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"Good is not good, where better is expected."

—Thomas Fuller

I don’t read MINT, but the day before yesterday my newspaper vendor inadvertently delivered a copy of MINT instead of ET. While flipping the pages of the newspaper, I came across an advertisement by Birla Sun Life Mutual Fund on the last page (page 24 of MINT dated 15 Dec 2009) claiming that two of its mutual fund schemes have delivered exceptionally good returns during the last 10 years (without considering the load).

The following claims were made:

i). At 24% CAGR your money multiplies 8 times in 10 years;

ii). 2 of our schemes have given more than 24% CAGR in last 10 years (as on 16 Nov 09)

a) Birla Sun Life Tax Relief’96 --> Value of Rs 1 lakh invested in scheme on 16 Nov 99 is now Rs 8.91 lakh @ 24.45% CAGR

b) Birla Sun Life Equity Fund --> Value of Rs 1 lakh invested in the scheme is now Rs 8.72 lakh @ 24.19% CAGR.

On the other hand, value of similar investment in benchmark (BSE 200) is Rs 4.21lakh @ 15.46% CAGR.

The first thought which crossed my mind was that how come such a great mutual fund scheme escaped my attention while I was writing the post: Best Tax Savings Schemes for FY 2009-2010.

So, I decided to take a second look and review the performance of Birla Sun Life Tax Relief’96 (BSLTR '96).

Review of Birla Sun Life Tax Relief’96
In the published advertisement, the 10-Yr returns are as on 16 Nov 2009 i.e. assuming the investments were made on 16 Nov, 1999. However, I checked the figures as per the latest data ((14 Dec 2009) available on Value Research, a mutual fund rating agency.

Here are the findings:

1. Current 10-Yr trailing CAGR of Birla Sun Life Tax Relief 96 (growth option) is 21.49% and its comparative position vis-à-vis other ELSS based on 10-Yr returns is as follows:

ELSS-----------------------------------10-Yr CAGR----Rank
HDFC Taxsaver-------------------------29.45%--------1/15
Franklin India Taxshield--------------25.00%--------2/15
Sundaram BNP Paribas Tax Saver---23.31%-------3/15
Birla Sun Life Tax Relief 96-----------21.49%--------4/15

We notice that although the performance of Birla Sun Life Tax Relief 96 is good considering last 10-yr returns, there are many funds which have given far better returns (note the difference of 8% in CAGR of HDFC Tax Saver and Birla Sun Life Tax Relief’96). For example, the amount of Rs 1lakh invested in HDFC Tax Saver and Franklin India Taxshield would have become 13.21 lakh and 9.31 lakh respectively as compared to 7.0 lakh in Birla Sun Life Tax Relief’96.

2. Next, though last 10 years returns are important but the returns earned in immediate past are more relevant than those earned in distant past (although both may or may not be sustained in the future). Do you know that Value Research ratings are also based on combined performance of last 3 years and 5 years? So let’s see Birla Sun Life Tax Relief 96 return performance for last 7-Yrs, 5-Yrs, 3-Yrs and 1-Yr (trailing CAGR returns):

Period-----------CAGR------------------Rank
7-Yr --------------30.99%---------------10/19
5-Yr --------------21.48%-----------------9/20
3-Yr --------------10.15%----------------10/26
1-Yr --------------103.83%----------------2/30

What do we observe? The fund has indeed performed quite well during the last one year. Nevertheless, the return ranking of last 7-Yrs, 5-Yrs and 3-Yrs returns is almost average. Why? Let’s see.

3. To get a better glimpse of its performance, we take a peek at its year-wise return performance of last five years :

Year------------Returns----------Rank----------- + (-) BSE 200
2009------------99.14%----------2/32--------------14.20%
2008----------(62.67%)---------26/29-------------(6.21%)
2007------------76.07%----------4/26--------------15.63%
2006------------43.53%----------2/23---------------3.95%
2005------------32.31%----------19/20------------(1.49%)

Here, we notice that this ELSS fund has beaten its benchmark (BSE 200) in three out of last five years. That’s nothing to be proud of!

That’s ok. What else do we notice? The most striking observation is that it’s one of the riskiest mutual funds in the ELSS category of equity funds. How? Please note the wide variation in returns. So, while Birla Sun Life Tax Relief 96 delivered extraordinary returns in the year 2009, 2007 and 2006, it was among the worst performers during 2008 (Rank 26/29) & 2005 (Rank 19/20).

4. To substantiate our findings that it is indeed a risky ELSS scheme, let’s take a look at various risk parameters. So, while risk grade of Birla Sun Life Tax Relief 96 is ‘above average’, beta (1.14) is highest in the ELSS category, even higher than Tauras Tax shield whose performance I reviewed earlier.

5. One more point worth noting is that Birla Sun Life Tax Relief ‘96 P/E multiple of 29.46 and P/B ratio of 4.12 (as on Nov 30 2009) is second highest in the ELSS category which indicates that the current valuations of the majority of the stocks in which the fund is invested is quite high thereby limiting the future return potential.

6. Finally, what about its rating by Value Research? Yes, this is in fact the most important factor to consider. Know that its current rating by Value research is 3-star. In other words, based on last 3 and 5 years risk-adjusted returns, Birla Sun Life Tax Relief 96 is an average performer not worth investing in when there are so many better alternatives out there.

Lesson
Why did I write a review of a 3-star rated fund? What lesson do we learn from the above review of Birla Sun Life Tax Relief’96?

The message is clear: you should be wary of the returns advertised by the mutual funds. Investment decisions should never be based on such misleading claims made in advertisements. Literally speaking, the facts stated may be quite correct but the reality is that such an ad hides more than it reveals. So understand that before investing in mutual funds, it is necessary to look beyond the appearance in order to see the broader picture.

What’s your opinion?


P.S. I’m sorry Mr. Balasubramanian; your ELSS is not worth investing as of now. I’m quite aware that recently Birla Sun Life Tax Relief 96 (BSLTR ‘96) has been adjudged World’s Best Performing Equity Fund for the 13-year period ended September 30 2009 as per Lipper global fund data. However, the above analysis shows that it has a long way to go before it finds its proper place in the best performing ELSS funds.You must have heard of the quote, “Good is not good where better is expected”. So, please stop hard selling the ELSS by misleading public through such deceptive ads.


Also see:

1. Best ELSS for the FY 2009-10
2. How to Choose Best Equity Funds
3. Amazing SIP Calculators

Read more

Photo by Tony Blay

In January 2009, I published a list of seven best ELSS (equity-linked savings scheme) funds for the purpose of tax savings under section 80C. Further, out of those seven tax planning mutual funds in India, we selected top 3 schemes on the basis of their consistent outperformance during past 10 years.

