, this facility is no longer available to
HUFs.


The PPF also offers liquidity to the investor. If you need money, you can withdraw after
the fifth year, but withdrawals cannot exceed 50 per cent of the balance at the end of
the fourth year, or the immediate preceding year, whichever is lower. Also, only one
withdrawal is allowed in a financial year.
You can also take a loan against the PPF, but it cannot exceed 25 per cent of the
balance in the preceding year. The loan is charged at 2 per cent till 36 months, and 6
per cent for longer tenures. Till a loan is repaid, you can't take more. If you dip into your
PPF account, be sure to put back the amount at the earliest. Withdrawing from long-
term savings is not a good strategy if you do it frequently. It can dent your overall
retirement planning.
The PPF is especially useful for risk-averse investors, self-employed professionals and
those not covered by the Employees Provident Fund and other retiral benefits.
2. ELSS FUNDS
RETURNS: 17.5 per cent (Past five years)
The potential for high returns, wide choice of funds and flexibility make these funds a
good tax-saving option for equity investors.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-
saving options under Section 80C. However, this should not be the most important reason for investing in
this avenue. Being equity funds, these schemes can generate good returns for investors over the long
term. In the past five years, this category has created wealth for investors with average returns of 17.5
per cent.

However, this potential to earn high returns comes with a higher risk. There is no
guarantee that your investment will generate positive returns after the 3-year lock-in
period. The category has generated an average return of 2 per cent in the past three
years. Even the best performing funds have churned out disappointing returns. The
returns will naturally mirror the performance of the stock markets. Therefore, only
investors who have the stomach for a roller-coaster ride should consider this option.

Should investors avoid ELSS now, especially since the stock market is close to its all-
time high? Not really, because the stock market has returned to the previous high after
a 6-year gap and, therefore, is not overvalued at all. "Since the stock market is
reasonably valued now, ELSS should generate good returns for investors who can
remain invested for 5-7 years," says Gajendra Kothari, managing director and CEO,
Etica Wealth Management.
Though the large-cap Sensex and Nifty are at higher levels, the mid-cap and small-cap
indices are at much lower levels. This means there is enough value in midcap stocks,
which should help the fund managers do well in the coming years. Selecting the right
scheme is crucial since there is significant variation in the returns of different schemes.
Though past performance is an important parameter, also take into account the track
record of the fund house and fund manager. Once you select a scheme, decide whether
you want to go for the dividend or growth option. There is no difference in the tax
treatment of the two options. The decision should be based on the cash-flow
requirements of the investor. If you opt for the dividend option of the fund, you might get
some portion of the money back within 1-2 months. Dividends from mutual funds are
tax-free so there is no tax liability as well. Avoid the dividend reinvestment option for
ELSS schemes because the lock-in period will prevent you from exiting fully.
Though the ELSS funds invest in equities, they are different from other open-ended
diversified equity funds. Due to the lock-in period, the ELSS fund manager does not
have to worry about redemption pressure from investors. This gives him the freedom to
invest in shares as per his conviction and hold them for longer periods.
In the past few years, the ELSS category has consistently outperformed the large and
midcap sub-category of diversified equity funds (see graphic).

ELSS funds offer tremendous flexibility to investors. As mentioned earlier, the 3-year
lock-in period is the shortest. Since there is no tax on gains from equity funds after a
year, an investor can safely recycle his investments every three years and claim tax
benefits on the reinvested amount.
Young taxpayers, who have taken huge loans and don't have enough surplus to save
tax, will find these schemes very useful. If you can help it, don't exit the scheme after
three years just because lock-in period is over. Studies show that equities give better
returns in the long term. The minimum investment is also very low.
Though regular equity mutual funds have a minimum investment of Rs 5,000, you can
put in as little as Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan or an
insurance policy, there is no compulsion to continue investments in subsequent years.
Since ELSS funds are a high-risk investment and their NAVs are volatile, you need to
stagger your investment over a period of time instead of going for a lump-sum
investment at the end of the financial year. This is more important at this juncture when
the benchmark indices are trading close to their all-time high levels.
Your best option is to take the SIP route. This may not be possible now because you
have less than three months before the 31 March deadline. At best, you can split the
investment into three tranches. Before you take the plunge, remember that your
investment should be guided by your overall asset allocation. If your exposure to
equities is lower than what you want, go for the ELSS fund. If your portfolio already has
too much equity, avoid investing in these funds.
BRIGHT IDEA: Don't invest a lump sum. Split investments in ELSS funds into three
SIPs starting from January till March.

