"Have you planned your tax saving investments yet?" This must be one of the most frequently asked questions in the past few weeks. Ask your father to guide you with it and chances are that he may tell you to go in for postal schemes like National Savings Certificate or Public Provident fund. As your financial advisor and he/ she will bombard you with the equity linked mutual fund schemes that provide tax benefit. With Just a couple of months to go for this financial year to end, if you are still undecided as to how to plan your tax investments, read on.

Some Tax facts:
• Rs. 100,000/- is the maximum amount an individual can save under designated tax saving instruments.
• This Tax exemption is available under section 80C of the income tax act.
• This Rs. 1 Lakh upper limit can be invested in any one of the instruments or some of them with allocation depending on the discretion of the investor
• Instruments eligible for tax exemption u/s 80C include National Savings Certificate, Kisan Vikas Patra, Equity linked Saving Scheme, Life insurance premium, Public Provident Fund.

Returns calculated for ELSS is taken as an average return of the category averages in the past 6 years.
Returns on ULIP taken as an average of the equity oriented underlying funds in the ULIPs of leading insurance plans.
*NSC offers 8% annual rate that is compounded monthly.

While NSC and PPF are predominantly invested in the fixed income asset class, we have ELSS and ULIPs offering equity exposure to the investors. Risk-Return grade-wise, NSC and PPF fall in the category of “Low-Risk Low-Returns”. The fixed interest rate offered on the investments in PPF and NSC has undergone constant downward revision in the past few years, making these schemes unattractive investment avenues.

ULIPs fall in the “Moderate-to-High Return” and “Moderate Risk” grade while ELSS are a little more aggressive in their investment approach, qualifying for “High Return” and “Moderate-to-high Risk”.

How would the money have grown in the past 5 years?

The graph above shows the growth of an investment amount of Rs. 10000 invested in 3 different instruments for a period of five years between 2002-2007. While NSC and PPF have returned Rs. 16300 in the five-year time frame, investment in the ELSS category has swelled to Rs. 87300 by the end of the year 2007.

Inflation adjustment factor: An investor could say that being risk averse, he/she prefers to be invested in fixed income oriented tax saving instruments like NSC and PPF. But a pertinent question to be addressed here is whether the investment is really going to beat the inflation in the long run. Equity asset class has historically delivered highest inflation-adjusted returns as compared with any other asset class.

An ideal tax saving combination:
Equity, as an asset class, has emerged as the highest return-generating Investment Avenue as compared with the return potential of any other asset class. Long term saving and wealth creation plans should necessarily be carried out via the equity route. High risk associated with the equity investments gets mitigated with a longer duration of investment.

Investible instruments that offer an exposure to the equities while offering tax benefits should be preferred if the investor has a long investment horizon. To enjoy tax exemption while getting to invest in the equity asset class, the safest route to opt for is the Equity Linked saving scheme offered by the Mutual funds.

Insurance policies that are linked to the market can be looked at as providers of additional life cover for individuals. Young investors in their initial years of savings can opt for the ULIP with a heavy tilt towards the Equity fund. This will help faster build up of capital.

Ideal tax planning could be a combination of ULIP and ELSS wherein the investor gets a life cover as well as goes for long term savings via equity.

When we compare all these tax saving instruments, we need to take into account the monetary value of tax benefit availed from these instruments. The following table shows the total returns on an investment of Rs. 50000 in each of these instruments over a period of 6 years.

• Tax benefit computing for a 6 years period
• Amount invested Rs. 50000/-
• Risk free rate at which the notional tax saving amount is invested = 8%
• Highest tax slab applicable: 33.99% [30%+10% surcharge+3% edu cess]

We have assumed that the notional amount of tax saved is invested at the risk free rate of 8% over a period of 6 years. So the total return delivered by each of these instruments (see column 8) includes the gain from investing the notional amount of tax saved.