The following were the top 3 ELSS Funds:

1. Canara Robeco Equity Tax Saver
2. Sundaram BNP Paribas Taxsaver
3. Sahara Tax Gain


So, now that almost a year is over, let’s review the performance of tax saving mutual funds and see whether those are still the top rankers or, is there any new addition or deletion? Put another way, which are the current best tax planning equity mutual funds in India for FY 2009-2010 having potential to deliver top returns over next 3-5 years?


Out of the previous seven 5-star and 4-star rated schemes by Value Research, a mutual fund rating agency, Magnum Taxgain and Sundaram BNP Paribas Taxsaver stands downgraded from 5-star to 4-star; Principal Personal Tax Saver rating has been lowered from 4-star to 3-star (hence removed from the list) while Canara Robeco Equity Tax Saver has got its rating improved from 4-star to 5-star. There are two new additions to the league of ELSS toppers: Tauras Tax Shield and Fidelity Tax Advantage. Revised current list (as on Nov 30, 2009) of top tax saving mutual funds in India is as follows:

Best Performing ELSS Funds
a) Fidelity Tax Advantage (5 star)
b) Canara Robeco Equity Tax Saver (5 star)
c) Magnum Taxgain (4 star)
d) Sundaram BNP Paribas Tax Saver (4 star)
e) Franklin India Taxshield (4 star)
f) HDFC Taxsaver (4 star)
g) Sahara Tax Gain (4 star)
h) Tauras Tax Shield (4 star)

Further, talking about the best of the best, out of the top three ELSS funds I recommended, two are still maintaining their top position.

While the Canara Robeco Equity Tax Saver is performing quite well (despite change of fund manager 1-year back) and is in tune with its excellent long term performance, there is some slippage in the performance of Sundaram BNP Paribas Tax Saver but let’s hope it’s a temporary phenomenon and the fund will soon recover (but still it can no more claim to be in the league of top three ELSS). Coming to Sahara tax gain, delivering consistent above average returns there’s no change in its 4-star status.

Our choice has been vindicated by the ET Quarterly MF Tracker (Sept 09 ratings) according to which the only two schemes to get Platinum rating in the equity-linked saving scheme (ELSS) category are Canara Robeco Equity Tax Saver and Sahara Tax gain. So we get additional assurance that our choice of best of the best among the tax saver equity mutual funds (ELSS category) is in fact right.

Next question is: Which new ELSS scheme should take this coveted third position? Whether HDFC Tax Saver or Fidelity Tax Advantage (a new entrant)? My vote goes to HDFC Taxsaver, despite comparatively better 3 year performance by Fidelity Tax Advantage (and its 5 star rating). There are basically two reasons: first is consistent top performance by HDFC Taxsaver over a period of 10 years except in the year 2007 (the only year in its history when it performed miserably and failed to beat its benchmark index), while Fidelity Tax Advantage is a new entrant yet to complete even 5 years. Second reason is that the current performance (trailing 1-Yr returns as on 30 Nov 2009) of HDFC Taxsaver(108.73%; 4/30) is a lot better than Fidelity Tax Advantage (91.92%; 13/30). The only thing I don’t understand is why the HDFC Taxsaver scheme is awarded ‘Silver’ rating (which indicates average risk-adjusted return performance) by the ET MF Tracker Sept 09.

Won’t it be an injustice to Tauras Tax Shield, another promising ELSS with the highest Sharpe Ratio (i.e., delivered best returns per unit of risk taken) and highest alpha (i.e., excess returns on and above the risk-adjusted returns) among all the tax saving mutual funds?

No, because Tauras Tax Shield is a highly risky scheme in the ELSS category: high risk grade (only ELSS among the top 8), mid-cap orientation, beta of more than one and highest turnover ratio. While it was the best performing ELSS in the year 2007 ( 111.69% returns outperforming its benchmark index [BSE 200] by a huge margin of 51.25%), it was the worst performing tax saving fund in the year 2006 (returned negative 10.13% as against around +40% delivered by both BSE 200 and Nifty). OK, that’s 2-years back, what’s about the recent performance? See again that although it’s ranked 6/30 on the basis of 1-yr trailing returns (as on 30 Nov 2009), but last 6 months performance (16.03%, [Rank 32/36] against the category average of 21.72%), is again poor. Put simply, there is too much variation in the performance of Tauras Tax Shield which is not good.

Here’s the latest list of TOP 3 ELSS Funds for FY 2009-2010.

Top 3 ELSS Funds
1. Canara Robeco Equity Tax Saver
2. Sahara Tax gain
3. HDFC Taxsaver

Do you agree?


Also see:

1. Why must you Choose the Best Equity Funds?

2. How to Invest in Best ELSS Mutual Funds?

3. Review of Birla Sun Life Tax Relief '96

Read more

March – the last and final month allowed for tax savings – is here again. And, like every year you’ve yet to start with your tax savings. If you’re clueless as to where to begin, don’t worry. The Money Quest is here to help and guide you so that you don’t repeat the same mistakes over again.

I’ve already covered almost every aspect of section 80C tax planning. So, this post has nothing new to write about, but to act as a guide for preparing section 80C TAX PLANNING STRATEGY to minimize your tax outgo.

1. The first step is to find out the optimum way of tax planning. So, understand how to do section 80C tax planning.

2. Know the various tax saving options available to you under section 80C of the I.T. Act and also various limitations and restrictions imposed under section 80C.

3. There’s more to tax planning than section 80C. So, look beyond section 80C of the Income Tax Act because there are many other deductions available to you under section 80 other than 80C.

4. The most crucial part of tax planning is choosing the investment instrument based on various criteria like type of return (fixed vs. variable), risk involved, duration and taxability of returns.

a) The best section 80C investment is ELSS. Before investing, understand how to invest in ELSS.

b) If you are looking for a debt option under section 80C, PPF is considered as best. Know how PPF stands vis-à-vis NSC and if you decide to invest in it, keep in mind various tips for realizing the full potential of PPF before opening an account.

c) There is yet another mutual fund debt option available under section 80C. Before investing, know the pros and cons of section 80C mutual fund pension plans.

d) Insurance is a bad choice from section 80C point of view. Nevertheless, if you want to invest in Ulips, understand that Ulips are better than traditional life insurance plans. Besides, before investing in Ulips also go through and learn the Ulip secrets, top most Ulip factors and the best Ulips based on IRR.

5. At last, please make an INFORMED DECISION. To avoid regretting later, make sure that this time you don’t pick up the wrong investment product under section 80C.

Read more

Though ELSS is the best section 80C option but if you’re hesitant to invest in it as the risk factor is evidently higher and doesn’t match your risk profile; there is yet another mutual fund option to invest in and also save tax under section 80C.

