Unit Linked Insurance Policies
Many investors choose Unit Linked Insurance Policies (ULIPs) as a tax saving investment because it kills two birds with one stone. For investors, combining insurance and investments seems like an efficient way to cover their personal finance needs. But insurance policies are not the best way to save tax. The primary purpose of life insurance is to ensure the wellbeing of your dependents in the event of your untimely demise. Policies that combine insurance and investments neither offer enough financial protection nor give attractive returns. Moreover, the costs of servicing ULIPs is very high.
Term Insurance
Once you determine the amount of life insurance you need, consider taking a term policy. Term policies are cost-effective in terms of financial security, even if they do not promise returns. The premiums cover mortality charges and ensure adequate protection when you need it the most.
Equity Linked Savings Scheme ELSS
ELSS has the shortest lock-in period of three years for tax saving investments. This is the only scheme which allows investors to save on tax while earning high returns (market-linked capital appreciation) from investment in equity funds.
Public Provident Fund (PPF)
The tax-free status of the PPF gives it a distinct advantage over other investment options. Since PPF is backed by the Indian government, it offers guaranteed, risk-free returns, and complete capital protection. The element of risk involved in holding a PPF account is minimal. NRIs and HUFs are not eligible to open a PPF account. A PPF account is a 15-year investment commitment – you must contribute at least Rs 500 every year to keep it alive.
PPF vs ELSS
| Criteria | ELSS | PPF |
| Tax-deductible | Yes | Yes |
| High returns | Yes | No |
| High liquidity | Yes | No |
| Short term investment | No | No |
| Longer lock-in | No | Yes |
| Tax Treatment | E-E-T | E-E-E |
| Low risk | No | Yes |
Tax Saving Plan
What is best for you might not suit another. As you can see, these products are meant for different investor profiles. A conservative investor looking to invest in a long-term product to achieve long-term financial goals like retirement, child’s education, etc. can opt for PPF. An aggressive investor looking to save taxes and earn higher returns can opt for tax-saving mutual funds.
Therefore, it is important to assess the goals and risk profile and ensure it is in line while planning your tax-saving investments.