Just yesterday I went to buy a pack of chips to eat while watching India hammer Australia in yet another cricket match. What I thought would be a 2-minute exercise took me more than fifteen minutes. No, it wasn’t the crowd in the shop, but the crowd on the shelf. I thought I will just go and pick up a Spanish Tomato or an American Cream & Onion which I regularly do. But I was taken aback by the numerous varieties – all convincing me to ‘try’ them. Never realized buying a pack of chips would be so painstaking. However, I picked up a big attractive packet with lot of air hoping that it would not disappoint my taste buds. I said to myself, “after all it’s just a pack of chips; don’t buy again if it doesn’t taste nice”.

It’s not very different when it comes to investing with an objective to save tax. On the shelf, I find a number of options ranging from provident fund, fixed deposits, insurance and mutual funds – all screaming at me to ‘try’ them. The only difference is this time around I am scared to say, “after all, it’s just a tax-saving investment, will not invest again if it doesn’t seem right”.

You cannot buy any investment just like you buy chips for a lot of reasons. Firstly, the monetary commitment is negligible while buying chips. Further, some investments force you to buy from them regularly and all investments come with a lock-in period where you cannot enjoy the benefits. It’s not like opening a pack of chips and eating them right away. But, the tragedy is most of us buy tax-saving investments just like we buy chips – without giving much thought and deliberation.

The real question is, which is the right pack of chips for me? Of course, there is no standard flavor which everybody likes. And there is no standard tax plan that suits everyone. In the next couple of paragraphs, you will get the right approach that you should take while planning investments for tax savings.

It is a common knowledge that an we can invest upto ₹1,50,000 to save tax under section 80C. Most of us also know about the other sections under which we can save tax. The purpose of this post is not to recall the sections but to use them.

Step 1: Look at the payslip

your contribution towards employee provident fund is included in the ₹1,50,000 limit. Deduct the annual contribution from the overall limit.

Step 2: Look at your bank statement

There are a certain expenses covered under this limit. These are tuition fees of your children, principal component of your house loan EMI and interest on higher education loan.

Step 3: Look at Safety First

Buy a term plan for the maximum duration with the maximum sum assured that you are eligible for. This is an absolute necessity. It will be sinful not to have created a financial backup for your loved ones just in case you are not around to take care of them. DO NOT EXPECT ANYTHING IN RETURN FOR THIS PAYMENT! Be happy that you are still alive. Watch this space for a detailed account on how to buy a term insurance.

Step 4: Look at investments

Total the amount in Step 1, 2 and 3 and reduce the same from ₹1,50,000. The available amount is the amount you are left with for further investments.

Here is where there is maximum confusion. We are spoilt for choices. Of all the options available, you should look at the following three options in the same priority.

  • ELSS – Equity Linked Savings Scheme or commonly referred to as tax-saving mutual funds: With the lowest lock-in of three years and investment into diversified equities, this is ideal for a young professional who has time on his/her side. It would be extremely easy to put in the past returns which are in high teens to early twenties to make a case for them. But that would be biased. If you invest in these funds, you can look at a return which is considerably higher than your increasing cost of living. Undoubtedly the most lucrative option for tax savings.
  • PPF – Public Provident Fund: The evergreen PPF has gone through some major changes over the last couple of years. The interest on PPF is now linked to the bond yields. This has made it less attractive to what it was. The current interest rate on PPF is 7.8% (https://www.ndtv.com/business/latest-interest-rate-on-ppf-senior-citizens-savings-scheme-nsc-sukanya-samriddhi-1757651). But knowing Indian politics, these rates might not dip drastically atleast for the next 7 – 10 years. After all, every vote matters!
  • Fixed Deposit: A five-year fixed deposit in a bank currently gives a return of around 6% to 6.5%. (HDFC FD Rate and SBI FD Rate) Despite this interest being taxable, it is still better than investing in any insurance (not term plan) which gives much lower returns. The achche din for fixed deposits are coming to an end as interest rates are reducing by the quarter.