Yes, I’m talking about mutual fund pension plans (or funds), which are debt-oriented tax saving funds and most neglected investment option – due to lack of awareness – among all the various tax saving instruments under section 80C such as PPF, ULIPs, SCSS, NSC, ELSS, Bank’s 5 year FDs and life Insurance. Please don’t confuse them with pension plans of insurance companies.

Although branded as pension plans, these are simple debt oriented mutual fund laced with tax benefit under section 80. Unlike pension plans of life insurance companies, these plans don’t offer you any pension or annuity. As these schemes are meant to encourage you to save and invest long term for your retirement, they mandate that you stay invested till the age of 58.

At present, there are only two such funds available – UTI Retirement Benefit Pension Fund (UTI-RBPF / UTI-RBP) and Templeton India Pension Plan (TIPP).


Comparison with ELSS and PPF

Position vis-à-vis ELSS

1. Risk Factor: Unlike ELSS funds which invest 100% in equities, pension funds have the mandate to invest not more than 40% in equities. Thus, risk level of mutual fund pension plans is lesser as compared to ELSS funds.

2. Liquidity: Both ELSS and mutual funds pension plans have lock-in period of 3 years. But, unlike ELSS schemes, mutual fund pension plans – as the name suggests – are meant only for long term; therefore, these funds impose stiffer penalties for premature withdrawals even after mandatory lock-in period of 3 years is over. Thus, pension funds score poorly on liquidity factor.

3. Returns: The current 5-year returns of these funds are around 8 per cent whereas ELSS category has delivered in excess of 10 per cent. Over a longer period of, say, 15-20 years ELSS (being equity funds) deliver even more better returns than mutual fund pension plans (which are debt-oriented balanced funds).

4. Taxation of maturity proceeds: Unlike ELSS funds, where the entire proceeds received after 3 year lock in period are exempt, the mutual funds pension plans tax treatment is similar to those of debt oriented mutual funds.


Position vis-à-vis PPF

1. Risk Factor: First, while PPF is a pure debt product, mutual fund pension plans also contain some equity usually in the range of 20% to 40%. Second, while PPF offers assured return (but not fixed), the debt portion of mutual fund pension plans carries interest rate risk and credit risk. Thus, we can say that though risk is lower than ELSS but slightly higher than PPF.

2. Liquidity: Though both PPF and mutual fund pension plans score poorly on liquidity, PPF is a lot better than Pension plans in terms of making premature withdrawals. The maturity period of PPF is also less as compared to mutual fund pension plans.

3. Returns: Though the current five year returns are almost at par with PPF, mutual fund pension plans have the potential to deliver better or superior returns than traditional tax-saving instruments like PPF due to two reasons: First, as mentioned above there is some exposure to equity and second, even the debt portion is invested is market linked instruments which have the potential to give higher returns depending on the interest rate scenario.

4. Taxation of maturity proceeds: While you earn tax-free returns from PPF, mutual fund pension plans returns are taxable.


Well, mutual fund pension plans are a good option to invest. But the primary reason to invest in them should never be section 80C deduction. You should consider opting for them based on the following conditions:

a) You can spare funds for long term. As obvious, from the name itself, these are meant only for long term investment. There are exit loads to discourage investors from making early redemptions. For instance, in case of TIPP, even after the mandatory 3 year lock-in, there is a stiff penalty (i.e., exit load) of 3% before maturity and the scheme matures on your attaining 58 years of age. Thus, you should consider investing in these funds only if you can spare the funds for long term because existing prematurely is a costly proposition.

b) You’re really serious about long term financial planning and want to make provision for your retirement.

c) It should form part of your overall asset allocation. Put simply, otherwise also you would like to invest in a debt-oriented or balanced mutual fund as part of your asset allocation strategy. Here, you should consider the tax benefit under section 80C as a kind of bonus which you won’t be allowed in other debt oriented mutual funds. However, remember than tax treatment of maturity proceeds is similar in both mutual fund pension plans and plain vanilla debt oriented mutual funds.

Finally, before investing you should analyse the actual performance of these funds. As mentioned above, right now there are only two such funds available in the market namely Templeton India Pension Plan (TIPP) and UTI Retirement Benefit Plan (UTI-RBP). As per Value Research (as on February 20, 2009) while 5 year returns of TIPP are 7.81%, UTI-RBP has delivered CAGR of 8.49 per cent during the last 5 years. And, while rating of TIPP is 3 stars, UTI-RBP has been given a lower rating of two stars by Value Research.

As you must be aware that it’s always preferable to invest in 5 star or 4 star rated funds, so avoid them. If you want to invest in debt oriented or hybrid mutual funds, you can find many better performing funds. As far as tax savings under section 80C are concerned, there are many other better options to invest. For a comprehensive list, please read “Section 80C Tax Saving Options & Investment Avenues”.

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Public Provident Fund (PPF) is the most popular option (among assured return schemes) under section 80C. I presume that by now you’re well aware of PPF ranking vis-à-vis NSC and would like to open a PPF account.

So, in this post topic of discussion is how to invest in PPF. There are certain tips and tricks you should know before you open a PPF account so that you can realise its full potential.

Here are the 10 practical tips on how to invest in PPF:

PPF Account Opening

1. First, you should open a PPF account even if it’s not on your investment radar. Why? Please read “10 tips for section 80c tax planning”.

Furthermore, leave aside section 80C tax-break/tax-planning, otherwise also PPF is among the best debt option available to you – particularly self-employed persons who don’t contribute to EPF – for retirement planning because it offers tax-free returns (current interest rate is 8% which translates into pre-tax yield of 12.12% for someone in the 33.99% tax bracket), exemption from wealth tax and the protection from attachment by any order or decree of court.

2. Public Provident Fund (PPF) account rules allow you to open an account in the name of your spouse or children. Children can be major or minor, son or daughter, bachelor or married, dependent or otherwise. The only restriction is that total aggregate contribution in all the PPF accounts should not exceed Rs 70,000 in a financial year (i.e. 1st April to 31st March).

Correction (6/10/2009): As per PPF rules, the aggregate limit of Rs 70,000 is only for the account of an individual and minor combined together. Contribution to other PPF accounts (spouse and major children) is excluded from this limit. The mistake is regretted. It came to light when a reader pointed it out. See comment section.

If you decide to open a PPF account in the name of your spouse or minor child, what are the tax implications? The contribution will be deemed as gift and clubbing provisions under section 64 should apply. But as the interest on PPF is exempt, there’s no income to be clubbed; therefore, nothing to worry about. On maturity of PPF account, if you reinvest the amount somewhere else, the clubbing provisions becomes applicable in both the cases: spouse and minor child. However, if by the time of maturity of PPF, child has become major, the clubbing provision under section 64 (1A) becomes inoperative (i.e., there won’t be any clubbing of income).

So, if you want to make investment in the name of your minor child, PPF is a preferred instrument to avoid the clubbing provisions of IT Act.

