As the time for investments related to tax savings draws near, individuals need to look at proper asset allocation of equity and debt to meet various goals. For tax-related investments such as EPF, PPF, five-year bank deposits, life insurance premium, National Savings Certificates, unit-linked equity plans, most people look at financial products that give tax exemptions of Rs. 1.5 lakh a year under Section 80C of the Income-Tax Act.

Most tax-savings related products are long-term investments. Equity-related investments could be for five years or more and debt related-investments could span for 15 years. So, lay down your investment goals, the time horizon and anticipated returns and then reap the compounding benefits and save tax, too.

Equity: ELSS & Ulips

Equity-linked savings schemes (ELSS) of mutual funds is an ideal way to invest in equity and get tax deductions under Section 80C. Every investment in ELSS comes with a lock-in period of three years, which is the lowest for any tax-savings related investments. In November, while most categories in equity mutual funds reported an outflow, ELSS reported inflow of Rs. 287 crore. The assets under management in this category was Rs. 98,872 crore.

In ELSS, an investor will not have to look at the performance of individual stocks regularly as the fund manager will invest in diversified stocks and sectors. There is no cap or limit on how much an individual can invest in an ELSS. However, the returns are taxable on redemption as long-term capital gains is applicable after one year at 10% for gains over Rs. 1 lakh a year.

Unit-linked insurance plans (Ulips) are long-term vehicles for life cover and investment. A part of the premium paid by a policyholder is used to provide life insurance cover while the remaining portion is invested in various equity and debt funds depending on the choice of the policyholder. Like mutual funds, the value of the fund can be tracked through the Net Asset Value. As Ulips are long-term contracts, policy-holders should stay invested for the entire term of the policy so that they do not lose out on fund growth.

The policy will specify the death benefit to be received by the nominee if the policyholder passes away during the policy tenure. If the policyholder survives the full term, then he will be paid the maturity value. Ulips are more tax efficient as the investment is eligible for deduction from taxable income under Section 80C and the maturity proceeds are also exempt from tax under Section 10(10D) subject to certain conditions.

Debt: PPF & SSA

For risk-averse investors, Public Provident Fund (PPF) is a popular long-term investment option. An individual can deposit up to Rs. 1.5 lakh in an account and tenor of the investment is for 15 years and can be extended within one year of maturity for five years. While the subscriber can open another account in the name of minors, the maximum investment limit in a year will be Rs. 1.5 lakh by adding balance in all accounts. The interest rates are revised every quarter depending on the bond-yield of similar maturity. Currently, for October to December quarter, the interest rate is 7.9%. The interest amount is credited to the account at the end of the financial year.

For a girl child up to 10 years of age, one can invest in the Sukanya Samriddhi Account (SSA).Maximum two accounts in the name of two different girl children is allowed. The minimum amount of investment in a financial year is Rs. 250 and the maximum is Rs. 1.5 lakh.

Maximum period up to which deposits can be made is 15 years from the date of opening of the account. The account will remain operative for 21 years from the date of its opening or till the marriage of the girl after she turns 18. One can go for partial withdrawal when the account holder turns 18 years for a maximum up to 50% of the outstanding balance at the end of the preceding financial year.

Like any small savings scheme, the interest rate of SSA is revised every quarter and the current rate is 8.4%. An investor gets tax deduction under Section 80C in both PPF and SSA and the returns are also exempt from tax, which effectively increases the post-tax returns.