3. RGESS: An avoidable option for the first-time equity investor
The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional
tax savings under the newly introduced Section 80 CCG. If you invest in the RGESS
options, you can claim a deduction of 50 per cent of the invested amount. The
maximum investment is Rs 50,000, so the maximum deduction availed of can be Rs
25,000. This is over and above the Rs 1 lakh limit available under Section 80C.
The scheme permits investments in the BSE-100 or CNX 100 shares, shares of
Maharatna, Navratna or Miniratna PSUs, or in designated equity mutual funds and
ETFs. Should you invest in it to avail of this benefit? We would not advise investing
directly in shares just to claim tax deduction. In fact, the first-time investors are better off
taking the mutual fund route.
If you do opt for any RGESS fund or ETF, your investment is locked in for three years
(fixed lock-in period during the first year, followed by a flexible lock-in period for the two
subsequent years). Under the flexible lock-in option, you are allowed to sell your
RGESS shares or mutual funds units and reinvest the proceeds in any other RGESS
instrument. This will enable you to get rid of the underperforming investments and shift
to better options. However, in the absence of an SIP facility, you are exposed to market
timing.
Also, the maximum tax saving you can get through this scheme is Rs 7,725 for those in
the 30 per cent income tax bracket. In the 20 per cent bracket, the maximum saving is
Rs 5,150, while you save only Rs 2,575 in the 10 per cent bracket. This is not much
considering the risk you are taking by investing in equities. Besides, investors will also
need to open a demat account to invest in the RGESS, which would incur annual
charges.
4. ULIPs
RETURNS: 7.2-11.8 per cent (Past five years)
Don't go by the past record. The new Ulip is a good way to invest in the equity and debt
markets for tax-free returns.
There's a good reason why this most hated investment is so high on our rating scale.
For many policyholders, Ulips denote the costly mistake they made a few years ago.
But that was a different era, when companies were gobbling up 50-60 per cent of the
premium in the first few years in the guise of charges.
The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly
investment. Though a Ulip should not be your first insurance policy, you can consider
buying one as an investment that also helps you save tax. Of course, it also offers a life
cover, but the stress is on investment, not protection. Don't buy a Ulip (or any other
insurance policy, for that matter) if you are not sure whether you can continue paying
the premium for the entire term. If you end it prematurely, be ready to pay surrender
charges.
Your insurance policy should not impinge on other financial commitments. It's easy to
set aside a big sum when you are young because your liabilities are limited, but this
changes and expenses shoot up when you start a family or buy assets. If the premium
is very high, the policyholder may find it difficult to pay it year after year.
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 insurance plan. A Ulip will yield good results only if you hold it for at least
10-12 years. Before that, the plan may not be able to recover the charges levied in the
first few years. This is why short-term plans of 5-10 years usually give poor results,
which pushes investors to dump them within 3-4 years of buying.

Buyers must also understand that a Ulip is not necessarily an equity-linked investment.
You can also invest your Ulip corpus in debt funds. Right now, debt funds are looking
attractive because of the possibility of a drop in bond yields, while the equity markets
are looking overheated. Instead of investing in the equity option, put your corpus in the
debt fund.
You can start shifting the money to the equity fund when the prospects look rosier. Only
a Ulip allows you to switch from debt to equity, or vice versa, without incurring any
capital gains tax. It is best to invest in a plain vanilla Ulip that allows you to choose your
investment mix and also offers online transaction facilities.
BRIGHT IDEA: Opt for the liquid or debt fund and then shift to the equity option as per
your reading of the market.