3. While opening a PPF account, please don’t forget to appoint a nominee. In fact this is a very important part of making any investment or buying life insurance. You’re also allowed to change the nomination at any time thereafter.


Making Contributions to PPF Account

4. One of the attractive features of Public Provident Fund (PPF) is the flexibility offered to you for making contributions. Unlike NSC, you need not invest a lump sum amount at one go. PPF gives you full discretion to invest in installments within the range of minimum amount of Rs 500 and maximum amount of Rs 70,000. Besides, unlike recurring deposits or mutual fund SIPs each PPF installment need not be the same. You can vary the amount of PPF deposit as per your convenience. Also, you can deposit more than one installment in a month. The only limitation is that the total number of installments in a year should not exceed twelve.

Thus, rather than waiting for the end of the year to deposit the one lump sum amount, keep on investing small sums on regular basis in your PPF account.


5. Make sure that you invest by the 5th of every month. Why? Because, in case of PPF accounts, interest is calculated on the lowest balance between the close of the fifth day and end of the month (though credited to your PPF account on annual basis).

6. Keep on investing in your PPF account. Never think of making premature withdrawals. Nevertheless, if ever you face a financial crunch, you can avail the facility of loan (from 3rd year to 6th year) and partial withdrawal (from 7th year onwards). However, both the facilities are subject to certain ceiling limits.

Furthermore, there’s another possibility that you’re not able to make tax-saving investments for availing the deduction under section 80C due to some temporary cash flow problem (although your financial position is ok). In such a case also you just need to rotate the funds by making a partial withdrawal from your PPF account and redepositing the amount in your PPF account.

7. Ensure that you continue to make a minimum deposit of Rs. 500 every year to keep the PPF account active. Otherwise, it becomes ‘inactive’ account and you become ineligible for loan as well as partial withdrawal. However, you can regularize or revive the discontinued PPF account after paying the prescribed default fee along with subscription arrears (i.e. a minimum of Rs 500 for each such year).

8. Though the term of PPF account is 15 years, the contribution made in 16th year (even on the last day) also qualifies for section 80C tax benefit. How? Because the PPF account can be closed only after the 15 years from the end of the financial year in which it is opened. Put another way, PPF account runs for full 15 financial years subsequent to opening and matures on 1st April of the 17th year. In other words, if you make a contribution to your PPF account on 31st March of the 16th year, and withdraw it on the next day (i.e., 1st April of the 17th year), you’ll be allowed a deduction under section 80C.


PPF Account Maturity

9. On maturity, you can still continue with your Public Provident Fund (PPF) account, if you so desire. PPF gives you option to extend the account beyond maturity, each time for another block of 5 years. Put another way, you have three options available to you:

a) Close the PPF account and withdraw the entire amount.

b) Continue the PPF account without making any further contribution and earn the same rate of interest as before the maturity. If you choose this option, you can withdraw the entire PPF amount either in a lump sum or in installments. However, you’re not allowed more than one withdrawal in a financial year.

c) Continue the PPF account with fresh subscription. Please remember that for exercising this option, you’ve to submit form H within a period of one year of maturity. Besides, also note that if you choose this option, (i.e., extending the PPF account while continuing with fresh deposits), then you’ve access to only 60% of the account balance (at the beginning of the extended period) during the next five years (i.e., 40% gets permanently blocked for another 5 years and you can’t withdraw it even in an emergency).

In other words, though you’ll continue to be eligible for section 80C deduction on fresh contributions, it will adversely affect the liquidity.

How to decide whether to close the PPF account or continue with it? The decision depends upon the facts and circumstances prevailing at the time of maturity such as your need for funds (immediate or in the near future), interest rate and availability of other investment opportunities.

10. When closing the PPF account and withdrawing the amount, make sure you do it at the beginning of a month because you are not allowed any interest for the month of withdrawal.


If you think that I’ve missed something or you’ve any other question relating to PPF, please feel free to add in the comment box.

Also see:

1. PPF vs NSC - How to Decide?

2. Section 80C - 10 Smart Tips

3. PPF Returns Calculator

4. Filing Tax Returns - 12 Practical Tips

5. 10 Reasons Why You Need a Savings Plan

6. 10 Tips for Using Credit Cards Smartly

7. 5 Secrets about ULIPs

Read more

Everybody knows that section 80C along with section 80CCC and section 80CCD of Income Tax Act, 1961, allows a tax deduction of Rs 1 lakh from the gross total income. I’ve already given a brief overview of various tax saving options and investment avenues eligible for deductions under section 80C and also discussed the various limitations of section 80C.

But, did you know that apart from section 80C, there are many more tax deductions available under section (u/s) 80? You can avail deduction under section 80D for health insurance, section 80DD & section 80DDB for medical treatment, section 80E for educational loan, 80G for donations and 80GG for rent paid.

Here’s a list of 7 such deductions available to individuals under section 80:


Medical Based Deductions under Section 80

1. Health insurance premium under section 80D
You can claim a deduction of Rs 15,000 (RS 20,000 in case of senior citizens) under section (u/s) 80D for medical or health insurance--popularly known as mediclaim policy--premia paid on the health of yourself, spouse and dependent children.

Additionally, (from 1st April, 2008) you’re also allowed a further deduction of Rs 15,000 u/s 80D for buying health insurance policy for your parents (Rs 20,000 if either of your parents is a senior citizen) irrespective of whether they’re dependent on you or not.

Thus, if neither you nor your parents are senior citizens, you’re allowed a maximum deduction of Rs 30,000. On the other hand, if both you and your parents are senior citizens, then the maximum limit allowed under section 80D increases to Rs 40,000.

Please also note that part payment of premium is also eligible for deduction u/s 80D. For example, suppose that your parents buy a health insurance policy having an annual premium of Rs 14,000. Out of the total premium, let’s say your parents pay only Rs 5,000 and the balance of Rs 9,000 is paid by you. So, you’ll be allowed a tax deduction of Rs 9,000 under section 80D and your parents will be allowed a deduction of Rs 5,000.


2. Medical treatment of disabled dependent under section 80DD
You’re also allowed a fixed deduction of Rs 50,000 (irrespective of the actual expenses) u/s 80DD, if you happen to incur any expenditure on the medical treatment (including nursing, training & rehabilitation) of handicapped dependent (spouse, children, parents, brothers and sisters). For severe disability, the amount of deduction available is Rs 75,000.

Furthermore, section 80DD also allows deduction on insurance premium paid on certain specified life insurance policies. JEEVAN ADHAR policy of Life Insurance Corporation (LIC) qualifies for deduction under section 80DD. The policy is meant for the maintenance of handicapped dependent after the death of the insured. This is a whole life policy with no maturity value. On the death of the insured (individual depositing the money), 20% is paid in lump sum and balance is utilized to pay annuity to the handicapped dependant or the nominee for the benefit of the handicapped dependent. If the handicapped dependent dies before the insured, the amount is refunded back and is taxable in the year of receipt.

