Best tax saving options: Comparison of 10 investment options

Are you among the Rip Van Winkles who haven’t completed their tax planning for the year? Lakhs of salaried people leave this task for the last minute, and end up making costly investment mistakes. If you are also trying to figure out where to invest, your search ends here. ET Wealth’s annual ranking of tax-saving instruments cuts through the clutter and tells you which is the most suitable option for you. We assessed 10 tax-saving options on eight key parameters—returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. Each parameter has been given equal weightage and the composite scores determine the place in the ranking.

This year’s ranking has seen a major churn, with the NPS emerging as the best tax-saving option in 2023. Ulips are at second position, while ELSS funds, which had ruled the roost for the past nine years, have been pushed down to third place. The weakness in the stock markets and the possibility of an extended slowdown have taken the sheen off this winner from yesteryears. At the same time, the high bond yields indicate that debt options in the NPS and Ulips would give good returns in the coming months. Investors in both NPS and Ulips can switch to equity funds later without any tax implication. While the NPS and Ulips have moved up, traditional insurance policies continue to be the worst way to save tax. These plans offer neither good returns, nor adequate cover to buyers. We hope our story will help taxpayers make more informed investment decisions.



RETURNS 8-11% Past five years Lock-in: Till retirement
The additional tax deduction and the flexibility to switch between debt and equity will benefit taxpayers. But the very long lock-in is a damper.
The NPS is our top pick for tax saving this year for the simple reason that debt investments are expected to yield higher returns than equities in 2023. Also, it offers additional tax benefits by helping save tax under three different sections. Firstly, contributions of up to Rs.1.5 lakh can be claimed as a deduction under the overall Sec 80C. Secondly, there is an additional deduction of up to Rs.50,000 under Sec 80CCD(1b). Thirdly, if the employer puts up to 10% of the basic salary of the individual in the NPS, that amount will not be taxable.

“The tax benefits offered by the NPS cannot be matched by any other tax-saving option. It also helps save for a critical financial goal,” says Sudhir Kaushik, founder and CEO of tax filing portal The past one year has not been very good for NPS investments, with all categories, except alternative investment funds, delivering less than 4% returns (see table). Both equities and bonds went down in 2022. But though equity markets are not looking so stable, bonds are in a better position. The 10-year bond yield is at 7.3% and could go up marginally because analysts expect the RBI to hike the repo rate by 25 basis points in February. But after peaking in the first or second quarter, interest rates are expected to start easing. When the rate cycle turns, corporate bond funds and gilt funds of the NPS could deliver high single-digit returns.

At the same time, investors should be mindful of the fact that NPS is a long-term commitment and the money gets locked up till retirement. In the long term, equity investments have turned out the highest returns. The beauty of the NPS is that it allows investors to change their asset allocation. This can be done up to four times in a year. The flexibility to change the asset mix puts investors in a sweet spot. They can lock into the high bond yields to gain from the upside in debt funds, and later switch to equity funds when the stock markets correct. “But the NPS has a cap on the exposure to equities, and even aggressive investors can’t put more than 75% in equity funds,” points out Harshad Chetanwala, Co-Founder of MyWealthGrowth.How NPS funds fared




RETURNS 8-9% Past five years Lock-in: Minimum 5 years
The flexibility to switch between debt and equity, tax-free returns and possibility of partial withdrawals make this a good option
Ulips have also moved up this year and for the same reasons as the NPS. The debt funds of a Ulip can yield good returns in the coming months. Ulips are more flexible than the NPS because the money is not locked till retirement and the policyholder can make periodic withdrawals. But unlike NPS, where the investor can change the pension fund manager, here the buyer is stuck with the insurance company for the rest of the term. The best part is that there are no tax implications of the switching from equity to debt and vice versa. So you can start with a debt option and gradually shift to the equity fund if and when the stock markets correct to reasonable levels later in the year.

This flexibility is a vital advantage that Ulips enjoy. It makes Ulips an effective portfolio rebalancing tool as also a one-stop fund for retirement planning. One can use them for generating tax-free income in retirement. If the life cover is at least 10 times the annual premium, the maturity proceeds are tax free under Section 10(10d). This also gives Ulips an edge over ELSS funds, where long-term gains beyond Rs.1 lakh a year are taxed at 10%. But a Ulip may not be able to give you the life cover you actually need. Also, it is a long-term investment, so buy it only if you can continue with the policy for the full term.