5. VOLUNTARY PF
RETURNS: 8.5 per cent (for 2013-14)
This little used option is available only to salaried taxpayers covered by the Employees'
Provident Fund.
The contribution to the Employees' Provident Fund (EPF) is a compulsory deduction, as
also an automatic tax saver. However, you can contribute more than 12 per cent of your
basic salary that flows into the EPF every month. This voluntary contribution will earn
the same rate of interest, will fetch you the same tax benefits under Section 80C and
the maturity corpus will also be tax-free.
A key disadvantage is the limited liquidity that the Provident Fund offers. You cannot
access the money till you retire. A one-time withdrawal is allowed in special
circumstances, such as medical emergency, purchase or construction of a house, or a
child's marriage. However, it may not be possible to opt for the VPF at this juncture.
Companies typically ask their employees to submit the VPF mandate at the beginning of
the financial year. Ask your company if you can start contributing to the VPF from this
month onwards. Once you have opted for the deduction, you cannot discontinue it till
the end of the financial year, except in extraordinary circumstances. While the VPF gets
tax deduction and the maturity corpus is also tax-free, you will have to pay tax on the
interest if you withdraw the money within five years. So, opt for it only if you are sure
that you can remain invested for the long term.

Another drawback is the possibility of a lower interest rate for the PF in the coming
years. The rate is announced by the EPFO Trust after examining the interest earned by
the EPF corpus. It is likely to be 8.5 per cent for the current financial year, but there is
no certainty that this will be maintained over the longer term.
Contributing to the VPF is suitable for taxpayers in their 50s, who want to aggressively
save for their retirement but don't want to invest in market-linked options or tax-
inefficient fixed deposits.
BRIGHT IDEA: Channelise at least 10 per cent of your increment to the VPF every
year. The higher savings will not pinch you.

6. SENIOR CITIZEN'S SAVING SCHEME
RETURNS: 9.2 per cent (for 2013-14)
This remains the best way for retirees to save tax, though the Rs 15 lakh investment
limit is a damper.
With four stars, this assured return scheme is the best tax-saving avenue for senior
citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility as a tax-
saving option. The interest rate is 100 basis points above the 5-year government bond
yield.
Unlike the PPF, the change in interest rate does not affect the existing investments.
This year, the interest rate has been cut by a marginal 10 basis points to 9.2 per cent.
Many grey-haired investors may not be enthused by this. Banks are offering up to 10
per cent to senior citizens right now, almost 50-60 basis points higher than what they
give to regular customers.
There's a good reason for this pampering. Senior citizens have a bulk of their
investments in fixed deposits, which makes them prized customers for banks. So, if you
do not consider the tax deduction under Section 80C, this option is not as lucrative as
bank FDs. However, as a tax-saving tool, the scheme scores over bank fixed deposits
and NSCs because the quarterly payment of the interest provides liquidity to the
investor. The interest is paid on 31 March, 30 June, 30 September and 31 December,
irrespective of when you start investing.



This aspect of the SCSS, and the fact that it is an ultra safe scheme backed by the
government, makes it an ideal option for retired taxpayers looking for a steady stream of
income. Though the interest earned is fully taxable, retired people usually don't have a
high tax liability. Keep in mind that the basic tax exemption for senior citizens is higher
at Rs 2.5 lakh. For very senior citizens, it is even higher at Rs 5 lakh.
The only glitch is the Rs 15 lakh investment limit per individual. If a person parks Rs 15
lakh of his retiral benefits in the scheme, he will be able to claim deduction for only Rs 1
lakh. Although the scheme is for senior citizens (60 years), even those above 55 years
can invest if they have taken voluntary retirement. Retired defence personnel can join
irrespective of their age if they fulfil other conditions.
BRIGHT IDEA: If you have Rs 15 lakh to invest in the scheme, stagger the investments over 2-
3 years to claim more tax benefits.

7. NEW PENSION SCHEME
RETURNS: 4.2-10.2 per cent (past 3 years)
The low-cost retire
ment product is a good option fro those saving for retirement, but watch out for the
limited liquidity it offers.
Its low-cost structure, flexibility and other investor-friendly features make the New
Pension Scheme an ideal investment vehicle for retirement planning. However, even
though the fund management charges have been raised from the ridiculously unviable
0.0009 per cent to a more reasonable 0.25 per cent, the pension fund managers are not
hardselling the scheme.
If you want to save tax through the NPS this year, be ready to do a lot of legwork and
paperwork before you can get to invest in this unique pension plan. The returns from the
NPS funds are a mixed bag (see table).
While the returns from the E class (equity) funds are in line with the market returns,
those from the G class (gilt) funds are quite a disappointment. Government employees,
who have a chunk of their pension funds in the G class schemes of LIC Pension Funds
and SBI Pension Funds, would be especially hit. The redeeming feature is the high
returns churned out by the C class (corporate bond) funds. However, these bonds carry
a higher risk.
The scheme scores high on flexibility. The minimum annual contribution is Rs 6,000,
which can be invested as a lump sum or in instalments of at least Rs 500. There is no
upper limit. The investor also decides the percentage of the corpus that goes into
equity, corporate bonds and government securities, the only limitation being the 50 per
cent cap on exposure to equity.