There is yet another policy of LIC (JEEVAN VISHWAS) meant for the purpose of providing for the handicapped dependents; however, it is not eligible for deduction section 80DD of the IT Act. It is a with-profit endowment plan with guaranteed and loyalty additions.

The point worth remembering is that section 80DD allows fixed deduction of Rs 50,000 / Rs 75,000 irrespective of the expenditure incurred on the medical treatment of the handicapped dependent or amount deposited in the Jeevan Adhar Policy. It might seem absurd, but it’s true.

To know the specific ailments covered and other formalities to be completed for availing deduction u/s 80DD, please read this article by Raagvamdatt.

UPDATE: As per the changes made by Budget 2009 in section 80DD, from current financial year (FY 2009-10), while the limit of Rs 50,000 for ordinary disability remains same, the fIxed limit of Rs 75,000 for severe disability stands increased to Rs 1,00,000.

3. Medical treatment of certain specified ailments under section 80DDB
You’re also allowed a deduction of actual expenditure incurred—minus any amount reimbursed by employer or by an insurance company—up to Rs 40,000 (Rs 60,000 for senior citizens) for medical treatment of certain specified diseases and ailments (e.g. AIDS, cancer, Parkinson’s disease etc.) of yourself or any dependent family member (spouse, children, parents, bothers and sisters) under section 80DDB subject to certain conditions.

4. Handicapped person under section 80U
You’re allowed a fixed deduction of Rs 50,000, if you’re suffering from any of the disabilities specified such as blindness, hearing impairment, mental retardation or illness, leprosy-cured, low vision and locomotive disability, autism and celebral palsy. For severe disability, deduction is Rs 75,000. Please note the following points for claiming deduction u/s 80U:

1. The disability pertains to you (i.e., the taxpayer) and not any of your family members.
2. You need not spend any amount on the medical treatment.
3. A certificate is required from specified medical authority.
4. For up to 40% disability, nothing is allowed; for disability ranging from 40% to less than 80% a deduction of Rs 50,000 is allowed and if the disability is 80% or more, Rs 75,000 is allowed to be deducted from your gross total income.

Finally, see this post by taxworry to know the medical certificates / forms required to claim deduction u/s 80DD, 80DDB and 80U.


Other Deductions under Section 80

5. Educational Loan under section 80E
You’re allowed a deduction u/s 80E for the repayment of loan taken (from any bank, financial institution, or approved charitable institution) for higher studies (full time studies including graduation of specified courses such as management, engineering and medicine) for yourself or any of your family members (children, spouse).

However, the deduction u/s 80E is only for the interest portion and unlike home loans, deduction for principal repayment is not allowed. Finally, deduction u/s 80E is limited to a maximum period of 8 years.

UPDATE: As per the changes made by Budget 2009, the scope of section 80E in respect of interest on loan taken for pursuing higher education is enlarged to cover all fields of study including vocational studies pursued after passing senior secondary examinations.


6. Donations under section 80G
Donations paid to specified institutions also qualify for tax deduction under section 80G but is subject to certain ceiling limits. Based on limits, we can broadly divide all eligible donations under section 80G into four categories:

a) 100% deduction without any qualifying limit (e.g., Prime Minister’s National Relief Fund).
b) 50% deduction without any qualifying limit (e.g., Indira Gandhi Memorial Trust).
c) 100% deduction subject to qualifying limit (e.g., an approved institution for promoting family planning).
d) 50% deduction subject to qualifying limit (e.g., an approved institution for charitable purpose other than promoting family planning).

The qualifying limit u/s 80G is 10% of the adjusted gross total income.


7. Rent paid under section 80GG
If you’re either self-employed or employed but not getting any HRA from your employer, you can get a deduction under section 80GG for the rent paid by you. However, unlike HRA exemption under section 10(13A) of I.T.Act, here the maximum amount allowed is only Rs 2,000 per month (Rs 24.000 annually) and is also subject to certain conditions.

So, make sure that (in addition to section 80C, 80CCC and 80CCD), you consider all the above tax concessions available to you u/s 80 while doing your tax planning.

In fact, the first course of action while doing your tax planning is to avail to all the tax breaks related to expenses (whether under section 80C or any other section such as 80E) before making any further investment commitments for tax savings under section 80. For more details, please read how to do section 80C tax planning.


Also see:

1. Section 80C – Tax Saving Options & Investment Avenues
2. 10 Smart Tips for Section 80C Tax Planning
3. ELSS: The Best Option u/s 80C
4. Health Mediclaim Insurance – 10 Practical Tips
5. Budget 2009 Tax Highlights – Impact on Individuals

Read more

In my previous post “Section 80C Tax Saving Options & Investment Avenues” a brief overview of various expenses and investment instruments eligible for section 80C deductions is given.

However, many specific conditions & restrictions are applicable to those expenditure and investment options mentioned in section 80C. This post specifies those conditions & restrictions in detail:


Restriction & Conditions under section 80C

1. Tuition fees: Tuition fees paid for the full time education of your two children is allowed as deduction under section 80C. However, it is subject to following restrictions:

1. Allowed only for full time education, i.e., part time course and private coaching classes not allowed

2. Allowed only up to two children

3. Development fees, building fund, donations or any payment of similar nature not allowed.

4. Self or Spouse education not allowed.

5. Overseas education not allowed.

However, playschool, pre-nursery and nursery tuition fees are allowed. For a more detailed discussion, you can read http://simpletaxindia.blogspot.com/2008/02/tuition-fees-paid-for-children-us-80c.html.

2. Home loans: The principal component of the housing loan EMI, which is eligible for deduction under section 80C, is subject to following conditions:

1. If the loan is borrowed for the purpose of reconstruction/renewal/repair, then deduction under section 80C is not allowed.

2. The deduction for repayment of principal of a loan is not allowed in case of commercial property.

3. The property should not be sold before a period of 5 years. If you sell the house within a period of five years from the year in which you have started claiming home loan IT benefits, the entire deduction claimed under section 80C – for repayment of principal sum of the home loan – in earlier years will be deemed to be your income in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

4. If the house is in the name of your family member (spouse or your parents) and you make the repayment of loan yourself, the deduction u/s 80C won’t be allowed.

5. Unlike section 24(b), where you are allowed interest deduction irrespective of the source of borrowing (the borrowing may be even from your family and friends), the repayment of principal sum under section 80C is allowed only if the borrowing is from specified institutions mentioned therein.

3. House registration expenses: The following expenses relating to house property are not allowed under section 80C:

1.Stamp duty and registration charges paid for purchase of plot of land is not allowed under section 80C.

