Are you optimising your 80C returns?

Juzer GabajiwalaVentura SecuritiesThe most common and one of the main mistakes which many taxpayers make is to think purely from the tax perspective while utilizing the benefit under section 80C. This normally results in the entire Rs. 1.5 lacs being allocated to insurance and/or PPF.How to determine the maximum amount you can invest?Some of the available deductions under 80C are Tuition fees, Housing loan (principal) repayment, EPF, PPF, ELSS, Insurance commitment, etc. Let’s take an example where two individuals Ram and Shyam earn Rs. 3.5 lacs and Rs. 5 lacs p.a., respectively.

*some deductions under 80C which are not in your hand and you should claim exemption if available to you. Most commonly available options for investment under 80C(See table below for comparison)Points to Remember:•  Maximum Investment Amount under 80C for:o    Any Income >  Rs. 4 lacs = Rs. 1.50 Lacso    Any Income < Rs. 4 lacs = Income – Basic exemption limit. Eg: ( Rs. 350,000 – Rs. 250,000 = Rs. 100,000) •  Maximum Tax Savings under 80C:

The table below shows the comparison between the 3 most commonly used tax-savings instruments:

 Most investors are comfortable investing money in PPF for a fixed return (which has a 7 year lock-in and tenure of 15 years) and are ready to purchase insurance policies, wherein they pay yearly premium and money is locked-in for the term of the policy ranging from 15-20 years. These instruments give returns of around 8-8.5% p.a. Though we may consider these as safer bets, as they are not affected by volatility, the biggest risk is that they are unable to generate inflation-adjusted real returns over the long run.Insurance is for protection against life and should not be considered as a tax saving instrument. Meanwhile, PPF is an instrument which only protects your money and earns the inflation rate. It is like running on a treadmill, there is a benefit but you are not moving ahead. You will manage inflation but not beat inflation.The table below shows what the present value of an investment of Rs. 1 lac, made 15 years back in ELSS and PFF, would be.

All the amounts for ELSS and PPF are in Rs. Lacs.  Data as on 30th September 2014It is observed that Rs. 1 lac held in PPF for 15 years would become just Rs. 3.4 lacs, whereas the same amount in ELSS would have grown to Rs. 31.16 lacs, (9.16 times higher). Now maybe going forward you may or may not get these returns but the risk-reward ratio merits some allocation towards ELSS.Yet ELSS has been ignored by many investors predominantly due to the fluctuations in the market as these schemes are linked to equity. ELSS has the potential to generate higher returns though it comes with an associated risk of lower returns because it is an equity linked product. The challenge is that many investors prefer the safety and guaranteed returns of PPF over volatility and uncertainty of stock markets. These arguments are not aimed at undermining PPF or Insurance, but at explaining the importance of considering ELSS as a sound tax saving option. One has to understand that unlike debt, equity has the potential to deliver after-tax returns which are higher than inflation in the long run. Time and again, studies have shown that to get the best benefits from equity, it must be held for the long term; the longer the term, the better the returns and the lower is the possibility of negative returns. Now think about this: if we are comfortable blocking funds in PPF/Insurance for 15 years, then why NOT ELSS?