One of the most outstanding features of the NPS is the 'lifecycle fund'. It is meant for
those who are not financially aware or can't manage their asset allocation themselves. It
is also the default option for someone who has not indicated the desired allocation for
his investments. Under this option, the investor's age decides the equity exposure. The
50 per cent allocation to equity is reduced every year by 2 per cent after the investor
turns 35, till it comes down to 10 per cent. This is in keeping with the strategy to opt for
a higher-risk, higher-return portfolio mix earlier in life, when there is ample time to make
up for any possible black swan event.
Gradually, as the investor approaches retirement, he moves to a more stable fixed-
return, low-risk portfolio. This automatic rejigging of the asset allocation is a unique
feature of the NPS. No other pension plan or asset allocation mutual fund offers such a
facility to investors. There are a few funds based on age, but they are one-size-fits-all
solutions, not customised to the individual's age.
Another positive feature of the NPS is the wide choice of funds for the investor. Though
you can switch from one fund manager to the other only once in a year, it is still better
than investing in a Ulip or a pension plan where you are stuck with the same fund
manager for the rest of the tenure. IDFC Pension Fund quit the NPS last year, but two
well-regarded entities HDFC Pension Fund and DSP Blackrock Pension Fund
have joined the club.
Another unique feature of the NPS is the tax benefit it offers under the newly added
Section 80 CCD(2). Under this section, if an employer contributes 10 per cent of the
salary (basic salary plus dearness allowance) to the NPS account of the employee, the
amount gets tax exemption of up to Rs 1 lakh. This is over and above the Rs 1 lakh tax
deduction under Section 80C. It's a win-win situation for both because the employer
also gets tax benefit under Section 36 I (IV) A for his contribution.
By putting in money in the NPS, the employer can provide an additional tax benefit to
the employee by simply reorganising the salary structure without incurring any
additional cost to the company (CTC). The wart in the NPS is the lack of liquidity. You
cannot access the funds before you turn 60. On maturity, at least 40 per cent of the
corpus must be used to buy an annuity. Some see this as a positive feature that
prevents premature withdrawals.
BRIGHT IDEA: Get your company to opt for the Section 80CCD(2), under which you
can save more tax trhough the NPS.

8. NSCs AND BANK FDs
RETURNS: 8.5-9.75 per cent
They appear attractive, but taxability of income takes away some of the sheen from
these instruments.
There are many misconceptions about bank fixed deposits in the minds of investors.
Many think that up to Rs 10,000 interest from bank deposits is tax-free, as announced in
the budget two years ago. This is not true. The newly introduced Section 80TTA gives a
deduction of up to Rs 10,000 on interest earned in the savings bank account, not on
fixed deposits and recurring deposits.

Also, the nomenclature 'tax-saving deposits' means you save tax under Section 80C. It does not mean
that these deposits are tax-free. The interest earned on deposits is fully taxable at the normal tax rate
applicable to you. You have to mention this interest under the head 'Income from other sources' in your
income tax return. Keep in mind that this tax is payable every year on the interest that accrues in that
financial year, even though you get the amount on maturity.
So don't get misled by the high interest rates offered on the 5-year bank fixed deposits. The post-tax yield
may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as
attractive as the yield of the tax-free PPF.
The second misconception is that there is no need to pay tax if TDS has been deducted by the
bank. You may have to pay tax even if TDS has been deducted. TDS is only 10 per cent (20 per
cent if you haven't submitted your PAN details), and if you are in the 20-30 per cent bracket, you
need to pay additional tax. Ignore mentioning the interest income in your return at your peril.
The TDS is credited to your PAN and reported to the tax authorities. If there is a mismatch in the
TDS details in the tax records and in your return, you will surely get a tax notice.
The Central Board of Direct Taxes has a computer-aided scrutiny system (CASS),
which flags any discrepancy in the tax return filed. Check the TDS in your Form 26AS,
which has details of the tax deducted on your behalf. It can be easily checked online. It
is easier if you have a Net banking account with any of the 35 banks that offer this
facility. Otherwise, you can go to the official website of the Income Tax Department and
click on 'View your tax credit'. The first-time users will have to register, but it takes less
than 5 minutes to log on and view your details.
The interest on NSCs is also taxable but very few taxpayers include it in their returns.
However, with the integration of tax records, a taxpayer may not be able to escape the
tax net easily. For instance, if you have claimed tax deduction under Section 80C for
investments in NSCs or FDs in one year, the tax department may want to know why the
interest earned is not reflecting in your tax returns for subsequent years.
BRIGHT IDEA: Don't try to avoid the TDS by investing in FDs of different banks. You
will have to pay the tax later anyway.