2. Property tax or municipal tax deduction is also not available under section 80C. It is available separately under section 23 while calculating net annual value of house property.

3. The admission fees, cost of share or initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming a member is also not allowed.

4. Life insurance: There are certain restrictions regarding the premium, lock-in period and the eligible persons:

1. If the amount of premium paid in any financial year exceeds 20% of the sum assured then deduction will be allowed only up to 20% of the sum assured.

2. While ULIPs can’t be sold or terminated before 5 years, other life insurance policies can’t be surrendered before the premium for 2 years have been paid.

3. Life insurance premium paid to insure the life of your parents (Father and Mother) is not eligible for the section 80C deduction.

5. Public provident fund (PPF): While PPF is considered as one of the best option among all the assured return schemes under section 80C, it is also subject to certain limitations:

1. Maximum contribution allowed Rs 70,000 per annum (p.a.) in all the accounts clubbed together. For example suppose you open two PPF accounts: one in your name and other in the name of your minor son. Here contribution to both the accounts will be clubbed for the purpose of limit of Rs 70,000. And if you still make a contribution in excess of Rs 70,000, section 80C deduction will not be allowed, nor will you get any interest on the excess contribution.

2. A joint account is not permissible.

3. To keep the PPF account active, a minimum annual investment of Rs 500 is required in all subsequent years.

4. It is not possible to close & withdraw the entire amount before the maturity period of 15 years except in the case of death. However, partial withdrawals can be made from 7th year onwards.

6. Pension plans of insurance companies: The investment in pension plans of insurance companies is subject to following limitations:

1. If any investments have been made in pension plans of Insurance companies’ u/s 80CCC, then the qualifying amount u/s 80C stands reduced to that extent. In other words, combined overall limit u/s 80C and 80CCC is Rs 1 lakh.

2. On maturity, you can withdraw (or, commute) only one-third (33%) of the corpus which is tax-exempt; balance 2/3rd has to used to purchase an annuity (monthly pension) from any insurance company.

3. Pension is taxable.

7. 5-Yr Bank Fixed Deposits (FDs): While offering you same interest rates which are offered on plain vanilla FDs, tax-saving fixed deposits suffer from poor liquidity:

1. Tax Saving Bank FDs can’t be pledged for loan purpose.

2. Unlike other plain vanilla bank FDs, which you can encash before maturity by paying a penalty – usually one per cent – tax saving FDs doesn’t allow premature encashment.

3. Fixed deposits of non-scheduled banks are not covered.

8. Mutual Fund Pension Plan: Though lock-in period for tax purposes is only 3 years, premature exit before the vesting age of 58 years is subject to high exit loads. For instance, Templeton India Pension Plan (TIPP) charges 3% exit load for early redemptions.

9. Employee's Provident Fund (EPF): Basically, there are two kinds of EPF - first is Statutory Provident Fund (SPF) applicable to government and semi-government (including universities and other specified institutions) employees. And second is Recognised Provident Fund (RPF)under Employee's Provident Funds and Miscellaneous Provisions Act, 1952, applicable for private sector employees. While SPF is fully exempt from tax under section 10(11); RPF is subject to a lock-in period of 5 years. For more details, please read "10 Common Income Tax Misconceptions".

10. General or Common Restrictions: There are certain general limitations also:

1. The total limit under section 80C – combined with ‘pension plans of insurance companies under section 80CCC – is Rs 1 lakh. However, let me clarify that unlike section 88, there are no sub-limits under section 80C. The following sectoral caps which existed under section 88 have been omitted from section 80C:
a. Rs 12,000 per child for tuition fees
b. Rs 20,000 in respect of repayment of housing loan
c. Rs 10,000 in respect of equity linked saving schemes (ELSS)

2. Deductions permissible under section 80C to 80U are not allowed from short term capital gains chargeable under section (u/s) 111A and long term capital gains chargeable under section 112. It is because that these capital gains are already taxed at concessional rates. So, if your total taxable income includes any capital gains taxable under either section 111A or section 112, please exclude them from total income for the purpose of availing deduction u/s 80C.

3. Deductions under section 80C to 80U is also not available in case of winnings from lotteries, card games, races, gambling etc.

So, keep the above limitations in mind while doing your tax-planning to avail tax deduction under section 80C of IT Act.

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Section 80C of Income Tax Act, 1961, sets out a number of options or tax-saving instruments that are eligible for tax deduction. Broadly, we can divide tax-saving avenues into two categories: first is expenditure related deductions such as tuition fees and home loan principal repayment; and second is investment instruments or options such as EPF (Employee’s provident fund), VPF (Voluntary provident fund), PPF (Public Provident Fund), NSC (National Savings Certificates), ULIPs (Unit-linked insurance plans), ELSS (Equity linked savings scheme), SCSS (Senior Citizens Savings Scheme), 5-Yr POTD (Post office time deposits), 5-Yr tax-saving fixed deposits (FDs) of banks, Mutual funds pension plans , NABARAD (National Bank for Agriculture and Rural Development) Rural Bonds and life insurance premium.

Here’s the brief over view of various tax-saving avenues or options under section (u/s) 80C of the IT Act, 1961:

Expenditure avenues u/s 80C
I’ve already pointed out in my earlier post on section 80C tax-planning and tax saving strategies, “Making the most of Section 80C – 10 Smart Tips”, that before making any investment to get tax break under section 80C, you should first avail the concession / deduction available to you for certain expenditures incurred by you. The various expenses which are eligible for section 80C tax break are:

1. Tuition Fees: Expenses – only tuition fees – incurred on children’s full time education in India are eligible for deduction under section 80C. No other charges or expenses are allowed.

2. Repayment of principal sum of home Loans: The EMI (Equated Monthly Installment) that you pay against your home loan comprises of two components - principal and interest. While principal part is deductible under section 80C, there is a separate deduction for interest portion under section (u/s) 24(b) of Income tax Act. For further details, please read, "Housing Loan Tax Deduction: Comparison between Section 80C and Section 24(b)".

3. Expenses incurred on purchase of house property: Stamp duty, registration fees, and other expenses incurred for the purpose of purchase of house property are also entitled for section 80C deduction.

Investment options / avenues u/s 80C
Various investment options can be broadly divided into three categories: first is equity instruments, second is debt instruments and third one is life insurance and pension plans.

Equity Instruments:

1. Equity linked savings scheme (ELSS): Considered as the best section 80C option, it’s a mutual fund scheme investing entirely in equities and therefore has the potential to deliver the best returns. For more details please read, “ELSS – The Best Section 80C option”.

Debt Instruments:

2. Public Provident Fund (PPF): Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Current rate of interest is 8% tax-free and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500 and maximum is Rs 70,000. A point worth noting is that interest rate is assured but not fixed. For details, please read “PPF vs. NSC- Which is Better?”. If you're interested in investing in PPF, first get yourself acquainted with certain practical tips and tricks to be followed while investing in PPF.

