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Think where you want to invest the additional Rs50,000 for tax deductions in 2014-15

Under the 2014 budget proposals, the FM has increased the investment limit under section 80C to Rs150,000 from the earlier limit of Rs100,000.   By investing the additional Rs50,000, you would be able to save income tax of Rs15,000+ for those who are in the 30% tax slab.  

You have a multitude of investments options ranging from NSC, PPF, Insurance and lot more.  Along with raising the investment limit, the maximum amount you can invest in PPF has also been raised to Rs150,000. 

For lot of tax payers, the immediate choice is to increase their PPF contributions as the returns are a decent 8.7% and tax free!!  If you are one of them, take a step back and look at the chart below.  

I came across the below chart which compares Public Provident Fund against one of the tax saver funds (which is eligible for deduction u/s80C), HDFC Tax Saver over the last 16 years period.  You will observe that over the last 16 years, the HDFC Tax Saver investment has beaten the returns of PPF handsomely.  Mind it, we went through a bull market (2002-2007) and followed it with almost 5+ years of bear market (2008-2013).   

The chart below was specifically prepared by a Financial Advisor for one of his clients to show the ability of Equity funds to create wealth over long periods of time.  He has taken the exact dates when the client made the investments in PPF and matched it with notional purchases at ruling market NAV in HDFC Tax Saver fund.  The result is what you see in the table below. 

The gist of the below table is as follows:

Public Provident Fund:

Total amount invested: Rs12,66,486

Total amount withdrawn:  Rs140,000

Total value in 2014:  Rs20,00,373

HDFC Tax Saver:

Total amount invested: Rs12,66,486

Total amount withdrawn:  0

Total value in 2014:  Rs81,16,199

The tax saver fund has out-performed PPF by 4 times, yes, you read it right, 4 times!!  This table once again goes to prove the power of equity over long periods of time.  I am not saying that PPF is a bad investment, but can’t go overboard on PPF and completely ignore equity as an asset class.  

So, before you decide to park the additional Rs50,000 in PPF or NSC, think! Consider ELSS schemes of Mutual Funds which can create you real wealth over long periods of time.  


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