9. LIFE INSURANCE POLICIES
RETURNS: 5.5-7.5 per cent
Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will
find the tax-free corpus appealing.
Though the Irda guidelines for traditional plans have made insurance policies more
customer-friendly by ensuring a higher surrender value and larger life covers, they are
still the worst way to save tax. The tax saving is only meant to reduce the cost of
insurance. It is not the core objective of the policy. Money-back and endowment
insurance policies score low on the flexibility scale. 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.
However, these policies are not as illiquid as they appear. You can easily get a loan
against your endowment policy from the LIC. The terms are quite lenient and repayment
can be done at your convenience. Insurance companies claim their products offer the
triple advantage of life cover, long-term savings and tax benefits. That's not true.
Traditional plans give a low life cover of 10 times the premium.
For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give
niggardly returns. The internal rate of return (IRR) for a 10-year policy comes to around
5.75 per cent. For longer terms of 15-20 years, the IRR is better at 6.5-7.5 per cent. As
for the tax benefit, there are simpler and more cost-effective ways to save tax, such as
5-year bank FDs and NSCs. If the taxability of the income worries you, go for the tax-
free PPF.
However, traditional insurance policies still make a lot of sense for the HNI investor who is more
concerned about the tax--free corpus under Section 10(10d) than the deduction under Section
80C. Even for such investors, a Ulip will make more sense as they will have control over the
investment mix. The opacity of the traditional plan is best avoided, but your agent might not be
very keen to sell you a Ulip this year because his commission has been cut to 6-7 per cent of
the premium.
10. PENSION PLANS
RETURNS: 7-10 per cent
After a hiatus of 2-3 years, pension plans are making a comeback, but the high charges mean
lower returns for investors.
Pension plans offered by life insurance companies made a comeback in 2013.
However, the charges of these plans are significantly higher than those of the NPS.
While the NPS has a fund management charge of 0.25 per cent, a typical pension plan
from a life insurance company charges almost 3-4 per cent. This difference can
snowball into a wide gap over the long term, reducing the returns of the pension plan
investor by a significant margin.
Insurers argue that the low-cost NPS is good only on paper because there are so many
hurdles to investing in the scheme. A pension plan from an insurer is costlier but you
don't have to go around in circles trying to invest in it. That's true to a great extent. Even
after four years of launch and offering additional tax benefits, the NPS has not been
able to attract investors in hordes. However, the solution is not a high-cost pension plan.
A few mutual funds also have pension plans. The Templeton India Pension Plan is one
of the oldest schemes in the market and offers deduction under Section 80C. It is a
debt-oriented fund that invests 30-40 per cent of its corpus in equities and the rest in
debt. But at 10.7 per cent, its 5-year annualised returns are nothing to gloat about. A
better option would be a combination of an ELSS scheme and any of the debt
instruments that offer tax deduction.
BRIGHT IDEA: It is not a good idea to invest a large sum in the equity option at one go.
Opt for the liquid or debt fund instead.





