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When Should You Consider Tax Saving Funds (ELSS) Over Other Options?

It’s probably time to start your tax saving investments if you haven’t already started by now. The question on top of your mind now must be which is the best and which is the easiest way to do so, under Sec. 80C.

It’s probably time to start your tax saving investments if you haven’t already started by now. The question on top of your mind now must be which is the best and which is the easiest way to do so, under Sec. 80C.

The easiest option:

Just increase your EPF contribution to the point that you are putting away Rs. 1.5 lakh, which is the upper limit of investment under Sec. 80C.

Is it the best option?

EPF over the long run gives about 7.5% in returns and generally taking money out from EPF isn’t easy. After all, it is meant to serve as compulsory long-term savings. Recently the government has also introduced uncertainties over whether you will actually be able to do what you please with your saved up money upon retirement. Therefore, while EPF is actually the easiest way to save tax, it is not really the best.

What has given the most bang for the buck when it comes to tax saving investments?

Historically, tax saving mutual funds have delivered the highest returns compared to all other options normally chosen by taxpayers, such as 5-year Fixed Deposits. Here’s how tax saving funds stack up against other options.

But are they for you?

Ask yourself the following questions:

“How much tax am I actually liable to pay” (You can find that out here)

“How much can I reduce this amount by?”

Find Out How Much Tax You Can Save

Enter your Annual CTC
Twelve Lakhs
You fall under the tax bracket
Your tax amount
You can save taxes of upto
by investing under 80C
You don't need to invest for saving your taxes.
Save Tax Now

Quite frankly, if your total tax outgo is less than Rs. 45,000 you are better off just increasing your EPF contribution if it doesn’t already cover your tax-saving needs. The most you can save in terms of tax outflow under section 80C is about Rs. 45,000. So unless you cross this limit, even searching for tax saving options might be less than useful activity.

If, however, your outflow is more than Rs. 45,000, then the best way to save tax (tax saving mutual funds) becomes relevant. This usually happens when your CTC goes beyond 7 lakhs per annum.

The fact that this option has the lowest lock-in and the highest returns (assumed based on past performance) simply makes the choice a no-brainer.

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