Avinash.tech(…)

We all want to save on income tax and most of us do very little research on what’s best for building long term wealth. Doing half the research that goes into finding that brand new Android Phone released in the market would have made us Rich by now :).

January ( as on 2019, when this article was written)  is usually that time of the year where everyone is scampering to max out their 1.5 Lakh Tax exemptions 🙂 . What most of us miss is the fact that section 80C ,80CCD and so on are to be looked at as vehicles for Compound Interest and contribute to our freedom fund. All investments should be done when the new tax assessment year starts, which is April ( of 2018 ) .

Based on the earlier post talking about 20K rule to build a Freedom Fund ( FF ) , the investment schemes have been divided into A , B and C ratings.

We will call these FF(Freedom Fund) Ratings going forward. Note that these ratings purely based on my opinion and you free to disagree. 

Category	Ratings
A+	-Ideal for building FF. -Tax-exempt -Zero Fee
B+	– Good ,but not ideal for FF. – No guaranteed returns. – Minimal Fee. – Interest may be taxed.
B	– Not ideal for FF. – 10% Tax. – High fee.
B-	– Not ideal for FF. – Average Returns. – 10-30% tax
C	– Not recommended. – High Fees and low returns. – High Risk.
D	– Stay Away

Let’s discuss some of the well-known tax-saving vehicles available in India

Section 80C

1.Public Provident Fund ( PPF )

One of the best and widely used saving schemes in India. A lot of not salaried class in India use this scheme. The interest rates fluctuate based on the Inflation but historically has had a return higher than bank FD’s.

A monthly investment of 12500/- can yield a return of 40-50 Lakhs in 15 years.

Another plus for Ppf is the extension period offered in multiples of 5 years. During these extended years one can just put 500/- in cash and see their money magically grow further ! See the power of compounding …

Lock-in Period	15 years, extended in 5 years block after
Fees/Expenses	0%
Yearly Limit	1.5 Lakh
Rate of Return	8-8.5%
Compounded	YES
Tax	NONE on withdrawal
FF Rating	A+

2.Equity Linked Savings Scheme ( ELSS )

Not bad as a way to save. But the fees and expense ratio just kills it as a contributor to Freedom Fund. In our earlier posts, I have explained why Expense Ratio are pure evil !

ELSS might have been great if not for the high expense ratio. Also choosing the right ELSS scheme can get really hard. No investment should eat up your valuable time trying to manage them on a regular basis !

Lock-in Period	3 years. Depends on the plan after.
Fees/Expenses	2-3%
Yearly Limit	1.5 Lakh
Rate of Return	6-7.5%
Compounded	YES
Tax on withdrawal	10% on Long Term Dividend is also taxed.
FF Rating	C

3. Employee Provident Fund ( EPF )

12% of your basic salary is equally matched by your employer. This can build a huge corpus over the years and mostly at 8.5% compounded.

If the money is not disturbed and allowed to grow , it can turn out to be a good contributor to your Freedom Fund.

EPF is backed by the Government of India and is one of the safest bets. The only problem is that the Government might try to put some restrictions on the withdrawal of funds.

One can contribute upto 100% of their basic to EPF. Might be ideal if you want to max out your 80C for 1.5Lakh.

Lock-in Period	Till retirement or have no job.
Fees/Expenses	0%
Yearly Limit	1.5 Lakh. (Employee can contribute upto 100% of basic salary.)
Rate of Return	8-8.5%
Compounded	YES
Tax on withdrawal	NONE*. (* the employee continues in employment for five continuous years or more )
FF Rating	A+

4. Sukanya Samriddhi Yojana ( SSY for girl child )

One of the best schemes to build long term wealth provided you have a girl child. Imagine handing your daughter a lump sum cash of 75Lakhs when she is 21.

Some argue that 75Lakh after inflation would not amount to much at age 21. Even after inflation if the amount is current day equivalent of 40Lakhs, it would be huge. Imagine your dad giving you 40Lakhs on turning 21. Not sure about others, but I would have jumped with joy !!