3. Employee’s Provident Fund (PF): PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF). Current rate of interest is 8.5% per annum (p.a.) and is tax-free.

4. National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%. If you invest Rs 1,000, it becomes Rs 1601 after six years. The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

5. Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list, Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. Current rate of interest is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest. Interest income is chargeable to tax.

6.5-Yr post office time deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) – which currently offers 7.5 per cent rate of interest –qualifies for tax saving under section 80C. Effective rate works out to be 7.71% per annum (p.a.) as the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable.

7. 5-Yr bank fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction.

At present, rate of interest offered on these FD’s is at par with plain vanilla FDs. For instance, current – as on 2nd February 2009 – applicable rate of interest on ICICI Bank ‘Tax-Saver Fixed Deposit’ is 8.25% per annum (p.a.) for general category and 8.75% for senior citizens which are similar to what the bank is offering on its other fixed deposits of similar maturity. Likewise, SBI (w.e.f. 01.01.2009) is currently offering rate of interest of 8.5% for general public and 9.0% for senior citizens on SBI tax-saving FD’s called “SBI tax saving scheme 2006 (SBITSS)” which are also same as being offered on other FDs with similar tenure.

However, remember that unlike plain vanilla FDs, premature exit is not possible. Besides, interest income is taxable.

8. NABARD rural bonds: There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.

At present, ‘NABARD rural bonds’ are not open for subscription. Last year NABARD opened the subscription for these bonds – 5-Yr tenure carrying coupon rate / interest rate of 8.25% – during end of January 2008 but received a lukewarm response.

Life Insurance & Pension Plans:

9. Life Insurance: Any amount paid towards life insurance premium for yourself or your family (spouse and children) is eligible for section 80C tax break.

This is the most popular investment avenue among all the tax-saving instruments but for all the wrong reasons. If you would like to know why, please read “How to do Section 80C tax planning”.

10. Unit linked insurance plans (ULIPs): Although, Ulips gets covered under life insurance, but still require a specific mention due to their immense popularity. Undoubtedly, better than traditional insurance plans; nevertheless, you should avoid them. Why? Read: “10 Top Most Factors about Ulips”.

However, if you still want to invest in them to avail section 80C deduction please read, “5 Secrets about ULIPs” and “Best Ulips based on IRR”.

11. Mutual fund pension plans: Another variable return instrument available under section 80C is pension plans of mutual funds. There are only two such plans available in the market –Templeton India Pension Plan (TIPP) and UTI Retirement Benefit Pension Plan (UTI-RBP). These are open-ended debt-oriented mutual fund schemes with a maximum exposure of 40% to equities. In the long run, you can expect these pension funds to deliver better returns than the assured return schemes like PPF and NSC.

However, invest in them only if can spare funds for the long term because premature exit is very costly. Also, please don’t confuse them with pension plans of insurance companies.

12. Pension plans of insurance companies: Contribution towards pension plans offered by insurance companies qualifies for tax benefit under section 80CCC instead of section 80C. However, the aggregate deduction allowed under section 80C and section 80CCC can’t exceed Rs one lakh.

There are basically two kinds of pension plans offered by the insurance companies: traditional pension plans which invest mostly in fixed income products and unit-linked pension plans (ULPPs) which are more flexible. If you want to invest, make sure that you buy pure pension plan without a life cover. Also note that while pension (or annuity) is taxable, commutation of pension is tax-free. For details, please read, “5 Common Sources of Tax-Confusion”.

In next post, I’ll discuss about various conditions and restrictions imposed under section 80C. Meanwhile, if you’ve any other idea or question about section 80C, please share them in the comments below.

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Among all the tax-saving instruments under section (u/s) 80C, ELSS occupies the numero uno position (for details, please read “ELSS: The Best Section 80C Option”) but the ELSS schemes are inherently risky. So, if you’re not comfortable investing in ELSS, you can consider PPF (Public Provident Fund) or NSC (National Saving Certificate). Among the assured return schemes, both PPF and NSC occupy the top slot.

But, the next question is: How to decide which – PPF or NSC – is better among the two? Or, which is the best tax-saving instrument under section 80C among the assured return schemes? Therefore, this article attempts to resolve the classic dilemma: NSCs vs. PPF. Let’s compare them on various parameters:

PPF vs. NSC – A Comparison

1. Returns
While PPF offers 8% per annum (p.a.), NSC offers 8% per annum compounded half yearly i.e., the effective yield is 8.16% per annum. Not a big difference.

2. Tax on returns
PPF returns are tax-exempt but NSC returns are taxable. Interest accrued on NSC is to be included in your total income every year.

However, you’re also entitled to get the deduction under section 80C for the interest accrued on NSCs, because this notional interest is deemed to be reinvested. So, the net effect is that your section 80C limit gets reduced to that extent because otherwise you would have made investment in other tax-saving instruments to the extent of accrued interest on the NSC. If your section 80C limit already stands exhausted, then your post-tax returns from NSC would become 6.48% if you fall in 20.6 per cent tax bracket and 5.64% if your marginal tax rate is 30.9 percent.

3. Whether returns are guaranteed/ fixed
Once you invest in a NSC the interest rate gets locked-in i.e., can’t be changed subsequently, where as in case of PPF the returns are assured but not fixed. In other words, depending upon the interest rate scenario, government can move it either downward or upward, as the economic situation demands.

However, as the interest to your PPF account gets credited every year, the change in interest rate is always prospective and not retrospective.

Let’s see the past changes in the PPF interest rates:

From 1986-87 to 1999-00 -> 12.00%
2000-01 -> 11.00%
2001-02 -> 9.50%
2002-03 -> 9.00%
Since 2003-04 -> 8.00%

Now, let’s see the past changes in NSC interest rates:

Mar’01 to Feb’02 -> 9.5%
Mar’02 to Feb’03 -> 9.0%
Mar’03 onwards -> 8.0%

From the above mentioned changes in PPF and NSC interest rates, we notice that PPF and NSC interest rates are changed simultaneously, so that both are at par (with a slight difference due to half yearly compounding in case of NSCs).

However, what makes the yield differ is the fact that in case of NSC’s revised rates applies only for new purchases, while for PPF new interest rates apply to all accounts, both new and existing. For instance, let’s say you invested Rs 1000 each in both PPF and NSC in March 2001. Now, while for NSC you would have received interest @ 9.5% per annum (compounded half-yearly) for all the 6 years of it’s duration, your PPF account would be credited with interest @ 9.5% for only the year 2001-02 and for subsequent years reduced interest rate would apply (i.e., 9% for 02-03 and 8% since 03-04 onwards).