ULIPs 2.0: Why you should buy these
insurance-cum-investment plans now

They were once the most bought financial product. Then Ulips became the most reviled
investment, forcing a string of reformatory measures. Now these investment-cum-insurance
plans have changed once again to become a low-cost investment option. In fact, some of the
Ulips introduced in recent months are cheaper than the direct plans of mutual funds.
We won't be surprised if this evokes an angry response from readers. Ulip became a
four-letter word due to the high charges levied by insurance companies and rampant
mis-selling by distributors. In some cases, the charges were as high as 80% of the
premium in the first year. Distributors lured gullible investors by not revealing the high
charges and showcasing only the returns offered by the market-linked product.
The Insurance Regulatory and Development Authority (Irda) clamped down in 2010,
capping the annualised charges of Ulips at 2.25% for the first 10 years of holding. The
charges were fixed at this rate because it was the average cost charged by competing
products such as mutual funds. With no incentive left for distributors, Ulip sales plunged
after the Irda guidelines came into effect. Though Ulips had become a very cost-
effective investment, nobody was buying them because nobody was selling them.
In recent months, insurance companies have sweetened the deal for investors by
reducing the charges even further. The Bajaj Allianz Future Gain plan does not levy
premium allocation charges if the annual investment is Rs 2 lakh and above. The
Edelweiss Tokio Wealth Accumulation Plan doesn't have policy administration charges.
Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don't have lower
charges but compensate long-term investors with 'loyalty additions'. "The plan works out
cheaper because we return the money to the long-term investors," says Rishi Piparaiya,
director, marketing & direct sales, Aviva Life Insurance.
But the Click2invest plan from HDFC Life is a game changer for the segment. The only
charge it levies is an annual fund management fee of 1.35% of the corpus value. There
is also a mortality charge but that is for the life cover offered to the policyholder. The low
charges make the Click2invest plan cheaper than even the direct plan of a diversified
equity fund. For instance, the direct plan of the largest equity scheme, HDFC Equity
Fund, charges an expense ratio of 1.5% per year. "The Click2invest plan is costefficient
and, therefore, comparable with the direct plans of mutual funds," says Sanjay Tripathy,
senior EVP, marketing and product, HDFC Life (Click here for interview).
Some readers may pooh-pooh the idea of saving a sliver on costs. After all, a 0.15%
saving on costs makes a difference of only Rs 150 on an investment of Rs 1 lakh. While
this may seem small, the difference in the cost can balloon into substantial savings in
the long term (see graphic). As the graphic shows, the difference in the corpus value of
various levels of returns is not very substantial in the initial years, but in 30 years, even
a 0.5% difference in returns will widen the gap between 9.5% returns and 9% by Rs
15.4 lakh.
Shed your aversion to Ulips
This transformation of Ulips from a costly bundled product to a low-cost option has led
to a change of heart among financial planners as well. For long, they have advised
clients to keep insurance and investment separate. "We used to advise against mixing
insurance and investment because of the high costs of Ulips. A combination of mutual
funds for investment and term plans for life insurance worked out to be cheaper," says S
Sridharan, head of financial planning, FundsIndia.com. "However, low-cost products like
this will be suitable for investors who want to combine insurance with investments," he
adds.
He's not alone. With more low-cost Ulips on the anvil (at least two companies are
awaiting Irda's approval for their low-cost Ulips), many financial planners are changing
their tune. "The Click2invest plan from HDFC Life is a good product. We are
recommending it to our clients," says Jaya Nagarmat from Investor Shoppe. Tanvir
Alam, founder & CEO of Fincart goes a step further. "This Ulip will give the mutual fund
industry a run for its money," he says
Indeed, it is time to get rid of the historical aversion to Ulips and look at them through the prism
of lower charges. This will not be easy because a lot of investors have been scarred by their
experience with Ulips. Many have lost money due to the doublespeak of distributors and the
failure (or unwillingness) of insurance companies to redress their grievances. Policyholders lost
money even though the markets were shooting up. Buyers didn't realise that even though their
funds went up by 15-20% in a year, they were suffering losses because only 40-50% of their
money was actually invested in the first 2-3 years. "The new Ulips are facing the baggage of old
Ulips," says Yashish Dahiya, CEO and co-founder Policybazaar.com.
The tax advantage
While the low charges of new Ulips make them attractive, the main advantage is the
seamless and tax-efficient transfer from debt to equity, and vice versa. This switching
may be for varied reasons, including rebalancing the portfolio or even timing the
markets by savvy investors. "Though retail investors may not have the bandwidth to
switch on the basis of market views, people who are aware can make use of this facility
without any tax incidence," says Alam. Turn to page 16 to know how you can use your
Ulip to gain from the volatility in stock markets.
It is important to note that Ulip is not just about equities. Smart investors can also move
within debt, shifting to long duration funds when interest rates are expected to go down
and moving to short-term funds when rates are on the rise. If mutual fund investors do
this, they will have to pay tax on the shortterm and long-term capital gains made on the
fund. Since Ulips are insurance plans, the gains and maturity proceeds are tax-free
under Section 10(10d). However, the sum assured must be at least 10 times the annual
premium for this tax benefit.
The lay investors who follow a fixed asset allocation and don't tweak their investments
too much can use the switching facility to rebalance their portfolios. Financial planners
say that rebalancing should be done at least once a year. For example, their equity
allocation might have surged due to the recent rise in the market and, therefore, they
should shift some portion of the corpus out of equity funds to debt funds. Similarly, if the
equity allocation goes down drastically during a bear phase, they may shift back from
debt to equity. Financial planners also advise investors to shift from equity to the safety
of debt well ahead of their important goals. This prevents any disturbance for the goal
due to a sudden crash in the stock markets.