Step 5: Look at the division

Now that the universe for your investments has been narrowed down to three, how do you divide among these? If it was me, I would have gone only with ELSS as I have been a beneficiary for a decade now. Around 70% – 80% of your investment should be in ELSS and the rest in PPF. Go for fixed deposit only if the fifteen-year lock-in period of PPF scares you.

Step 6: Look at additional savings

Currently, there is an additional amount of ₹50,000 that you can invest in National Pension Scheme (NPS) to save tax further. This means additional avenue to save tax. NPS is a market-linked investment product which aims at creating a healthy retirement corpus. The returns being market-linked cannot be guaranteed but are surely expected to beat inflation as the investment is spread across equities and bonds. The past returns (NPS Performance) have been exceptionally well but are in no way an indicator of the future.

The above six steps might not make buying investments as simple as buying chips, but it will definitely give you a roadmap on the right way to save tax. Don’t just save tax for the heck of it. Make your savings work for you, after all you worked real hard to save in the first place.

You can always contact us to put the above approach into practice.

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  1. A very good read. Very informative and well penned.

  2. This Happens to be Simplified way to put Across, how to save tax, Thanks.

    Keep the good Work up Sir

    Your Student

  3. Super post sir I loved the way you linked chips to investments

  4. Still confused

    • Please state the confusion, would be glad to clear it if I can.

  5. Amazing blog

  6. Very informative and useful article Sir.

  7. what an exceptional thought process to link a chips pack with tax savings !
    Thank you sir for this blog, looking forward for more .

    • Thank you for your compliment! Keep watching this space for more.

  8. Very clear n simple !!!

  9. Very well written. Keep writing.

    • Thank you Harish sir! Learnt a lot about investing from you in my early career! Owe a lot to you.

  10. Everyone seems only to like the blog which is surely well articulated, but invest karo yaar…. Tax save karo

    • Kar rahe hain sir. Have been able to get quite a lot of first timers to invest in last few months. Hoping to add more through this effort.

  11. Wats most interesting about the writing is it’s as simple as eating a packet of chips.
    Wat a beautiful approach to explain a crucial topic like this.

    • Thanks for those beautiful words. Am glad it added value to you. Hope you will adopt this approach to make your savings work for you.

  12. Wonderful read sir, for the first time I don’t find myself late to the party and have been investing in most of the instruments already, but looking forward to see your next article on the term insurance part. Guess what, I still don’t have one ????

    • Good to see you on the right track. But not having term insurance is just not acceptable. That’s why it comes before investment in my approach too.

  13. Very useful information sir.

  14. This is quite informative Sir! As I’m nowhere near the Commerce field, there are certain things that i dont understand. But I guess I’m gonna start gathering more information now that I work. And this article is a good start!
    Keep writing and contributing. Best wishes!!
    PS- You could add a subscribe button to your blog. :))

    • Thank you Ruchika! More simpler ones would be here soon. And thanks for the wonderful suggestion, I will add the subscribe button.

  15. Very interesting & informative article sir , loved the way you related it to a packet of chips . Too curious to read your upcoming articles.

  16. Beautiful piece of writing Sir!!Very well-articulated! I started investing right after getting my very first salary and have been reaping the benefits over the years. Sometimes people go overboard with saving tax by opting for investment options which doesn’t offer them an ideal return.Saving tax along with getting an ideal return out of it is a bliss. I look forward to read many more of those Sir! All the best ????

    Your student
    Asish Bothra

    • Great job Ashish! You are one of those rare species who is not alreadylate!! Keep investing!

  17. Very well written sir, it’s short and hits the mark. Starting with the Chips anology was a great way to lower the guard of common investors who get butterflies in their stomachs even trying to read an article on investments and tax savings.

    All the best for your future endeavors sir.

    • Thank you Shashi!! Hope you follow this approach too!

  18. Amazing article Alok.
    Very complex concept drastically simplified. Will definitely help investors plan better.

  19. A simple article for right investing .. good job Alok

  20. Great blog about best ways to save tax are just amazing I found this blog really helpful and informative looking forward to read more of your future blogs I’ve also found a page with good information RBL Bank thanks for such a great blog.

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