Senior Citizens’ Saving Scheme


Jan-Mar 2023
Lock-in: 5 years
The best investment option for senior citizens has become better after the interest rate was hiked last week.

The Senior Citizens’ Saving Scheme (SCSS) was already the best investment option for those above 60, but last week it became even better when the interest rate was hiked to 8%. Though the interest earned is fully taxable as income, senior citizens enjoy tax exemption for interest up to `50,000. This means up to `6.25 lakh invested in the scheme will earn tax free interest. The scheme pays out pension at the start of each quarter. At 8%, it offers a higher return than the PPF. Banks also offer higher rates to senior citizens for five-year tax-saving fixed deposits, but they cannot match the SCSS. However, the eligibility is restricted to those above 60 years. Also, there is a `15 lakh overall investment limit per individual. Senior citizens who have exhausted their investment limit should consider investing in tax-saving bank fixed deposits or NSCs to save tax.

These rules have narrowed down the eligibility of the scheme and brought down its score in the ranking. In some cases, where the investor has opted for voluntary retirement and has not taken up another job, the minimum age is relaxed to 58 years. There is also no age bar for defence personnel. They can invest in the scheme even before 60 as long as they satisfy the other requirements An account can be opened in a Post Office or at designated branches of banks. It is better to open an account with a bank because operating it will be less cumbersome.

Retirement mutual funds


Past three years
Lock-in: 5 years
These hybrid mutual funds would benefi t from the prevailing high bond yields. Lock-in period is also not long.

ELSS funds are equity funds, so carry the same risk as any other diversified equity fund. However, there are also retirement mutual funds that are hybrid in nature and are eligible for tax deduction under Section 80C. With less than 40% of their corpus in equities and 55-60% in debt, the Franklin Pension Fund and the UTI Retirement Benefit Pension Fund have significantly lower risk. At the same time, the equity portion of these funds has helped them generate good returns in the past three years (see table). Investors with a low risk appetite who want to save for the long term can go for these retirement funds. But these funds have a longer lock-in of five years compared to the three years for ELSS schemes. Also, some retirement funds such as Franklin Pension Fund levy an exit load if redeemed before you turn 58.

One big issue is that the capital gains from these hybrid funds don’t enjoy the tax benefits given to long term gains from equity funds. Gains will be taxed at 20% after indexation. This is a major drawback in these funds, though most retirees need not worry about tax. Their income in retirement will not be too high to attract high tax. Also, in the long term, the indexation benefit reduces the tax significantly.

Best retirement schemes


ELSS funds


RETURNS 10.01% Past five years
Lock-in: 3 years
With markets looking unstable, investing a large amount at one go can be risky
ELSS funds have slipped to the third place this year because equity markets are not looking very stable. Fears of a global recession, high inflation and slackening demand mean corporate profits could be depressed in the coming months. “Markets will be volatile, so equity investors should be ready for ups and downs, maybe even an erosion in the capital,” cautions Harshad Chetanwala of MyWealthGrowth.

ELSS funds score high on most other parameters. They are transparent, have very low costs and the three-year lock-in period is the shortest among all tax-saving options. But these are equity funds and ideally one should invest in them through monthly SIPs. This is not possible if you have to show proof of Sec 80C investments in a few days. However, taxpayers can still take the SIP route by staggering their investments over the next two months. “ELSS funds can be very rewarding in the long term, so investors can consider paying a little more tax right now and then claiming a refund later by completing the SIPs before 31 March,” says Chetanwala.
Top performing ELSS funds




Jan-Mar 2023
Lock-in: 15 years from inception
Though the interest rate has not been hiked despite rise in bond yields, the tax-free nature of the Public Provident Fund makes it more attractive than bank deposits.

The interest rates of small savings schemes are linked to government bond yields. But though government bond yields consistently rose during 2022, the interest rates of small savings schemes remained unchanged. Only the interest of the Senior Citizens’ Saving Scheme was raised when rates were reviewed last week. Even so, the 7.1% offered by the PPF is better than what banks offer. It is tax free, and we recommend that investors should go for this safe and assured option even if they have exhausted the Section 80C deduction limit. High income earners who used to put large amounts in the Provident Fund before the government put an annual Rs.2.5 lakh cap on the tax-free investment will find it particularly useful.