This year's budget has changed the tax rules for debt funds. The minimum holding
period has been increased from 1 year to 3 years. Debt fund investors will have to pay a
higher tax if they rebalance by shifting out of debt within three years of investing.
However, there will be no tax in case of Ulips.
Investors should note that insurance companies allow only a limited number of free
switches. While some Ulips allow unlimited free switches, others permit only 4-12 free
switches in a year. There is a Rs 100-250 charge for every switch beyond the free limit.
Check how many switches your Ulip allows before you start rebalancing your portfolio.
Like banks, insurance companies also charge you less if you do the transaction online.
For example, HDFC Click2invest charges `250 per additional switch if done offline and
only Rs 25 if the same is executed online.
Decoding the charges The charge structure of Ulips is not as straightforward as that of
mutual funds. There is a premium allocation charge, a policy administration charge and
a fund management charge. There is also the mortality charge for the life cover offered
by the plan. The 2010 Irda guidelines say that the combined charge cannot be more
than 2.25% a year in the first 10 years. They have also capped the fund management
fee at 1.35% per annum, though many Ulips are charging less than that on their short-
term debt schemes.
The mortality charge differs across Ulips. Some plans offer either the sum assured or
the fund value on death. These are Type I Ulips and their mortality charges go down as
the fund value goes up. The Type II Ulips offer both, the fund value as well as the sum
assured. Obviously the mortality charges are higher in such plans.
Unlike the premium of term plans, which is fixed for the entire term, the mortality
charges of Ulips keep rising as the policyholder gets older. However, there is no need to
worry because the term plan premium is calculated on the basis of the average age of
the policy term. This means the mortality charges of the Ulip will be lower than that of
the term plan in the initial years and higher in the later years. Over the entire term, the
cost will get averaged.
Though Ulips offer a cover to policyholders, the benefit may be a drag for those who are
interested purely in investment. The lowcost Ulips are, therefore, Type I plans that will pay either
the fund value or the sum assured. Here's how it will work. Suppose a person buys a Ulip with a
Rs 1 lakh premium for 20 years. The plan will give him a cover of Rs 10 lakh (10 times the
annual premium), but the insurance company will charge mortality premium for only Rs 9 lakh
since the total risk for the company is Rs 9 lakh. With every annual payment of the premium, the
risk of the company will come down, reducing the mortality charge. When the fund value of the
Ulip exceeds the sum assured, the plan will stop deducting mortality charges and the entire
premium will go into investment.
Another way to reduce the impact of mortality charges is to buy the policy in the name
of your spouse or child. Income from investments made in the name of a spouse or a
child are subject to clubbing provisions, but since the maturity proceeds from Ulips are
tax-free, you don't have to worry about that. You can also go for single premium Ulips,
with an insurance cover of only 1.25 times the premium. However, the maturity
proceeds of such a plan will not be covered under Section 10 (10D) and will be taxable
in your hand.
Performance of Ulip funds While the charges of the new Ulips are low, it is equally
important to look at their performance. If the fund manager is able to generate an
additional 5% return, why not pay an extra 1% to him. It won't make any sense to invest
just to save on charges. We looked at the performance of Ulip funds and mutual fund
schemes of the same categories across different time periods and found that the returns
were more or less similar. In some categories, like large-cap equity funds and small-
and mid-cap equity funds, the mutual funds have done marginally better than Ulip funds.
But in case of debt-oriented mutual funds and debt funds, Ulips have scored higher
returns. Interestingly, equity mutual funds were able to generate good returns even
though they have higher expense ratios. This could be because the mutual funds were
selling based on their scheme performance, while the Ulips were pushed by agents
because of higher commissions. The debt-oriented hybrid funds and debt funds, where
intense competition has pushed down the costs, mutual funds did better than the Ulip
schemes.
However, investors should note that this is only a comparison of the change in the
funds' NAVs. The actual returns for the investor may be different because insurance
companies don't deduct the annual policy administration charges from the NAVs, but
reduce the number of units. Under the new schemes, where there are no policy
administration charges, the comparability has improved. The allocation charge, which is
similar to the entry load of mutual funds, is another hitch in this comparison. That too is
not levied by some of the new Ulips.
Apart from the lower charges, seamless rebalancing, tax efficiency and good
performance of schemes, there are other reasons why you should buy a Ulip now. First,
the Irda guidelines have turned Ulips more customer friendly and brought transparency
to the charge structure. Now they have to give benefit illustration showing the gross and
net yield upfront on top. Second is the flexibility and ease with which you can transact.
Almost all companies allow online access, and switching and managing your policy has
become very easy.