4. Liquidity
While the duration of NSC is 6 year, PPF carries a lock-in period of 15 years. Besides, PPF premature account closure is not permissible except in case of death. Although partial withdrawals are allowed from the PPF account from seventh year onwards, the actual amount depends on the balance in the account in earlier years. Thus, NSCs offer better liquidity than PPF.

5. One time or regular investment
While NSC requires one time investment, PPF requires regular investment. NSC is the form of a certificate but PPF is in the form of an account and to keep it active, you’ve to make regular investment – a minimum amount of Rs 500 has to be deposited every year to keep the account active.

So, except the parameter of ‘taxability of returns’, on all other counts the NSCs score over PPF. However, this singular factor is big enough to tilt the balance in favour of PPF. Let’s see:

1. If the tax-saving limit of Rs 1 lakh under section 80C remains under-utilized year after year, then NSC, no-doubt, is the best option for you because in that case net tax effect (of NSCs accrued interest) is zero. In other words, in such a case, NSCs returns also become tax-free.

2. If your existing tax saving investments exceeds the limit of Rs 1 lakh (or expected to cross the Rs one lakh mark, in the near future) as specified under section 80C, then it would have direct impact on your post-tax returns from NSCs ; for example, it becomes 5.64% if you fall in the 30.9% tax bracket. In such a case it is better to opt for PPF. However, even in such a case you should opt for NSC if your investment horizon is medium term (i.e., you’re going to require the money, say, after 6 or 7 years for your spending needs).

No doubt, the liquidity factor and uncertainty associated with the PPF interest rate are two major drawbacks.

However, if you just change your perception and give it another look, lack of liquidity should not be a hindrance. Perhaps, it’s a blessing in disguise. Why? Because even if you get back your money, say, after 3 years or 6 years, won’t you invest it some where else or spend it on some worthless things.

So, if you invest your funds for different time duration according to your financial plan/ needs and invest only so much in PPF which you can spare for long term, 15 years lock-in period should not be a constraint. In other words, for the purpose of saving money for long term goals, like education and marriage of children or to save for retirement – which you must – PPF is the best debt instrument after EPF (Employees Provident Fund).

Besides, in emergency cases, if you require the funds before the maturity, the option of making partial withdrawals, or borrowing against your PPF account, is always available.

As regards the uncertainty associated with the PPF interest rate, we can observe that since 2003, there has not been any change in the PPF interest rates. Even if there is a change in near future, in my view, it can’t go beyond +/- 1%.

I hope the above discussion is helpful to you in resolving the dilemma between PPF and NSC. However, if you’ve any further suggestion or questions, please feel free to leave a comment.

Finally, if you've decided to invest in PPF, please read "How to Invest in PPF-10 Practical Tips".

Also see:

1. Making the Most of Section 80C - 10 Smart Tips
2. Ulips vs Traditional Insurance Plans: Which is Better?
3. Direct Stock Investment vs Mutual Funds
4. Section 80C Tax Saving Options
5. Claiming HRA Tax Exemption - Tips & FAQs
6. Best Ulips based on IRR

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It’s tax-planning season again. During the last quarter of a financial year (January to March) the most talked about topic especially in office corridors is the tax saving under section 80C of the Income Tax Act. The first and most obvious choice of people is life insurance. And among life insurance products, the most popular policies are Ulips. To know, whether the decision to invest in life insurance as a tax saving tool is correct or not, please read “Section 80C - 10 Smart Tips”. In this article, the topic of discussion is some known and unknown top most factors about Ulips.

Here are the 10 Top Most Factors or things to know about ULIPs:

Good Factors

1. Top most fact about Ulips – Insurance cum Investment products
Ulips are insurance cum investment products and only way you can benefit from them is to consider them as long term financial products with a minimum tenure of 10 years.

While buying Ulips, insurance should be your most important consideration and investment should be the secondary motive.

2. Top most misconception about Ulips – Only equity linked
The most common myth about Ulips is that they are linked only to equity markets.

The fact is that there are various fund options (differs from company to company) available in case of Ulips. However, we can broadly categorize them into three types – 100% equity fund, balanced fund and 100% debt fund. There are also various other fund options available with varying degree of equity and debt allocations.

You’ve the flexibility to choose a fund option based on your risk appetite and if you wish, you can switch to another fund option at a later stage.

3. Top most benefit Ulips offer over traditional Insurance plans – Possibility to earn higher rate of return
Unlike traditional plans which invests almost their entire money in debt portfolio, Ulips give you full discretion to invest the money the way you want.

As already mentioned above, there are various fund options available with varying degree of equity and debt proportions. Further, once invested, you’re not bound and can make subsequent changes in the fund option according to your needs and risk appetite.

For a detailed comparison between Ulips and traditional life insurance plans, please read "Ulips vs Traditional Plans".

4. Top most good (or the best) thing about Ulip – Fund Switching Option
There is nil or negligible cost involved. Besides, there is no tax involved. And most of all, it is hassle free. The day mutual funds also start providing this fund switching facility, the only real edge Ulips have over mutual funds will be lost.

5. Top most Ulips available in the market
Please see “Best Ulips Based on IRR And Expense Ratios”.


Bad Factors

6. Top most reason for Ulips popularity – Large scale financial illiteracy
Undoubtedly, the most important reason behind Ulips popularity is that most of us don’t know what is life insurance and why and how much we need it?

The secondary reasons behind their popularity are—Ulips are better than traditional life insurance products and also the exceptional stock market returns during 2004-07.

7. Top most flipside of Ulips – Riskier
Ulips are more risky than traditional life insurance plans. Actual risk depends upon the fund option chosen by you; greater the equity component, higher the risk. As the investment risk is borne by you, in case of a market down turn, you might have to bear huge losses. Just try asking someone who has invested in Ulips during the last few years.

8. Top most hidden factor about Ulips – IRR
IRR (Internal rate of return) is the major factor which is kept under wraps by the life Insurance companies to make it difficult for us to compare one Ulip with the other. If the life insurance companies start publishing this figure it will become a lot easier even for a layman to understand and find the low cost Ulips in a manner similar to the way we compare term plans. For other hidden facts please read “Unravelling the Ulips – 5 Secrets You Should Know About”

9. Top most bad (or the worst) thing about Ulips – The way they’re sold
Instead of selling Ulips as the long term life insurance products, advisors sell them as short term investment plans with tax incentives.

10. Top most reason to invest in Ulips – If you’re not financially savvy
Go for Ulips, if you’re not financially savvy and can’t separate your insurance needs from your investment and tax planning goals.


Also see:

1. SBI Life-SMART ULIP: Review
2. Life Insurance - Top Most Amazing Fact
3. Section 80C - 10 Smart Tips
4. Section 80C - Various Tax Saving Options
5. 5 Secrets about ULIPs
6. Tax Calculator

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