A PPF account can be opened in a Post Office branch or designated branches of PSU banks. Some private banks, such as HDFC Bank and ICICI Bank, also offer the facility to invest in the PPF. Though the PPF is for 15 years, it does not lock up your money for that long. The 15-year term is from the day of opening the account and the lock-in progressively reduces. In the 14th year, it is only one year. If you opened your PPF account in 2009, the lock in ends next year. After the sixth year, you can withdraw up to 50% of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. You can even take a loan from the third year till the sixth year. It costs just 1% per year.

Sukanya Yojana


INTEREST RATE 7.6% Jan-Mar 2023
Lock-in: Till child is 18
Used to fetch highest interest among all small savings. Missed rate hike last week.

The Sukanya scheme used to fetch the highest interest among all small savings schemes, but it missed a rate hike when the interest rates of small savings schemes were reviewed last week. Still, this scheme remains a good tax-saving option for taxpayers who have daughters younger than 10 years. At 7.6%, it has the second highest interest rate among all small savings schemes. Just like the PPF, the interest earned is tax free and there is an annual cap of Rs.1.5 lakh on the investment.

Keep in mind that the interest rate is linked to the government bond yield and is subject to change every quarter. However, the rate has remained unchanged for more than two years despite a consistent fall in bond yields. It seems unlikely that the rate will be hiked from this level. Sukanya Samriddhi Yojana accounts can be opened in any post office or designated banks with a minimum investment of Rs.1,000. A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed Rs.1.5 lakh in a year. The best part is that the account is opened in the name of the child and the maturity proceeds have to be used for her education and marriage.

Pension plans


past five years Lock-in: Till retirement
These plans from insurance companies can’t match the NPS on several counts.

The pension industry does not have a level playing field. Pension plans from insurance companies do not enjoy the same benefits as the NPS or other retirement investments like the PPF. Making pension plans eligible for deduction under Section 80CCD is one of the long-standing demands of the insurance industry. The additional tax deduction of Rs.50,000 that is available to NPS under Sec 80CCD(1b) can be a game changer for pension plans. However, it is unlikely that the coming budget will curtail the exclusive benefit enjoyed by the government-sponsored NPS.

The NPS also allows an investor to shift from one pension fund manager to another if he is not satisfied with the service or the performance. But in case of a pension plan, the investor is tied to the company till the plan matures. One big problem for pension plans is the taxability of the annuity pension. The NPS also has to contend with this. “Annuity income should be made tax-free in the hands of policyholders, or a deduction for the principal component should be allowed,” says Satishwar B, Managing Director & CEO, Aegon Life Insurance. But the Budget is unlikely to make this change.

NSCs, tax-saving FDs


Lock-in: 5 years
Good option for senior citizens who have exhausted investment limit in SCSS.

Tax-saving fixed deposits are now offering more than 7%. This might look attractive, but tax reduces the returns of the investor. “Interest is fully taxable at the slab rate, so the post-tax return for investors in the 30% tax bracket is less than 5%,” says Raj Khosla, Managing Director of But one big advantage of tax-saving FDs is that the investment can be done very quickly with minimum effort. Just log on to your Netbanking account, and a few clicks of the mouse is all it takes.

NSCs offer a marginally lower interest of 7%, but the interest earned on the NSC is also eligible for deduction in the following years. Here’s how this works. Suppose an investor buys Rs.50,000 worth of NSCs in January 2023. One year later, the investment would have earned an interest of about Rs.3,500. The investor can claim deduction for this Rs.3,500 for the year 2023-24. The next year, the investment would earn about Rs.3,745 in interest. This can be claimed as a deduction in 2024-25.


Life insurance policies


Lock-in: Minimum 5 years
These continue to be the worst way to save tax. The tax break is not the core benefit of a life insurance policy.

Not much has changed for life insurance policies. They continue to be the worst way to save tax in our ranking. Life insurance is the lynchpin of a financial plan, but they continue to be sold as tax-saving instruments. The basic objective of an insurance policy is to protect the goals of the individual in case of his unfortunate demise. This purpose is best accomplished through a pure protection term plan with no investment component. These plans cost a fraction of what you pay for a traditional endowment policy or a money back plan. A 30-year-old man can buy a cover of Rs.1 crore for 30 years by paying an annual premium of Rs.12,000-14,000 per year. In comparison, an endowment plan offering a cover of Rs.40-50 lakh will cost the buyer almost Rs.4-5 lakh per year.

The life insurance industry wants a separate deduction for insurance policies in the coming budget. But this deduction should be only for pure protection term plans where the cover is at least 200 times the annual premium.

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