Lock-in Period	21 years. 50% withdrawal for marriage when girl turns 18.
Fees/Expenses	0%
Yearly Limit	1.5 Lakh.
Rate of Return	8.5-9% will always yield more returns than PPF.
Compounded	YES.
Tax	NONE on withdrawal
FF Rating	A+

5.Tax Saving Fixed Deposits

The only problem is that money is locked in for 5 years and the interest is taxed :(. The interest earned is also not that great compared to PPF .

The interest earned is taxed is the biggest let down here.

Lock-in Period	5 year
Fees/Expenses	0%
Yearly Limit	1.5 Lakh.
Rate of Return	7.5%
Compounded	YES.
Tax	10-30% based on your tax slab
FF Rating	B-

6. Unit Linked Insurance Plan ( ULIP )

Most of the investment is done in the Equity market by Fund Managers with High Fees and Expense Ratios. The only plus point might be that it is linked to Life Insurance, but even that is debatable. Do not go by the past returns of the Funds. Read earlier articles to understand why its more of a scam.

ULIP is one of the worst investments out there. The agents will lure you in with promises like – ” you will for sure at least get your money back ” . As a young investor had fallen into this trap myself 😔.

Lock-in Period	minimum of 3 years. Max of 10-15 years.
Fees/Expenses	2-2.5% + Entry Load
Yearly Limit	1.5 Lakh.
Rate of Return	6-24% , read posts on Index Funds , part2 to understand the scam.
Compounded	YES. Based on the investment chosen.
Tax	NONE on withdrawal
FF Rating	C

7.Senior Citizen Savings Scheme ( SCSS )

Only valid for senior citizens aged 60+. An individual can invest a maximum of 15 lakhs in this scheme. Very secure and probably yields the highest returns. Do remember that a return beyond 50K per financial year is taxed based on the income tax slab one is in.

Make sure that you ask the bank for the tenure and the returns.

Lock-in Period	5 years. extend further to 3 more years.
Fees/Expenses	0%
Yearly Limit	1.5 Lakh.
Rate of Return	8.7%
Compounded	YES.
Tax	returns above 50,000 per financial year in return is taxed.
FF Rating	B+

8.Tax Benefit on Home Loan

I personally feel Home Loan is never the way to go for building your Freedom Fund. Discussing return and tax benefits on Home Loan would be like committing a crime !

Everyone is entitled to their opinion and mine is jotted down in this article ( Housing Debt Bubble ).

I give Tax benefit on Home Loan a FF rating of D-. Just stay away !

Section 80CCD

1. National Pension Scheme ( NPS )

NPS investment is partly managed by Equity Fund Manager and has performed badly in 2018, not able to beat the Nifty. The average one year return has been as low as -3% in 2018.

NPS usually has a Debt+Equity combo , but in 2018 even the corporate debt segments fared poorly, generating just around 2%.

Recent changes have allowed allocating as much as 75% towards equity and 25% to Debt funds. The main worry is the expense ratio on Equity Funds as these are managed by Fund Managers charging insane fees.

Though Short term volatility should not be much of a worry, the problem is that only 4% of the fund managers will be able to beat the market. I would suggest putting money in a low-cost Index Fund like Nifty 50.

Lock-in Period	30 years or retirement
Fees/Expenses	0% – 3%
Yearly Limit	0.5 Lakh. Can be clubbed with 80C to get a tax exemption of a total of 2L.
Rate of Return	It depends completely on the choice of debt and equity ratio. Based on the Fund Manager .
Compounded	YES. Based on the investment chosen. Risky as its managed by Fund Managers investing in Equity Market.
Tax on withdrawal	60% withdrawn is Tax free. 40% has to go in Annuity and pension is taxed.
FF Rating	B+

More ?

There are other Tax saving schemes, but I suggest everyone stay away from it. They fall in the FF Rating of D.

Don’t think of these investments for saving tax. Use them to build your Freedom Fund. You can search more on each of the schemes and see what suits you.

Some may need Insurance and some might not. Find the Investment league you are in and invest accordingly.

Please read the disclaimer carefully before making any investment based on the articles published on this Blog !!