We can save money through Tax Saving Mutual Fund Scheme (ELSS) as well as 14 to 17 % returns on average in Long Term Period.

The Income-tax Act, 1961 has various sections taxpayers can use to reduce their tax outgo every year. And the most common sections in the Act that people use to save on tax are 80C, 80D, 80CCD (1B), and 24 (b).

Based on the tax rate of the individual - 5 percent, 20 percent and 30 percent (excluding cess of 4 percent) – we will get Tax saving benefit and 14 to 17% return on long Term investment on an average. Illustratively, on an investment of Rs 1 lakh, someone paying 20 percent tax will save Rs 20,000, while someone in the 30 percent Tax bracket or slab will save Rs 30,000 annually.

So both way an Investor can get monetary benefits.

Why ELSS Tax Saving Mutual Funds is best choice for tax planning?

Investors can save up to Rs 46,350 in taxes per year by investing up to Rs 1.5 Lakhs in eligible schemes under Section 80C of the Income Tax Act 1961. There are broadly two types of tax savings schemes – risk free or low risk schemes and market linked schemes. The risk free or low risk schemes are Public Provident Fund (PPF), National Savings Certificates (NSC), 5 year tax saving Fixed Deposits (offered by banks and post office), traditional life insurance plans (e.g.endowment plans, money back plans etc), Senior Citizens Savings Schemes etc. In these schemes capital safety is assured. In some schemes like NSC, FDs returns (interest) are guaranteed, while in others the interest rates can change from time to time over the investment tenure.

The market linked schemes under Section 80C are ELSS Tax Savings Mutual Fund Schemes or Equity Linked Savings Schemes (ELSS).

ELSS invest in capital market securities and therefore, they are subject to market risks. If you want assurance of capital safety then market linked schemes are not for you and you should invest in Government small savings schemes (PPF, NSC etc) or Bank tax saving FDs.

However, if you are willing to take risks and are prepared to remain invested even beyond the lock-in period of these schemes then ELSS is the best tax saving investment choice. ELSS enjoys three big advantages compared to other tax saving investments.

Superior Returns

Historical data shows that, equity is best performing asset class in the long term. In the last 20 years, the S&P BSE – Sensex gave 11.7% compounded annual returns, while bank FDs gave average annualized returns of only 7% over the entire period. Many investors focus simply on tax savings and ignore the growth potential or the tax implications on the maturity amount. The result is that, they get sub-optimal returns which struggle to beat inflation on a post tax basis. ELSS tax saving mutual fund Schemes, on the other hand, offer both 80C tax savings and wealth creation potential over a sufficiently long investment horizon. The table below shows the post tax inflation adjusted rate of different 80C investment schemes over the last 5 years.

Why Life Insurance (Money Back & Endowment) Policy shouldn’t Purchase?

DON’T PURCHASE TO SAVE TAX:

Don’t buy life insurance to save tax. There are better, more lucrative investments avenues that can get you tax deduction under Section 80C. PPF gives assured returns (8.00%) and tax free corpus. Fixed deposits give higher returns (6-7%) even though the income is taxable. ELSS gives tax free income and potentially higher returns (12-17%) in Long Term Investment for 15 to 20 years. If you are only looking at tax savings, these instruments are better options than an insurance policy which gives you 4-5 % return with insufficient Life cover.

Insurance companies and their agents feed on this obsession to save tax. Almost 70% of the total business of life insurance companies is transacted in the last three months of the financial year when millions of taxpayers are trying to invest under Sec 80C. But life insurance is not the best way to save tax either. Other instruments can achieve that objective in a much better way.

WRONGLY COMBINES INSURANCE WITH INVESTMENT:

Agents like to say that endowment or money-back insurance policies offer the twin benefits of insurance and investment. In reality, they fall between the two stools. As an investment, an endowment policy gives very low returns, yielding barely 4.5-5.5% returns. Even very long-term plans of 25-30 years offer around 6.5%. As an insurance product, an endowment plan offers inadequate cover. The life insurance cover is just 10 times the annual premium. You will need to shell out Rs 10 lakh a year to get the Rs 1 crore cover your family would need if something untoward happens to you.

DON’T GIVE GOOD RETURN ON THE NAME OF GUARANTEED RETURNS:

Many insurance buyers are looking for the guaranteed returns promised by life insurance companies. But this guarantee of returns comes at a high price, forcing the company to invest in safe debt-based options. There are other instruments that give guaranteed returns and offer better yields than a traditional insurance policy. The PPF, Mutual Fund for instance, offers returns with tax free corpus.

Life cover too low:

A person earning Rs 70,000-80,000 a month needs an insurance cover of roughly Rs 1 crore. A term insurance cover of Rs 1 crore will cost a 30-year-old male about Rs 12,000-15,000 a year. But the same cover from a traditional insurance plan will require an annual premium of at least Rs 10 lakh. Going for such a plan would mean putting all other goals and expenses on the backburner.

GST charged in Insurance Premium:

While payment for our Insurance premium we have to pay GST @18%.So this GST amount works like expenses in our pocket which is not disclosed by Insurance agent and tax saving benefit we will get actually less if we deduct GST Payment amount form Tax benefit from 80 ©.

What about your life coverage after age of 45,50 or 55 when your Insurance policy matured?

**If Death happened what about family??

When you purchase life insurance for 20 years or 25 years then what happen with your life cover after that insurance maturity. For instance, if you take insurance at the age of 25 for next 25 years then your insurance cover will going to be end at the age of 50.So after 50 do you think you won’t face any tragedy of death. If you face then who will take care your family? If you think your family need it then why only for 20 or 25 years?

To rectify this mistake if we go for a Term Insurance till our age of 70 or 80 with very minimum amount and rest of the monies we can invest in a Mutual fund for 15 to 20 years which can generate 14 to 16 % return in long term then from insurance and investment end you have sufficient corpus for your need.

If putting 50/60 or 70 thousand annually then why only 25 or 30 lakh cover. In contrast 25 to 30 Lakh cover can get in 5 thousand rupees in Term insurance and remaining amount we can invest in other plan to generate 12 to 16 % which is double than any option.

Please see attached information to check how insurance policy manipulating in market by misselling of Policy and showing as an Investment:

We can save money through Tax Saving Mutual Fund Scheme (ELSS) as well as 14 to 17 % returns on average in Long Term Period.

Why ELSS Tax Saving Mutual Funds is best choice for tax planning?

Superior Returns

Why Life Insurance (Money Back & Endowment) Policy shouldn’t Purchase?

Why Life Insurance (Money Back & Endowment) Policy shouldn’t Purchase?

DON’T PURCHASE TO SAVE TAX:

WRONGLY COMBINES INSURANCE WITH INVESTMENT:

DON’T GIVE GOOD RETURN ON THE NAME OF GUARANTEED RETURNS:

Life cover too low:

GST charged in Insurance Premium:

Related Question regarding Insurance policy.

What about your life coverage after age of 45,50 or 55 when your Insurance policy matured?