Put your money in right schemes to save on
tax

Investors are wary of investing in tax-saving mutual funds(equity-linked savings schemes
or ELSS in mutual fund parlance) this tax-planning season, say financial advisors. The abysmal
performance of these schemes in the past three years and the current higher level of the market
are cited as the reasons for investor disinterest.

One can avail of tax deduction of upto 1 lakh under section 80 C by investing in options like ELSS, ppf,
NSE, Tax saving 5-yr bank fixed deposits
According to Value Research, a mutual fund tracking entity, ELSS funds, as a category,
have given a mere 0.33% returns in the last three years. With the tax planning season
beginning in December, most companies ask their employees to submit investment
declarations around this time.
Investors can avail of a tax deduction of up to Rs 1 lakh under Section 80C by investing
in a host of options like ELSS, tax-saving 5-year bank fixed deposits, the Public
Provident Fund (PPF) or National Savings Certificate (NSC), among others.
"Investors, who invested in ELSS three years ago, are disappointed with lower returns.
Clearly, they are not keen to invest in tax-saving mutual funds again and they prefer to
invest in either PPF or tax saving bank deposits," says Abhishek Gupta, certified
financial planner, Moat Wealth Advisors. Investors have also become cautious about
investing in stocks due to weak economic fundamentals say experts.
"Since investors have not made money for three years, they have turned risk averse,
and want to protect capital," says Anup Bhaiya, MD and CEO, Money Honey Financial
Services. That is the main reason why many investors would flock to PPF or tax-saving
bank deposits.

Invest as per asset allocation However, experts frown upon such "random" tax-planning
exercise. They argue that investors should consider tax planning as part of their overall
financial plan and choose products accordingly. They say picking tax planning
instruments on the basis of past performance alone won't help one reach the right
conclusions.
"Make a financial plan based on your earnings, liabilities and goals. This financial plan
will tell you how much money would go into various assets like equity, debt or gold.
Some part of the equity portion of this plan could go into ELSS," says Mukund Seshadri,
founder, MSV Financial Planners. Advocates of ELSS also claim that it is the right time
to get into stocks due to attractive valuations.
"The Sensex trades at a P/E of 18 times, making valuations attractive and leaving scope
for appreciation over a 3-5-year period," says Rupesh Bhansali, head
(distribution), GEPL Capital. Experts also say that investors should also try to find out
the details of the product they are investing. For example, consider the case of these
disenchanted investors opting for PPF or 5-year bank deposits.
Chances are that most of them haven't thought about the different lock-in periods in
these options. "If you have a time-frame of five years, opt for tax-saving bank deposits.
Opt for PPF only if you can wait for 15 years," says Abhishek Gupta.
Sure, you can withdraw from PPF after five years, but for some specific purposes only.
Also, you have to keep your PPF account alive by investing a minimum ofRs 500 every
year. Currently, a tax-saving deposit in SBI for five years will give you an interest rate of
9%, while PPF gives you 8.7%.

However, financial planners suggest you keep tax treatment in mind while making
these investments, as interest income is taxed differently. "Interest earned from PPF is tax free,
whereas interest income from bank FDs and NSCs are taxable. Hence, if you are in the 30% tax
bracket, PPF may be a better investment from a tax perspective," says Harshvardhan Roongta,
chief financial planner, Roongta Securities.